CGT – Dunedin investment property perspective

by Guest

Guest post: Grant Roydhouse
Accountant and President Otago Property Investors Assn

Imagine an average Residential Investment property in Dunedin … say value $250,000 with Rent of $380 per week. On a cashflow basis the owner pretty much breaks even during this artificial period of low interest rates.

Imagine a capital gains tax was in place now as proposed. The owner would need to allow for a tax @15% on the increase in value of the property  (payable when the property is sold). The Labour Party calculations by Berl Economics on page six estimated an annual price appreciation rate of 3.5%. Using this as a basis, this would give an annual increase in the first twelve months of $8,750 on which tax would later be payable of $1,312.

THIS AMOUNT OF TAX IN THE FIRST YEAR IS THE EQUIVALENT TO $25 PER WEEK.

I would conclude that over time rents would need to adjust by an equivalent amount to maintain the current position, if a similar number of landlords would be expected to facilitate supply of accomodation.

The law of supply and demand will ensure this. Economists explain price movements in this way.

Is a gain on sale of Investment property a “profit”? or merely reimbursement of reduced “real” value by virtue of inflation?

The other major factor which effects Rent levels is interest rates… and they are forecast to rise from later this year. Planning a new tax on landlords to apply 2013 might not be ideal for those who might want to rent housing.

Residential property Investors of course are still going through adjusment of the recent tax changes whereby removal of buildings depreciation as a tax deduction also puts upward pressure on rents and reduces the cash available to a Landlord. My estimate of the impact of this alone was the EQUIVALENT OF $28 PER WEEK.  I understand the sector is expected to provide $700 million extra tax during the current financial year from this alone. Ie. Out of the landlord’s pocket and not (yet) fully reimbursed by tenants. But will inevitably.

And economists tell us a housing shortage is looming. Certainly this side of the election I fail to see any Investor taking the risk and borroing money to invest in housing supply for Investment purposes.

General comments

Berl analysis focussed solely on revenue. There was no mention of the cost of collection. Direct, in terms of IRD personnel (and we know the cost and phenomenal growth of Public servants during Labour’s recent reign).  Indirect, as in the deadweight cost to the economy of all the professional adviser’s assisting reduction of amount paid! (As an Accountant I am qualified to comment on this aspect).

Berl analasis also seemed to make the assumption that behaviour would not change. Hard to imagine some would chose not to sell so as to not pay the tax. Because the tax is selective on the assets it would tax, investment choices will change as a result. If a shortage of available property resulted more people would need to rent… pushing up demand… pushing up… (work it out)

Australia has CGT and it has not prevented a housing boom, nor the taxpayer subsidy of first home buyers to try and help them buy their first home. Is this what we want?

Take away the emotive language and focus on facts. The Average property Investor is not a high income earner and may have one to three properties. Trying to save for retirement so as to ring fence themselves from  Government!

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