Hard News: A Capital Idea?
246 Responses
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Matthew Poole, in reply to
So if you’re keeping the house, why should it affect rent except in some sort of nebulous future sense?
Because the rent only just keeps up with expenses, since the property is meant to make a loss now and make the owner money at the time of sale. If the gain at time of sale is reduced (and not by much, let's be honest), the income must be higher in order to offset the reduction in lifetime profit.
That's only applicable to landlords who are "property investors" *cough cough*, but the current tax structure very strongly encourages such behaviour. The removal of the depreciation loophole will help change that thinking over the medium term, and a CGT will change it further. Once you can't deduct large losses from the property to offset against your personal income, you're better to make an annual net profit and treat the capital gain as gravy. Thinking so far has been to make an annual net loss and use the capital gain to make up for it.
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JLM,
I have a question - has there ever been a version of CGT in NZ before? I ask because some time after we married in the early seventies we followed the example of some canny friends and bought a section in Rangiora with the intention of reselling it and providing a home deposit. Our friends had already bought a house, so it was their first step in what proved to be a long and successful retirement plan in property investment.
Some time after we had bought it there was an introduction of some sort of tax on the proceeds of our intended sale. We were apparently exempt as it was our only property, but our friends were worried they would have to pay tax. In the end they didn't, by the simple expedient of saying that they had intended to build on the section but had changed their minds. Both sections were sold at a "handsome" profit.
Did this happen, or is it a figment of my imagination?
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recordari, in reply to
Once you can't deduct large losses from the property to offset against your personal income, you're better to make an annual net profit and treat the capital gain as gravy. Thinking so far has been to make an annual net loss and use the capital gain to make up for it.
That seems to make a lot of sense. I mean in terms of understanding the per-capital-mutations. Thanks.
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BenWilson, in reply to
Thinking so far has been to make an annual net loss and use the capital gain to make up for it.
Yup, that's one of the most crazily dysfunctional parts of the system is that it actually encourages people to lose money. And it's not like that is hard. This is especially compelling to people who are bitter on tax generally. To my mind, a generalized encouragement of tax avoidance is nutso, the focus should be on making productive business. Then you'll make stacks and not grudge the tax.
Better would be stricter controls about the amount of leverage allowed. Yes, that will cut more people out of the market for a while, but it will also reign in rampant inflation, which is the main thing cutting people out in the first place. This really should be a no-brainer since the sub-prime crisis that precipitated the GFC. I don't have an actual reasoning for the ideal figure yet, though, any thoughts welcome. 20% was what I had to get for my place, being self-employed. But I'm almost thinking it should be higher for investment property, something around 30%, basically set at a point where they break even on rents and interest costs, so there is no loss. Then it is a real business, rather than a tax fiddle.
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BenWilson, in reply to
In the end they didn't, by the simple expedient of saying that they had intended to build on the section but had changed their minds. Both sections were sold at a "handsome" profit.
This was the fiddle that DexterX never seemed to accept was commonplace in the first thread which touched on CGT. Perhaps he's just too honest in his own business to see it?
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Danielle, in reply to
Thinking so far has been to make an annual net loss and use the capital gain to make up for it.
The more I read these threads, the more I realise my profound financial naivete. That would never have occurred to me.
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Craig Ranapia, in reply to
Well, I know John Key got sneer at for saying this but I think he has a point. Labour might be playing smart politics this week, but if the actual policy is full of loopholes and focus-grouped *cough* strategic ambiguity how credible is the “fairness’ line? Really?
The tax avoidance industry – like the poor – may always be with us, but our political lords and masters could make it a lot more difficult than they tend to do. While the base-arousing, headline friendly drip-feed sounds good, the devil really is in the details.
The more I read these threads, the more I realise my profound financial naivete. That would never have occurred to me.
I’m sure there’s any number of “tax specialists” who will think of all kinds of *cough* tax-minimisation strategies for a far-from-modest fee. Hell, my partner and I paid more tax than Google in 2009. Don’t be evil, my black arse.
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recordari, in reply to
20% was what I had to get for my place, being self-employed. But I'm almost thinking it should be higher for investment property, something around 30%
I'd prefer it was 50% myself for investment, and 30% standard, but there goes me showing my utopian idealism. In this utopia house prices would be on average $250,000*. Without raising the 'banks are evil' meme, banks are evil.
Having said that, we got 'into the market' on 10%, so that would have been a challenge for us.
ETA * Household Incomes as a proportion of Housing Values would also be more favourable.
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Simon C, in reply to
You might be thinking of Labour's Property Speculation tax from 1973 that taxed profits from property speculation at 90% if sold within 2 years?
It was repealed by National in 1979.
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Craig Ranapia, in reply to
Hell, my partner and I paid more tax than Google in 2009. Don’t be evil, my black arse.
Needless to say, I would be the first to applaud if Goff spend a few minutes on Tuesday laying out Labour’s plan to end the corporate culture of tax avoidance. Because you can’t tell me with a straight face that there’s anything “fair” about a profitable multi-national corporation doing the Irish jig to end up paying less tax in New Zealand than a teacher on an average salary of $42,900. That would be a fight I'd buy tickets to see.
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Rich of Observationz, in reply to
end the corporate culture of tax avoidance
They need to change and simplify the tax basis of large corporations. Move to a structure where the average profit for each industry is designated (e.g. 25% for telecoms) and applied to the firms sales in NZ + exports from NZ. That's the minimum taxable income, even if they purport to have made a loss.
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The more I read these threads, the more I realise my profound financial naivete. That would never have occurred to me.
It doesn't need to be a conscious thing.
If you have any sort of land intensive business, like a farm or rental property, or even if you buy a house rather than rent it, you're taking a punt on a capital gain. Almost no NZ farms make enough profit to pay a mortgage on the land. If you buy a house, you pay a 30-50% premium over rental, so you have to make a gain not to lose.
It's a backwards way to have things.
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BenWilson, in reply to
The more I read these threads, the more I realise my profound financial naivete. That would never have occurred to me.
Well, it is a little hard to believe when you hear capitalist rhetoric about the virtues of investment, which are all very plausible when it comes to setting up a small business of practically any other flavor than property investment. The only other ones that seem to be nearly as bad tend to be all about other financial instruments. What all these guys don't get is that money flowing around and around doesn't make squat. Only production makes something. So actually building or improving homes is practically the only good capitalism involved in the property market.
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Matthew Poole, in reply to
Move to a structure where the average profit for each industry is designated (e.g. 25% for telecoms) and applied to the firms sales in NZ + exports from NZ. That’s the minimum taxable income, even if they purport to have made a loss.
And watch new entrants go to the wall in short order, perpetuating cosy duopolies forever.
Seriously, 2degrees would never have opened its doors under such a tax structure, because they’d be deemed to be making the average return of the likes of Vodafone and Telecom – both of whom do make quite healthy net profits – from their very first customer. Their massive, necessary expenditure on network kit would, under your delusional fantasy, be completely irrelevant and not only would their investors need to fund the capital build-out they’d also have to fund endless tax bills on a deemed profit that bears absolutely no fucking resemblance to the income truth. It will be years before 2degrees turns a gross profit, and quite a few more before the accumulated tax credits for losses carried forward are consumed, and that is not at all unreasonable in a world where we want businesses to start and try to challenge entrenched players. To take risks. To try and drag us out of our collective national productivity malaise.Do you really want to destroy new businesses? Because that would be the net result; an indescribably efficient way to discourage any innovation, any risk-taking, and ensure a steady supply of business bankruptcies to keep the courts and the IRD busy.
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BenWilson, in reply to
If you buy a house, you pay a 30-50% premium over rental, so you have to make a gain not to lose.
That depends on how much you borrow, of course. If you buy it outright, you're not paying any mortgage. There's a break even point where rentals and mortgages are the same. I remember working it out to be around 30% in Oz in the 90s, I don't know what it is here, now. It is quite dependent on interest rates, so can change a heck of a lot.
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BenWilson, in reply to
under your delusional fantasy
Harsh, dude, it's just an idea. But I agree overall, I can't see it being a good idea to ever put caps on how much profit businesses can make. Indeed, I can't see any likely way to "end the corporate culture of tax avoidance". Tax avoidance is not a crime and businesses would be remiss not to avoid taxes they don't legally have to pay. That's what accountants are for.
The focus should be on changing tax structures so that things that really are profit are taxed as such, just like everyone else has to pay on their income. It's a pretty hard thing to do, because businesses running a total reinvestment strategy can make endless losses, whilst becoming enormous. Which is not bad at all, that's growth by any way of calculating it, and they will eventually have to turn a profit, at which point they should be paying a ton of tax. And there will have been a lot of tax in the meantime too, GST, income taxes on staff, etc.
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Rich of Observationz, in reply to
tax basis of large corporations
Is what I said. Not new businesses. And one could easily envisage an exception for startups of scale, and one for customer/employee cooperatives, which is how enterprises *should* be structured.
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because businesses running a total reinvestment strategy can make endless losses, whilst becoming enormous. Which is not bad at all, that’s growth by any way of calculating it, and they will eventually have to turn a profit, at which point they should be paying a ton of tax
Like Myspace, you mean?
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I can’t see it being a good idea to ever put caps on how much profit businesses can make.
How is this a cap? It's for the type of company that contrives to book their sales in Ireland to evade paying tax. Or generates bogus interest charges in order to reduce declared profits.
We don't need those kind of crooks. They *don't* generate GST and income tax (which is their usual defence). If they weren't around, people would work elsewhere and buy goods and services elsewhere, generating just the same tax revenues.
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BenWilson, in reply to
Like Myspace, you mean?
Yup. I'm describing very much the conditions that led to the dot-com bubble, but I don't have the answer about how to prevent that - that could very well be one for the famous discipline of the market. That was pretty much what ended up happening.
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I suspect things are boding well for the policy when discussion (not just here, but one of DPF's key points) tends towards "why aren't we ALSO including the family home?"
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BenWilson, in reply to
Hmmm, yes, I misunderstood you. You're suggesting that a minimum profitability should be expected? What happens when there is actually a downturn? Should the government take every unprofitable business to the wall?
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Martin Lindberg, in reply to
It's for the type of company that contrives to book their sales in Ireland to evade paying tax.
Fscking Bono!
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James Butler, in reply to
If you buy a house, you pay a 30-50% premium over rental
That depends on what kind of house you want. When we (very briefly) looked at whether we could buy a house this year, we discovered that there is a pretty good supply of the kind of place which we would be happy with - largeish apartments/units in solid middle-class suburbs - for sale, but we've never been able to find anything like that to rent; meaning an expensive cold decile-10 villa is actually the best we can get right now. We would love to live in somewhere less "nice" and more practical, and (if we could scrape together a deposit) it would actually cost us less per month.
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DexterX, in reply to
There was a land tax in the late 70s.
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