Capital Gains vs Interest deductibility

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#3083389 1-Jun-2023 17:59

Eitsop: introduce capital gains calculated every year, based on market estimates, so capital gains were paid every year.

Just so you're aware this part of your proposal is a wealth tax and is not a capital gains tax.

sir1963

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#3083397 1-Jun-2023 18:20

Kyanar:

sir1963:

https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/buying-or-selling-a-business/tax-on-asset-sales

Let's see.

If these assets are sold above their tax book value, then the seller must include the excess depreciation deductions they claimed previously as income in their tax return.

Ok, so the income from a sale of a depreciated asset needs to be recognised as income and tax paid. Alright, next.

Any part of the business sale price that relates to trading stock is taxable

Ok so everything the business has for sale or hire is taxable.

Any profits from the sale of commercial or residential land and buildings are income

Ok, so the dirt, sticks and bricks are taxable.

In fact the only thing I can find that isn't taxable, is "goodwill". And that's only if the "goodwill" is based on the reputation of the business. If it's based on location it's taxable.

You basically just proved yourself wrong.

Correct, if an asset sells for more than the depreciated value they must refund the depreciation they claimed.

If they claimed no depreciation then there is nothing to be paid

No capital gains tax

Again, no. If they sell the stock for purchase price there is no tax to pay because they have made no profits on the sale

If the sell the stock at retail value to the new owner then tax on the profits is applicable.

Again, no capital gains tax

Again, no. This only applies if you are a developer, if you bought some land, developed it and sold it at a profit.

However in the case of a supermarket or a farm, no capital gains is paid.

GST is payable.

But no capital gains.

sir1963

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#3083401 1-Jun-2023 18:23

mudguard:
sir1963:

All SENSIBLE stuff, not histrionics .

Well I can't help with that. But shifting the rates income from property to individuals is a pretty big shift.

Shifting a portion of the councils income from rates to a poll tax. Rates are STILL applicable and still have to be paid by the property. owner.

Eitsop

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#3083463 1-Jun-2023 18:56

There are property & retirement villages companies that do report profit and losses, based on valuation of properties.

There is nothing saying that if you buy a property and want to claim interest as an expense, they you should also be required to pay tax on gains and losses.

If do don't want to operate like this, as you may live in same property, then not being able to claim interest as an expense is probably good.

sir1963

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#3083501 1-Jun-2023 21:26

Eitsop:

There are property & retirement villages companies that do report profit and losses, based on valuation of properties.

There is nothing saying that if you buy a property and want to claim interest as an expense, they you should also be required to pay tax on gains and losses.

If do don't want to operate like this, as you may live in same property, then not being able to claim interest as an expense is probably good.

Retirement villages are traders in property, ie you can only buy/sell units through them, and they maintain various rights over the property, eg they take a sum from the price to pay for anything they may do to the property to make it ready for the next buyer. Even when you have bought the property the owners are still liable for monthly fees and those fees are still payable until the unit has sold.

Domestic rentals are nothing like this. And STILL no other business is denied the right to claim interest as a business expense.

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#3083504 1-Jun-2023 21:45

sir1963: Domestic rentals are nothing like this. And STILL no other business is denied the right to claim interest as a business expense.

Oh I agree, its messy to not have interest as claimable expense.. accounting 101

What the govt has done is put in albeit bad accounting "control" to help regulate the market. while not having a Capital Gains Tax, pure politics, as they don't want to arm National.

There is nothing stopping a govt having a policy to regulate housing, to ensure there is affordable housing for masses. as such they are perfectly able to put a rule in to say if you want to claim interest, you also need to pay capital gains/losses.

So, either your only

interested in your own person benefit, and of course you don't want any regulation
interest in the wider interest of NZ, and you do want regulation.

I would prefer regulation, but good regulation

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#3083542 2-Jun-2023 06:08

sir1963:

I do pay tax , I also pay ACC on those profits. I actually pay higher taxes because they are not set up within a company structure. I could do this and save money I guess, Business tax is 28%

Tell you don't understand imputation and how dividends work without telling me.

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#3083543 2-Jun-2023 06:15

sir1963:

Domestic rentals are nothing like this. And STILL no other business is denied the right to claim interest as a business expense.

Again, I've pointed out the way in which property investment at a mum-and-dad level isn't like any other business either. Operating at an ongoing loss to generate a tax free profit suggests you're in the business of generating capital gains, not providing long-term accommodation. There's an acceptance of a lack of credible viability there that, realistically, wouldn't stack up for any other type of business.

We accept inconsistency in the tax system, be it contractors vs. employees or thin-cap rules (how much debt is too much debt) or whatever. There's no black and white rule the tax system has to be absolutely consistent in its treatment of anything.

ockel

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#3083672 2-Jun-2023 09:29

GV27:

Again, I've pointed out the way in which property investment at a mum-and-dad level isn't like any other business either. Operating at an ongoing loss to generate a tax free profit suggests you're in the business of generating capital gains, not providing long-term accommodation. There's an acceptance of a lack of credible viability there that, realistically, wouldn't stack up for any other type of business.

We accept inconsistency in the tax system, be it contractors vs. employees or thin-cap rules (how much debt is too much debt) or whatever. There's no black and white rule the tax system has to be absolutely consistent in its treatment of anything.

Isnt this just a failure by IRD to enforce? It doesnt take a reasonable person to sniff the property investment and not smell a rat. I absolutely agree that if yields are inconsistent with what should be a risky asset investment (single heterogeneous asset with moral hazard) then the purpose of investment is not for income. As such any transaction should be subject to capital gains/losses (irrespective of whether its housing, art, antiques, gold or even non-dividend paying businesses [especially if there is no foreseeable dividend horizon].

The tools are there for enforcement but there is no directive - either politically or within IRD.

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sir1963

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#3083691 2-Jun-2023 09:58

GV27:

sir1963:

Domestic rentals are nothing like this. And STILL no other business is denied the right to claim interest as a business expense.

Again, I've pointed out the way in which property investment at a mum-and-dad level isn't like any other business either. Operating at an ongoing loss to generate a tax free profit suggests you're in the business of generating capital gains, not providing long-term accommodation. There's an acceptance of a lack of credible viability there that, realistically, wouldn't stack up for any other type of business.

We accept inconsistency in the tax system, be it contractors vs. employees or thin-cap rules (how much debt is too much debt) or whatever. There's no black and white rule the tax system has to be absolutely consistent in its treatment of anything.

You keep making the claim that people deliberately run the rentals at a loss. NO SENSIBLE LANDLORD does that, and stupid ones will not last long.

Give me 70% of the profits over 70% of the losses any day. If I loose 100,000 , that loss gets held on the books until such time as it can be dedicated from future profits....just like every other business.

And yes, you are right, it does not stack up. Bank do not allow a forever "interest only" and it makes zero sense because the owner will have to continually put money into the property out of their own pocket.

Contractors vs employees is Business vs wages. So of course there is a difference. You stance is more like "Like like McDonalds but not Burger King, so Burger King should be taxed higher"

Landlords are NOT property developers, NOT speculators, they are there for the long term income stream.

As I have said before, if you are OK with that door being opened, do not be surprised if it gets used by a different political party to justify things that are objectionable to you. Because it will happen.

Just look at how Republicans in the USA are bringing in all sorts of abhorrent laws to attack the people they don't like. Rosa Parkes biography is banned due to it, they want to stop evolution being taught. India has even gone so far as to remove the Periodic Table from teaching too.

You may not like the results of that door remaining closed, but you will hate the results even more if it is used by someone else based on their justification...

Kyanar

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#3083718 2-Jun-2023 10:49

sir1963:

Correct, if an asset sells for more than the depreciated value they must refund the depreciation they claimed.

If they claimed no depreciation then there is nothing to be paid

No capital gains tax

Again, no. If they sell the stock for purchase price there is no tax to pay because they have made no profits on the sale

If the sell the stock at retail value to the new owner then tax on the profits is applicable.

Again, no capital gains tax

Again, no. This only applies if you are a developer, if you bought some land, developed it and sold it at a profit.

However in the case of a supermarket or a farm, no capital gains is paid.

GST is payable.

But no capital gains.

All of what I said is a quote from what the IRD says. All of what you have said is made up.

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GV27

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#3083732 2-Jun-2023 11:15

ockel:

Isnt this just a failure by IRD to enforce? It doesnt take a reasonable person to sniff the property investment and not smell a rat. I absolutely agree that if yields are inconsistent with what should be a risky asset investment (single heterogeneous asset with moral hazard) then the purpose of investment is not for income. As such any transaction should be subject to capital gains/losses (irrespective of whether its housing, art, antiques, gold or even non-dividend paying businesses [especially if there is no foreseeable dividend horizon].

The tools are there for enforcement but there is no directive - either politically or within IRD.

The IRD generally rely on a pattern of buying or selling, which is pretty difficult to prove/disprove. We ended up here because so many people got in on it, either renovating and flipping family homes in the 1990s (can't buy a do-up if the housing stock is already done-up) or leveraging of the unrealised gains in one property to finance your next two or even three. Throw in a building crisis, a finance collapse and huge restrictive land policies (with little ability to service greenfield areas) and for a little spice, have the taxpayers underwriting the finance costs for investors. It's not a mystery how this happened.

There's nothing in the tax toolkit to deal with this though. Someone can go through an awful lot of houses before they get flagged as potentially holding them 'on revenue' as opposed to for property investment, and on the scale that people got in on it, it just gets out of hand very quickly.

The real kicker is credit availability. Revoking LVRs for investors was basically pouring gasoline on an already out-of-control fire.

GV27

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#3083741 2-Jun-2023 11:27

sir1963:

You keep making the claim that people deliberately run the rentals at a loss. NO SENSIBLE LANDLORD does that, and stupid ones will not last long.

Not a huge number of people buy properties for cash. If you had a half million dollar mortgage against a rental, you're not going to be getting enough rent out of tenants to cover the interest, let alone the cost of the investment.

At this point, your yield was less than a retail TD. So... what was the point, again?

Plenty of people never made money on actually renting property and sold within a few years for huge gains. That's specifically why the Brightline exists.

sir1963:Give me 70% of the profits over 70% of the losses any day. If I loose 100,000 , that loss gets held on the books until such time as it can be dedicated from future profits....just like every other business.

No, not like every other business. LAQCs/LTCs were hugely weighted towards property investment because they allowed for offsetting of losses against personal income.

Again, we ended up in this mess because the rules were set up so people could take the piss and a sufficient number of people got in on it to the extent it's caused us widespread social harm.

sir1963

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#3083743 2-Jun-2023 11:29

Kyanar:

sir1963:

Correct, if an asset sells for more than the depreciated value they must refund the depreciation they claimed.

If they claimed no depreciation then there is nothing to be paid

No capital gains tax

Again, no. If they sell the stock for purchase price there is no tax to pay because they have made no profits on the sale

If the sell the stock at retail value to the new owner then tax on the profits is applicable.

Again, no capital gains tax

Again, no. This only applies if you are a developer, if you bought some land, developed it and sold it at a profit.

However in the case of a supermarket or a farm, no capital gains is paid.

GST is payable.

But no capital gains.

All of what I said is a quote from what the IRD says. All of what you have said is made up.

No, you do not understand what it says so you interpret in a way that agrees with you opinion.

Life and taxes do not work that way.

I know what I know because I have spent a lot of time talking over stuff with my accountant and lawyer as well as having friends who have sold up businesses and rental properties.

sir1963

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#3083802 2-Jun-2023 12:19

GV27:

Not a huge number of people buy properties for cash. If you had a half million dollar mortgage against a rental, you're not going to be getting enough rent out of tenants to cover the interest, let alone the cost of the investment.

At this point, your yield was less than a retail TD. So... what was the point, again?

Plenty of people never made money on actually renting property and sold within a few years for huge gains. That's specifically why the Brightline exists.

No, not like every other business. LAQCs/LTCs were hugely weighted towards property investment because they allowed for offsetting of losses against personal income.

Again, we ended up in this mess because the rules were set up so people could take the piss and a sufficient number of people got in on it to the extent it's caused us widespread social harm.

A local supermarket was bought for over $30 Million.

It too is in the same situation, that initially there will be a loss but eventually there will be profits.

This is how businesses expand, they do so knowing there will be an initial period where the expansion does not pay its way, but eventually it does.

You are right, plenty (what ever that number actually is) did sell, the vast majority did not, I haven't and the landlords I know haven't. The average farm in NZ made something like $1M capital gains in 2020, this did not improve the finances, nor the viability of the farm because unless cashflow was positive the banks would stop lending money. Same with the rentals I have bought, I have had to show how (without capital gain) they were viable to get loans, this means end of financial year statements, etc etc etc. Even getting a loan to have additional heating/ventilation/insulation/etc etc in all of the properties or to even have them assessed(for the renting paper work), it was out with the last few years of financial statements etc etc etc. Even though I only had about 10% of the value on loans, I still had to come up with the proof. And before you get snarky, they were already compliant, I improved it still as well has had the roofs on 3 properties resurfaced.

The fact that we live in an unusual time with the GFC + Covid , it skewed money lending as countries tired to keep the economy afloat with cheap money. But this is NOT the norm. People who had money in the bank who had been earning 5%+ on their savings were doing OK. On $1M they made about 50K less tax, but that was enough with the pension to live on. When they dropped to 1%, that was 10K less tax and it was NOT viable to live on that, so they shifted into the next investment they understood, property, which was earning more money than interest. Now interest rates are going up, if it were not for the bright line test many would sell up and go back to living off the interest, but economically it makes financial sense to hold onto the property until the bright line has passed, so that is what they are doing.

The bright line test was bought in because of speculators who did up a house, wrote off all the expenses, held on to it for a few months as a rental, or lived in it for a year, and then sold it not having to pay the tax on their profits. It was bought in by national. It was NOT bought in to target landlords. It was set up for2 years as speculators need cash flow for the next project, they are not interested in having capital died up for years. And even today developers and speculators can STILL claim interest as a business expense.

The bright line test does not impact long term landlords, mine are all over 10 years already.

ALL that has happened since LAQCs have gone is that instead of losses being paid out that year, losses are held on the books and are used to offset future profits.

No magic, no conspiracy.

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