4. AARON GILMORE (National) Link to this
to the Minister of Finance
What changes has the Government made to the tax treatment of investment property to increase fairness and help rebalance the economy towards productive investment?
Hon BILL ENGLISH (Minister of Finance) Link to this
The Government inherited a flawed property tax regime that contributed to the excessive property boom of the last decade. So in last year’s Budget we stopped claims for depreciation deductions, tightened rules on loss attributing qualifying companies, prevented property investors from using rental losses to inflate their eligibility for Working for Families, and cut the top personal tax rate, reducing the value of losses that higher-income earners can claim on property investments.
What extra resources has the Government provided to the Inland Revenue Department to help ensure that property speculators pay their fair share of tax?
People who trade in property, of course, have to pay tax on their profits, and we need to make sure that they do. The Budget last year provided the Inland Revenue Department with $119 million over 4 years to target property speculators who were not paying. This investment has paid for itself in the first year, with $115 million of new tax assessments in the last 9 months. The extra funding has also been used for audits centred on the hidden economy, where people tend to do cash transactions to avoid paying tax.
We considered a number of options that were worked through by the Tax Working Group, including a comprehensive capital gains tax. However, we decided against a capital gains tax, for several reasons: it would make the tax system much more complex to administer, it would raise virtually no money for several years, and it would encourage taxpayers to hold on to assets for longer to avoid tax. Far from raising $4 billion, as I think the Opposition claimed, even a 15 percent capital gains tax on rental property will raise only $700 million, which will not pay for even half of its other tax promises.
I have seen what I think was an announcement that a 15 percent capital gains tax applied to investment properties would raise $4.5 billion. This is simply not correct. A 15 percent tax of that nature would eventually raise $700 million. In fact, it would probably take 15 years before it raised $700 million. The other big problem for a capital gains tax is that house prices are flat or falling, so it is quite possible that one could bring in the tax and raise nothing.