More on balancing Owner-Occupiers against Investors
RBNZ is giving consideration to making certain investors pay higher commercial rates but have problem with how investors can manipulate their borrowing
The Solution?
Assume ALL loans are commercial by placing a levy of perhaps 2% on the charged rate.
To balance this for an O-O credit back this levy where the O-O can prove occupancy for a minimum time each year.
An O-O can get some benefit for one investment unit by attaching a mortgage to the family home to invest in another property but this is very limiting.
The pressure from such action would ultimately lower property prices and benefit both O-Os and investors who would get a higher yield on fully owned (unmortgaged investments)
Tuesday, November 11, 2014
Monday, February 25, 2013
26 Feb 2013
Can New Zealand Housing be Re-priced to 'Affordable'?
Back in the 60s and 70s investment flats were priced for a yield of as much as 10 percent and standard affordable houses were about three times annual income.
The question arises as to whether housing can move toward that level again.
Currently some lesser desirable places enjoy investment yields that are much higher than in main cities. The comparable houses in smaller towns may be half the price of the city version.
I would contend that the value difference is not in the built value but in the land value. Often land is two to three times the value of the structure. Land value ultimately is flexible while buildings do have a constraint in their replacement cost and maintenance costs.
A solution?
Stage 1. Rather than actual rental income received a Government could place an Assessed Rental Value (ARV) on every property. An example may be to start with 5 percent of the CV. This is probably close to current levels in Auckland. Any property earning less than 5% would pay tax as if it had earned 5% less allowable expenses. Any yield at over 5% would pay tax as currently.
This would apply to all real estate not occupied by the owners or usable exclusively by them.
Stage 2. There would be an annual change of ARV to 6% then 7% , 8% and finally 9%
Even at 9% some small town investment yields would still have a tax that is no more than at present.
The effect of ARV -hypothetical outcome.
Firstly investors would know how much tax they would be paying over the development to the ultimate 9% ARV.
This would help owner occupiers because the price of property will adjust within 5 years to accommodate the new rules -see below
Examples now (All 50 week rented)
Property value $300,000 Current rent $350 pw Yield 5% based on rates insurance etc $50 pw
ARV 5% is in balance
Property value $750,000 Current rent $670 pw Yield 4% based on rates etc $70 pw
ARV 5% and tax would be payable on an additional $7500 not received
Year 5
Property value $300,000 Current rent $420 pw Yield 6% based on rates insurance etc $60 pw
ARV 9% is in balance Tax payable on an additional $9000 not received
Property value $750,000 Current rent $810 pw Yield 4.8% based on rates etc $90 pw
ARV 9% and tax would be payable on an additional $31500 not received.
These are radical changes and of course would not happen!
What would actually happen is that prices for investor property would fall and be taken up by owner-occupiers.
A real option
As above but increase ARV by 0.5% annually from 5% until 9% reached
Similar outcome but speculator cut off at the knees and the home ownership raised as many properties return to occupier ownership -even in Auckland
Can New Zealand Housing be Re-priced to 'Affordable'?
Back in the 60s and 70s investment flats were priced for a yield of as much as 10 percent and standard affordable houses were about three times annual income.
The question arises as to whether housing can move toward that level again.
Currently some lesser desirable places enjoy investment yields that are much higher than in main cities. The comparable houses in smaller towns may be half the price of the city version.
I would contend that the value difference is not in the built value but in the land value. Often land is two to three times the value of the structure. Land value ultimately is flexible while buildings do have a constraint in their replacement cost and maintenance costs.
A solution?
Stage 1. Rather than actual rental income received a Government could place an Assessed Rental Value (ARV) on every property. An example may be to start with 5 percent of the CV. This is probably close to current levels in Auckland. Any property earning less than 5% would pay tax as if it had earned 5% less allowable expenses. Any yield at over 5% would pay tax as currently.
This would apply to all real estate not occupied by the owners or usable exclusively by them.
Stage 2. There would be an annual change of ARV to 6% then 7% , 8% and finally 9%
Even at 9% some small town investment yields would still have a tax that is no more than at present.
The effect of ARV -hypothetical outcome.
Firstly investors would know how much tax they would be paying over the development to the ultimate 9% ARV.
This would help owner occupiers because the price of property will adjust within 5 years to accommodate the new rules -see below
Examples now (All 50 week rented)
Property value $300,000 Current rent $350 pw Yield 5% based on rates insurance etc $50 pw
ARV 5% is in balance
Property value $750,000 Current rent $670 pw Yield 4% based on rates etc $70 pw
ARV 5% and tax would be payable on an additional $7500 not received
Year 5
Property value $300,000 Current rent $420 pw Yield 6% based on rates insurance etc $60 pw
ARV 9% is in balance Tax payable on an additional $9000 not received
Property value $750,000 Current rent $810 pw Yield 4.8% based on rates etc $90 pw
ARV 9% and tax would be payable on an additional $31500 not received.
These are radical changes and of course would not happen!
What would actually happen is that prices for investor property would fall and be taken up by owner-occupiers.
A real option
As above but increase ARV by 0.5% annually from 5% until 9% reached
Similar outcome but speculator cut off at the knees and the home ownership raised as many properties return to occupier ownership -even in Auckland
Friday, February 4, 2011
Asset Tax Proposal
Asset Taxation (Substitute for a Capital Gains Tax?)
The Proposal A tax on assets that would apply to all assets over an individual lower limit A threshold that would eliminate most family homes.
Most importantly offset against tax already payable on income # see further explanation below
The means would be best shown by examples which would be based on:
a. Family main residence say $500,000 (50% above the NZ average house)
b. Main residence exemption not available unless owner occupies for minimum 90 days annually. Penalizes absentee owners.
c. Asset tax at 2% of gross asset value (equivalent to notional income of 6% on an asset).
d. Would incentivise making use of items like land banking
e. Would apply to individuals, trusts, and businesses.
f. Would apply to world assets of NZ resident entities.
g. Would avoid the need for a separate FIF regime.
Example 1 Family home $600000 with or without mortgage. Asset tax 2% of $100k =$2000 However income tax paid by owner(s) $20k NO more tax paid
Example 2 As above but absentee/overseas owner paying only $5000 NZ tax Asset tax $12,000
Example 3 Business owning property. Tax payable only if asset tax exceeds income earned. Loss making business may have to pay but recoverable from future profits.
Example 4 High net worth individual with assets of $50 million Asset tax $1 million. Would have to earn in excess of $1 million NZ paid tax but could also offset tax paid to an overseas country.
Example 5 Pensioner with $1,000,000 home. Asset tax could be $10,000 and tax on NZ super would not reach this level. Allowance for tax to be delayed until on sale or death.
Example 6 Taxpayer with overseas investments under FIF (complicated rules!) This would simplify the rules that would apply to all jurisdictions.
#Why offset against tax paid on income?
Examples shown include situations where the owner of an asset has no income associated or has deliberately avoided incurring/declaring tax with the expectation of obtaining non taxable gains or benefits such as Working for Families. Taxpayers who have earnings from outside NZ may not be including these in their position while occupying expensive properties in another example
Why gross asset value? Where income is earned there is already an offset because owner income tax paid is lowered by the interest deducted. Otherwise offsetting mortgage value would be a doubled benefit to the very highly geared.
SUMMARY
Who will pay a tax on assets?
1. Holders of assets that earn nil or low returns of income as returned as income tax.
2. Overseas residents will pay as above but also will pay on their property including a personal home if they are resident for less than 90 days each year.
3. All entities who use transfer pricing to hold their income below a minimum return for income tax purposes and who exercise control over NZ based assets.
Who will NOT pay tax on assets?
1. Those who generally earn 6% return gross and pay income tax accordingly.
2. Home owners on a personal residence of up to $500,000 or $800,000 jointly. Possibly a higher allowed value for those with no other assessible income - retired etc.
3. Superannuitants/ retired whose income is only from non business activities may pass accrued tax to their estate interest free.
SIMPLE IMPLEMENTATION LOGIC
Each asset is taxed based on its annual valuation based on say 5% at 30% = 1.50%
When the entity (owners of the asset) make its income tax return it can reduce its tax payable by the tax already paid on behalf by the asset proportion. Consequently if the asset has earned less than 5% on behalf of that entity's share the net benefit to the tax system is based on a 5% return on the asset.
Bare land for example which has no income will pay 1.50% of its capital value and there is no offset in the hands of the beneficial owner and so that owner will have to find cash to pay from other sources.
This incentivises owners of nil or low performing assets to get a return.
Overseas investors will have to make a 5% return on their gross asset value to avoid the tax and therefore there is less incentive to exercise transfer pricing which reduces NZ tax paid below a nominal 5% return. Double taxation agreements would not allow avoidance because the tax is initially not income related so has no equivalent in the other country.
Owner occupied homes could be excluded by annual adjustment allowance.
Government could introduce the tax gradually each Budget until it reaches a maximum level -possibly 5% or even 6%. Subsequent reductions could be dependent on performance of the overall economy
Thoughts have moved on and the comment below is the latest concept
The Proposal A tax on assets that would apply to all assets over an individual lower limit A threshold that would eliminate most family homes.
Most importantly offset against tax already payable on income # see further explanation below
The means would be best shown by examples which would be based on:
a. Family main residence say $500,000 (50% above the NZ average house)
b. Main residence exemption not available unless owner occupies for minimum 90 days annually. Penalizes absentee owners.
c. Asset tax at 2% of gross asset value (equivalent to notional income of 6% on an asset).
d. Would incentivise making use of items like land banking
e. Would apply to individuals, trusts, and businesses.
f. Would apply to world assets of NZ resident entities.
g. Would avoid the need for a separate FIF regime.
Example 1 Family home $600000 with or without mortgage. Asset tax 2% of $100k =$2000 However income tax paid by owner(s) $20k NO more tax paid
Example 2 As above but absentee/overseas owner paying only $5000 NZ tax Asset tax $12,000
Example 3 Business owning property. Tax payable only if asset tax exceeds income earned. Loss making business may have to pay but recoverable from future profits.
Example 4 High net worth individual with assets of $50 million Asset tax $1 million. Would have to earn in excess of $1 million NZ paid tax but could also offset tax paid to an overseas country.
Example 5 Pensioner with $1,000,000 home. Asset tax could be $10,000 and tax on NZ super would not reach this level. Allowance for tax to be delayed until on sale or death.
Example 6 Taxpayer with overseas investments under FIF (complicated rules!) This would simplify the rules that would apply to all jurisdictions.
#Why offset against tax paid on income?
Examples shown include situations where the owner of an asset has no income associated or has deliberately avoided incurring/declaring tax with the expectation of obtaining non taxable gains or benefits such as Working for Families. Taxpayers who have earnings from outside NZ may not be including these in their position while occupying expensive properties in another example
Why gross asset value? Where income is earned there is already an offset because owner income tax paid is lowered by the interest deducted. Otherwise offsetting mortgage value would be a doubled benefit to the very highly geared.
SUMMARY
Who will pay a tax on assets?
1. Holders of assets that earn nil or low returns of income as returned as income tax.
2. Overseas residents will pay as above but also will pay on their property including a personal home if they are resident for less than 90 days each year.
3. All entities who use transfer pricing to hold their income below a minimum return for income tax purposes and who exercise control over NZ based assets.
Who will NOT pay tax on assets?
1. Those who generally earn 6% return gross and pay income tax accordingly.
2. Home owners on a personal residence of up to $500,000 or $800,000 jointly. Possibly a higher allowed value for those with no other assessible income - retired etc.
3. Superannuitants/ retired whose income is only from non business activities may pass accrued tax to their estate interest free.
SIMPLE IMPLEMENTATION LOGIC
Each asset is taxed based on its annual valuation based on say 5% at 30% = 1.50%
When the entity (owners of the asset) make its income tax return it can reduce its tax payable by the tax already paid on behalf by the asset proportion. Consequently if the asset has earned less than 5% on behalf of that entity's share the net benefit to the tax system is based on a 5% return on the asset.
Bare land for example which has no income will pay 1.50% of its capital value and there is no offset in the hands of the beneficial owner and so that owner will have to find cash to pay from other sources.
This incentivises owners of nil or low performing assets to get a return.
Overseas investors will have to make a 5% return on their gross asset value to avoid the tax and therefore there is less incentive to exercise transfer pricing which reduces NZ tax paid below a nominal 5% return. Double taxation agreements would not allow avoidance because the tax is initially not income related so has no equivalent in the other country.
Owner occupied homes could be excluded by annual adjustment allowance.
Government could introduce the tax gradually each Budget until it reaches a maximum level -possibly 5% or even 6%. Subsequent reductions could be dependent on performance of the overall economy
Thoughts have moved on and the comment below is the latest concept
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