Treasury hikes long-run revenue forecasts to account for increased tax liability on residential property.
Investors who borrow on bare, unproductive land will be barred from writing off their interest payments as tax deductible – if there is the mere possibility that one day, housing could be built on that land.
A new tax consultation paper highlights inconsistencies in who and what will be targeted in the reforms, which are intended to tilt the playing field away from "speculators" and towards first home buyers who have been priced out of the market.
Among some of the more perplexing changes, bare land without houses will be taxed as investment properties, but houses on farmland will not. Some community housing providers will be treated as speculators, but Kainga Ora and its subsidiaries will be exempt.
It's uncertain whether the owners of new-build will escape the new liability for 10 years, 20 years or permanently. And there are big question marks over whether communal Māori land will be included in the tough new tax regime.
Newsroom Pro analysis reveals the removal of interest deductability and the extension of the bright line test on capital gains to 10 years is so significant that it forced the Treasury to increase its Crown revenue projections for the next few years.
A small note in the Medium-term Projection Assumptions, published in a tranche of documents accompanying last month's Budget, says officials have updated the long-run core Crown tax-to-GDP ratio from 27.5 percent to 27.6 percent of nominal GDP.
This was "to account for the future increase in tax revenue due to the changes in the bright-line property test."
In all, core Crown tax revenue is now forecast to be $21.1 billion higher, over the four-year forecast period, than the Treasury had projected just a few months earlier in February's Budget Policy Statement. Most of that is thanks to projected GDP growth boosting the tax take from GST, source deductions, and net other persons tax – but some of that is the increased tax liability for residential property investors.
Last night, the National Party loaded further uncertainty on house-buyers by announcing it would reverse the tax changes, if elected to government. The Govenment was "demonising" investors and landlords, said revenue spokesperson Andrew Bayly.
“It is astounding that Finance Minister Grant Robertson would be so cavalier about breaking the fundamental rule of tax which is: tax profits, not revenue," Bayly said. "It is no wonder that property owners feel the rug has been pulled out from under them.”
ASB economist Mark Smith puts the new tax revenue at up to $1bn a year – which is a quarter of the extra tax revenue in the new Treasury forecast. "Removing the tax deductability of interest payments is unusual as this would be considered an expense for a business," Smith said.
"I feel sorry for people who are tenants hoping to buy their first home, because we know house prices have gone up so much that the deposit they need is enormous." – Sharon Cullwick, Property Investors' Federation
Landlords and mum-and-dad investors had borrowed $82bn on their rental properties, Smith said, and from later this year those properties would no longer be generating a significant interest expense for property investors to use to offset rental income.
"It will generate a significant amount of additional tax to be paid by property investors, that is likely to be in the region of $0.5 to $1bn per annum according to our estimates."
The Property Investors Federation, the First Homebuyers Club and Tenants Protection Canterbury have met Grant Robertson, David Parker and other ministers, warning that those hardest hit by the new tax liability will be tenants, as landlords will be forced to raise rents. Now, they are turning their attention to the four-week consultation process, which closes on July 12.
Property Investors Federation executive officer Sharon Cullwick told Newsroom she had friends and family struggling to get into the market. "I feel sorry for people who are tenants hoping to buy their first home, because we know house prices have gone up so much that the deposit they need is enormous."
"A more sustainable housing market supports more first-home buyers to get into their own home but also protects our recovering economy. So we all benefit.” – Grant Robertson, Minister of Finance
The federation's survey of landlords indicated they would be passing on their extra tax costs in increased rents. "If rents go up, it means the tenants won't be able to save as much money, which means it will take them longer to save a deposit to buy their first home. This interest deductability is not helping anyone."
At Parliament, Revenue Minister David Parker told media it was virtually impossible to predict how many investors would sell properties, freeing up homes for new owner-occupiers. "If they do, that would be good for first homebuyers, because they can more often afford to buy an existing home than a new one," he said.
Minister of Finance Grant Robertson said the Government’s goal was to encourage more sustainable house prices, by dampening investor demand for existing housing stock to improve affordability for first-home buyers.
“This is part of the Government’s move to cool the property market," he said. "A more sustainable housing market supports more first-home buyers to get into their own home but also protects our recovering economy. So we all benefit.”
