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Topic # 198862 26-Jul-2016 00:45
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Biggest problem is the fact that you can buy an investment property, rent it out. If the rent doesn't cover the mortgage and other property expenses, meaning you have to contribute some of your wages to cover the mortgage. This means you make a loss on the property which can be offset against the tax you paid on your PAYE job. This tax refund is essentially free money. Which means you still get a benefit from owning a rental property even if there is never any capital gains. And the mortgage payments are simply "forced savings".

 

And under the previous Labour Govt, you could often also qualify for working for families if you previously didn't due to earning too much. National got rid of that in 2008. Which is why house prices went up heaps when labour was in power, but rents didn't go up much. Yet rents started going up more when National got into power. (So higher rents are definitely John Key's fault, for those who like to blame everything on him). But getting rid of that subsidy was still the right thing to do. This proves that tax rules definitely influence rents.

 

Now the government needs to get rid of that big tax dodge. Due to it causing excessive housing investment as well as not collecting as much tax. Easiest and fairest way of doing that - Outlaw all tax deductions against PAYE income. (Except donations) This is intended to get the desired result without many side effects.

 

And for taxing capital gains - First of all the ideal tax system is one where all income is taxed equally. And one where taxes don't influence decisions of investment, sales, (Wether or not to buy or sell an asset such as a house) or jobs ect.

 

How I propose to achieve that - Make kiwisaver operate on a "before tax" basis. Meaning you can contribute to kiwisaver out of your before tax income. But you then pay tax on your withdraws. Allow withdraws to purchase a house tax free if you don't currently own a home (even if you previously did own a home). If you sell a house you can buy another house with the sale money tax free. Or put the entire amount into kiwisaver tax free. This means that you can buy and sell houses, and move money between a house and kiwisaver tax free. But if you spend that money on anything else or gift it to anyone - you pay tax. And if you die, your estate pays tax on the money that gets distributed. (no tax on things like funereal costs and legal fees to manage your estate).

 

The overall intention of this - tax will eventually be collected on all capital gains. But only when it is eventually spent. This is to stop capital gains tax changing peoples decisions on wether to sell their house or not. And it will mean people selling to move. Or switching between being an owner occupier and renting out their house while they pay rent elsewhere. Wont be penalised. People will be discouraged from withdrawing everything from kiwisaver at once for a big spend up - as they will pay more tax to do so. And to help stop excessive inter generational buildups of wealth. As homeowners can currently gift deposits to their kids (either in cash or via use of equity in the parents property) to allow them to buy houses at young ages and skip the rent trap. Meaning they also buildup wealth to again pass on in turn to their kids. While those stuck renting are trapped. And only a few can escape.

 

As the big problem with a simple capital gains tax - is that not as many people sell their houses. As they will have to pay tax if they do. But this causes prices to increase as there are not as many houses for sale. And a capital gains tax that exempts the family home encourages people to over capitalise their homes. And makes it less likely that landlords will upgrade their rental properties.

 

And this will also mean that tax on a property, will finally be the same as tax on money earning interest in the bank (at least in kiwisaver). As in both cases investment returns can be compounded without paying tax - meaning your investments grow alot faster. And you only pay tax when you decide to spend that money. So will encourage more savings.

 

 

 

There is still the problem of restrictive planning rules making houses harder to build. And more expensive than they need to be (which is a separate but still very big issue, That I also have ideas on how to solve). And any changes to discourage property investment will cause rents to rise. Until the property market and wider economy rebalance.

 

So what do you think - any big problems apart from people who currently own property not wanting to pay tax? Or should I start my own political party?






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  Reply # 1598663 26-Jul-2016 07:07
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I mostly agree.
Although I think another major issue is that people are actually buying houses at the current prices.

What Auckland has going isn't a lot different to a pyramid scheme. There are a lot of people who will be screwed when this all falls over.

The bit I truly don't get is peoples continued insistence on living there.




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  Reply # 1598666 26-Jul-2016 07:13
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It's all too logical. That means there is no chance of any political party even considering your ideas.

 

The biggest thing that annoys me about property is the totally misguided belief by so many people that a CGT will instantly fix the problem when there isn't evidence from any country in the world to suggest this would work. A CGT should exist because the tax system should treat all income fairly, but those who think a CGT will suddenly fix things overnight live in a fantasty world.

 

The biggest problem now is pricing crashing are going to have such a massive effect across the economy.


 
 
 
 


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  Reply # 1598669 26-Jul-2016 07:22
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Or you could simply remove all PAYE and GST and have a simple land tax.  Would be very easy to monitor and collect so cheap to run, would benefit the bottom end of society through no PAYE or GST.  Yes rents would go up, but other taxes would go down. 


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  Reply # 1598672 26-Jul-2016 07:28
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jmh:

 

Or you could simply remove all PAYE and GST and have a simple land tax.  Would be very easy to monitor and collect so cheap to run, would benefit the bottom end of society through no PAYE or GST.  Yes rents would go up, but other taxes would go down. 

 

 

I wonder what rate land tax would need to be set at to cover all PAYE and GST? Also, how would this affect farmers and other large land owners?


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  Reply # 1598677 26-Jul-2016 07:39
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If investors are the problem, one way to discourage them would be to do away with "interest only" loans, which enable people to buy houses they can't afford because they never intend to pay for them. Instead of servicing the debt they just wait for its value to increase to the point where it's worth selling.

 

Introduction of a capital gains tax would probably discourage a number of "mom and pop" investors who have one or two rental properties but professional investors will see it as another cost of doing business and still buy properties, holding them until the after tax profit gets to the number they're looking for. The more the market is constrained, the faster house prices go up, and the sooner they make their money.


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  Reply # 1598678 26-Jul-2016 07:41
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mikebails:

 

jmh:

 

Or you could simply remove all PAYE and GST and have a simple land tax.  Would be very easy to monitor and collect so cheap to run, would benefit the bottom end of society through no PAYE or GST.  Yes rents would go up, but other taxes would go down. 

 

 

I wonder what rate land tax would need to be set at to cover all PAYE and GST? Also, how would this affect farmers and other large land owners?

 

 

People using the land productively would be better offer because they don't have to pay tax on the income.  People sitting on the land would be worse off.  The reduction of tax avoidance alone could make it worth it.  No opportunity to offshore it or put it into tax havens.  Overseas owners have to pay the tax too.


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  Reply # 1598698 26-Jul-2016 08:23
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I like your ideas. 

 

However I've just been living in a country with several of those ideas implemented, and it's also going through a house price crisis.

 

There's capital gain tax on anything other than your primary residence (which you have to actually reside in) - cause taxing that would be political suicide.

 

Payments into their version of Kiwisaver (Registered Retirement Saving Plans) deduct from your before tax income.

 

Most provinces/cities have made real efforts to reduce compliance, planning & building costs. And so on.

 

But city housing prices are insane there as well. Especially attractive cosmopolitan places like Vancouver, Toronto. Even in Alberta, going through a big economic downturn, city house prices have barely dropped.

 

I think the same issues are affecting much of the western world. And it starts with the US economy.

 

Low interest rates - introduced after their economic crisis are helping the US (world) economy, but messing with house prices.
The US had their housing crash a couple of years back and are more insulated from the effects.
Any other countries try to raise their rates, bang.. currency shoots up. So we all have to wait on the US to raise their interest rates, which keeps looking further & further away.

 

Globalisation - Free Trade. I like those things, and the movement of manufacturing and other work to poorer countries has pulled millions and millions of people out of poverty.
However it has left many middle earners and below in Western countries who dependent on those jobs worse off. Of course if you own/run the companies that are using globalisation to make bigger profits - you get richer.
And, the newly rich from those countries are following their dream, and moving to the traditionally rich Western countries in search of political and financial stability, which leads into..

 

Immigration - necessary because the whole existing edifice requires new workers to keep joining the workforce, their taxes supporting the promises made to the ageing crusty baby boomer (and now Gen X ers)
who aren't breeding replacement taxpayers (cause we've all been told about world overpopulation) but have been promised superannuation at 65. And who don't mind seeing house prices rise because a lot of their wealth is in housing.

 

The problem is it's got so big that doing anything too radical about it may cause a crash that'd be worse than the unaffordable housing issue..


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  Reply # 1598706 26-Jul-2016 08:38
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sbiddle:

 

It's all too logical. That means there is no chance of any political party even considering your ideas.

 

The biggest thing that annoys me about property is the totally misguided belief by so many people that a CGT will instantly fix the problem when there isn't evidence from any country in the world to suggest this would work. A CGT should exist because the tax system should treat all income fairly, but those who think a CGT will suddenly fix things overnight live in a fantasty world.

 

The biggest problem now is pricing crashing are going to have such a massive effect across the economy.

 

 

We must have a CGT (on all property), or a land tax. 

 

Simply to broaden the tax base such that all asset classes have similar tax implications. 

 

Nothing to do with house prices, but it could have a side effect of moderating prices. 

 

Incidentally, you have no proof that CGT does not dampen price increases.  If Australia did not have a CGT then I believe their house prices would be even higher than they are now.   You cannot really prove it one way or another though. 


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  Reply # 1598728 26-Jul-2016 08:53
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Aredwood:

 

Biggest problem is the fact that you can buy an investment property, rent it out. If the rent doesn't cover the mortgage and other property expenses, meaning you have to contribute some of your wages to cover the mortgage.

 

There is still the problem of restrictive planning rules making houses harder to build. And more expensive than they need to be (which is a separate but still very big issue, That I also have ideas on how to solve). And any changes to discourage property investment will cause rents to rise. Until the property market and wider economy rebalance.

 

So what do you think - any big problems apart from people who currently own property not wanting to pay tax? Or should I start my own political party?

 

 

 

 

Everyone agrees it is a primarily supply issue.  It is amazing we haven't looked at immigration yet either. 

 

The supply cannot be increased because encumbent house owners don't want change. Which is understandable.

 

And, we cannot expand the existing urban limits as the transport infrastructure has already broken down. 

 

Ultimately, Aucklanders need to accept high density living. 

 

 

 

 

 

 

 

 


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  Reply # 1598730 26-Jul-2016 09:00
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jmh:

 

People using the land productively would be better offer because they don't have to pay tax on the income.  People sitting on the land would be worse off.  The reduction of tax avoidance alone could make it worth it.  No opportunity to offshore it or put it into tax havens.  Overseas owners have to pay the tax too.

 

 

Interesting idea...

 

What about companies and trusts owning land? Do they pay the same rate as people, or do they get a tax break as per now?

 

Don't forget that, depending on their own tax laws, overseas owners might be able to offset the NZ land tax they pay against (e.g.) PAYE tax in their own country. Effectively, they would pay *no* land tax.

 

What about owning shares in overseas companies that own NZ land? I don't see a reduction in tax avoidance... just a shift in how it happens.

 

Presumably your proposal is that the land tax be based on the value of the land, rather than just its area? So owning a large chunk of rural swamp wouldn't cost much tax, until it was drained and zoned residential? So effectively this is a tax on land improvements.

 

Presumably a tax on land would see investments move to other, untaxed, areas... fine art, collectibles, etc

 

 


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  Reply # 1598754 26-Jul-2016 09:48
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surfisup1000:

 

Aredwood:

 

Biggest problem is the fact that you can buy an investment property, rent it out. If the rent doesn't cover the mortgage and other property expenses, meaning you have to contribute some of your wages to cover the mortgage.

 

There is still the problem of restrictive planning rules making houses harder to build. And more expensive than they need to be (which is a separate but still very big issue, That I also have ideas on how to solve). And any changes to discourage property investment will cause rents to rise. Until the property market and wider economy rebalance.

 

So what do you think - any big problems apart from people who currently own property not wanting to pay tax? Or should I start my own political party?

 

 

 

 

Everyone agrees it is a primarily supply issue.  It is amazing we haven't looked at immigration yet either. 

 

The supply cannot be increased because encumbent house owners don't want change. Which is understandable.

 

And, we cannot expand the existing urban limits as the transport infrastructure has already broken down. 

 

Ultimately, Aucklanders need to accept high density living. 

 

 

 

 

 

 

 

 

 

 

I'm not sure that "everyone agrees it is a primarily supply issue". Perhaps THE most important factor is the reduction of interest rates to historical lows. This single factor has caused HUGE extra demand for properties.

 

For example, many people who have always had to rent a property have worked out that they can now afford to buy a house because loan money is now so cheap.

 

The interest rates on money invested in term deposits in the banks is now SO LOW that many people who were previously happy to keep money in bank deposits have now invested in the property market in order to get a reasonable return.

 

Overseas investors are also taking advantage of a low interest rate regime and huge numbers are investing in properties and in many cases don't even bother putting tenants in them because it's better to just leave the properties empty and pick up the huge capital gain in a few month's time.

 

So, if interest rates were INCREASED back to previous levels (say by at least 2-3% pa) then a whole lot of people wouldn't be able to afford to pay off their huge mortgages and this would result in a huge number of properties going back on the market at cheaper prices, which is just what we want!

 

A lowering of interest rates has always fuelled demand for properties and I don't understand why the authorities keep reducing interest rates even further, it simply doesn't make sense! Conversely, increasing interest rates has always resulted in reducing the demand for properties.

 

At the moment we are rushing around trying to build thousands more properties only for them to be snapped up by investors who get huge cheap loans and then keep the properties EMPTY in anticipation of huge capital gains!

 

Fred


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  Reply # 1598804 26-Jul-2016 10:30
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frankv:

 

jmh:

 

People using the land productively would be better offer because they don't have to pay tax on the income.  People sitting on the land would be worse off.  The reduction of tax avoidance alone could make it worth it.  No opportunity to offshore it or put it into tax havens.  Overseas owners have to pay the tax too.

 

 

Interesting idea...

 

What about companies and trusts owning land? Do they pay the same rate as people, or do they get a tax break as per now?

 

Don't forget that, depending on their own tax laws, overseas owners might be able to offset the NZ land tax they pay against (e.g.) PAYE tax in their own country. Effectively, they would pay *no* land tax.

 

What about owning shares in overseas companies that own NZ land? I don't see a reduction in tax avoidance... just a shift in how it happens.

 

Presumably your proposal is that the land tax be based on the value of the land, rather than just its area? So owning a large chunk of rural swamp wouldn't cost much tax, until it was drained and zoned residential? So effectively this is a tax on land improvements.

 

Presumably a tax on land would see investments move to other, untaxed, areas... fine art, collectibles, etc

 

 

 

 

I don't see any reason why companies or trusts would be exempt - might stop land banking.  The exception might be charities.

 

Why do we care if they get rebates outside of NZ?  We want people to pay their fair share in NZ to benefit residents in the country - if they get it back overseas that's of no interest to me.  Most countries don't do that - the US might because of their global tax status, but most like the UK wouldn't do it.

 

I have no problem with rich people sinking their money into fine art - it has little social cost as far as I can see.


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  Reply # 1598826 26-Jul-2016 10:43
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surfisup1000:

 

 

 

 

 

Everyone agrees it is a primarily supply issue.  It is amazing we haven't looked at immigration yet either. 

 

 

 

 

 

 

 

 

It is raised, and every time whoever brings it up gets flamed for being "racist" - which is remarkable, plus there's the argument that we need to import skills (it's cheaper than training people already here apparently), and if GDP per capita was used as an indicator of how well the country is doing, it would look a hell of a lot worse than the headline figure on GDP.

 

Some coherent long-term policies on regional development might be a good idea too, but of course that suits neither laissez-faire agenda nor 3 year election cycles.

 

We are going to pay dearly for the last 30 years.


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  Reply # 1598836 26-Jul-2016 10:52
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jmh:

 

 

 

I don't see any reason why companies or trusts would be exempt - might stop land banking.  The exception might be charities.

 

 

I wasn't saying exempt... just that their taxation rate is currently lower than highest PAYE rate. A Govt would be inclined to tinker with land tax rates, I imagine.

 

Making charities exempt would be great for the churches, I guess. And the obvious next thing would be that churches would buy up the land, and then rent it out. A church with appropriate rules would make an even better tax shelter than they are now.

 

 

Why do we care if they get rebates outside of NZ?  We want people to pay their fair share in NZ to benefit residents in the country - if they get it back overseas that's of no interest to me.  Most countries don't do that - the US might because of their global tax status, but most like the UK wouldn't do it.

 

 

Why would you care? Because NZ land ownership becomes essentially free to wealthy overseas people. There being a pretty much inexhaustible supply of wealthy overseas people, land prices skyrocket. Oops.

 

It's been a long time since I cared about this stuff, but in the good old days you were required to declare all your earnings worldwide to NZ's IRD and pay tax to them based on it, less any tax you had paid overseas. I assume it's still the same. I assume that this is pretty common throughout the world. But I have no basis for my assumptions except distant vague memory. Do you have any basis for your assertion that most countries don't do that??

 

 

I have no problem with rich people sinking their money into fine art - it has little social cost as far as I can see.

 

 

The social cost is exactly the same as sinking their money into real estate without using it... capital is not invested in productive enterprises.

 

 


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  Reply # 1598839 26-Jul-2016 10:54
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I'd like some sensible discussion around why anyone should be able to own more than 2 properties.

 

And I too am confused as to why business losses etc should off set your income tax.  I don't pretend to understand it, but there do seem to be so many loopholes to be exploited.


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