Revenue Minister Peter Dunne and IRD officials appeared before the finance select committee today and were quizzed about why people had the impression that there was some tax advantage in investments in rental housing.

Deputy Commissioner Robin Oliver was blunt: “The short answer there is none.”

Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income were the same for investments in shares or anything else.

Mr Oliver said the rules were tougher for housing investment than other types.

“In fact under the housing case, the capital gains boundary is brought back a bit. There are tighter rules to what is a capital gain,” Mr Oliver said.

Mr Oliver said the concern appeared to be that housing was easier to get and it was easier to get loans from the bank to invest in property.

“The concern is the level of (debt) gearing that is possible in the house market which… is a matter of the willingness of banks to be laid.

Mr English said Finance Minister Michael Cullen and Reserve Bank Governor Alan Bollard had given the impression that one of the problems fueling inflation were favourable tax laws for investment housing.

Officials and Mr Dunne hinted that people seemed more likely to abuse tax rule in housing investments saying it was an area where they picked up greater non-compliance and clawed more tax back.

The budget had allowed for $14.6 million more in spending by the IRD to crack down on housing tax laws.

“Why is there a widespread view that… housing has a tax advantage,” Mr English asked.

Mr Dunne replied that it seemed to him the belief was part of the national psyche of home ownership and it had been decided by Government to enforce current tax law and not impose new taxes on housing.

Committee chairman Shane Jones said the clear inference from Dr Bollard that part of his “woes” with housing was due to a vagueness with tax law or the way it was enforced.

“What you have told us today is that it is not true,” Mr Jones said.

NZPA

Under the eligibility rules, outlined in Treasury post-Budget notes, people who get the housing grants will be forced to buy a house with a value in the lowest 25% of homes in their town, area or city.

In Auckland City or the North Shore, the Treasury notes say, that would be a home costing $400,000 or less, while in the Queenstown Lakes district, it would be a home worth $300,000 or less. The measure is designed to stop people in cheaper areas using KiwiSaver to buy bigger homes than the government thinks is reasonable.

Under the KiwiSaver scheme, to be introduced on July 1, there will be a first home ownership grant of $1000 a year for each year of saving. That is capped at $5000 per person, so a couple could get $10,000.

The first home deposit subsidies will be paid out in 2010 because only KiwiSavers who have been saving at least 4 per cent of their gross salary into KiwiSaver for three years will be eligible.

For households and families with three or more KiwiSavers clubbing together to buy, the income cap will be $140,000. The levels would be reviewed in 2009, and the property price caps would be reviewed annually.

Property investor Andrew King said the stipulation that homes be at the bottom end of the market appeared to be forcing relatively well-earning couples to downsize their aspirations with the intention of leaving them enough left over to save into KiwiSaver.

“I guess they are trying to reduce the quality of the houses we live in,” said King.

“They feel the homes we live in are too grand and that we spend too much money buying them.”

A spokesman for Finance Minister Michael Cullen said the scheme would provide targeted assistance to help those who struggled most to buy their first home. “This is a helping hand, getting them into their first home, but not necessarily the most desirable home in their life.”

On top of the government handout to buy a first home, he said tax breaks and employer contributions under the KiwiSaver scheme meant people will also have more money to save for a house. Those who failed to meet the subsidy’s criteria could still draw on their KiwiSaver money to buy a home.

To get the housing grant, a KiwiSaver must intend to live in the house they buy for six months or more; this is designed to stop people buying an investment property in one area, pushing up local house prices, and renting in another.

Those who flout the rules will have to repay the money and could be penalised.

The $100,000 cap indicates just how unaffordable the housing market is.

Statistics New Zealand’s June 2006 income data showed the average 15-24-year-old earned just $24,180 before tax. The average 25-34-year-old earned $34,684 and the average 35-44-year-old earned $37,856.

But mortgage broker Adam Parore said there was something demeaning about making middle-income New Zealanders go cap in hand to the government for money.

“I think subsidies have their place in every society, but I don’t believe it’s something families with combined incomes of $100,000 to $140,000 need.

“Michael Cullen’s heart’s in the right place, but … It would be a whole lot easier if he’d just given them a tax cut and let them buy their home from their own money.”

Parore says the three to five year waiting period for the grant will do nothing for those locked out of the market now.

“The nature of the property market is working against the scheme. In five years prices will have moved even further away from first home buyers and that $5000 is going to be worth a lot less.”

Parore did not think the government was trying to force people into smaller houses by saying they had to buy cheaper homes.

“Even if an Auckland couple earning $99,999 got a $10,000 subsidy, had saved $15,000 for themselves and had $10,000 gifted by their parents, they’d still only be realistically able to borrow $400,000 more – making for a buying price of $435,000, which is not a lot higher than the limit the government has set.”

Even if people are ineligible for the grants, all first home buyers will be able to withdraw their own savings, and part of their employers’ contributions, from their KiwiSaver account to help pay the deposit on their first home after three years of saving, though they cannot touch the $1000 the government put in, or its weekly contributions. All members of KiwiSaver, including new home buyers, can channel half their contributions towards paying off their mortgage.

Finance Minister Michael Cullen said Inland Revenue would get an extra $14.6 million over the next three years to strengthen property transaction audits. Speculative activity was driving up house prices and household debt levels, he said. So giving IRD more money would help it enforce the law.

Property auditing gathered $100 million between 2004 and 2006, he said and it was important for IRD to have the resources it needed.

Of the country’s 1.4 million houses, around 400,000 are owned by investors. If a landlord buys with the intention of selling, tax must be paid on any financial windfalls.

Sharon Cuzens from Inland Revenue in Wellington yesterday welcomed the boost.

“It will enable us to pursue further, in-depth investigations and education on a risk area we have been actively targeting for some years,” she said.

IRD would improve information so people were more aware of their liability, monitor major developments to ensure accurate return of sales or profits, boost research and analysis of risk areas and increase audit activity in areas of identified risk, she said.

One housing investment expert also welcomed the Budget package. Andrew King, Property Investors’ Federation vice-president, said speculators who evaded tax were taking high risks. He encouraged those people who were eligible to come clean, declare their profits and pay tax.

“It’s like playing Russian roulette if you don’t,” Mr King said. But he also criticised existing tax law, saying it had too many grey areas.

Matthew Gilligan, an Auckland chartered accountant and specialist tax and legal structures consultant, also welcomed the package, saying IRD was too poor to do its job properly and the money would help.

“They’re grossly under-resourced,” he said, citing long waiting lists for taxpayers seeking rulings and waiting for investigations to be concluded.

Mr Gilligan, whose firm has 4500 property clients investing in residential housing, called for clearer rules on housing investment tax liability. Many IRD staff were excellent but it was not uncommon for staff to change so fast that some taxpayers were dealing with three IRD staff members over one issue, he said.

“That’s not uncommon on an audit.” Nor was it unusual for a taxpayer to be given conflicting advice by various IRD staff members, Mr Gilligan said.

Greg Haddon, a Deloitte tax partner, said the $14.6 million was not nearly enough to tackle the issue.

“This extra money won’t make a big impact,” he said, and failed to address the reasons for so many people investing in housing, because they regarded it as a surer bet than other forms of investment.

IRD has already announced the success of previous crackdowns.

Two years ago, it netted just under $11 million from a campaign in the Queenstown/Otago region. Its concentrated audit blitz on developers and speculators started in March 2004 and by November 2005, it had 120 cases either under investigation or heading for prosecution.

Auckland was also a target two years ago, when IRD said it was increasing resources to hunt down speculators and developers who had kept their profits a secret.

Senior Auckland department official Richard Philp said in January 2005 that an extra $106.6 million was gathered nationally within two years on property transactions, including $52.9 million from Auckland.

The rules

• If you invest for the long term, there is no tax on money when you sell the rental property.
• But if you buy with the main aim of selling for a profit, any money you make is taxable.

First-home buyers wait for Government handout

Prospective first-home buyers hoping for help through a Government-run shared-equity scheme will have to wait a little longer.

Housing Minister Chris Carter said $1.4 million had been allocated in the Budget for work on the potential design of a such a scheme, but a pilot would not be funded until at least next year.

Mr Carter has said the most likely location for a pilot scheme is Auckland and it could involve the Government paying for a 25 per cent or 30 per cent stake in a house, effectively reducing the purchase price of a $400,000 property to about $300,000.

If the house was sold, the Government would take back its percentage share. The scheme is expected to be aimed at the lowest quartile of the housing market.

Mr Carter said the Government was keen to explore how much demand there was for a shared-equity scheme.

If the scheme “flew”, it would be introduced as part of a suite of new measures including a possible Housing Affordability Bill. “Shared equity will also be introduced at the same time as the Government seeks to increase the number of houses in the price bracket affordable to first-home buyers.”

Mr Carter yesterday also announced $43.6 million over four years for other housing initiatives.

That included $23.8 million to increase the life of the Healthy Housing programme and extend it into the Wellington region for the first time.

The programme targets overcrowded households and assists them into more appropriate housing.

The Housing Innovation Fund, which provides government assistance to local authorities and community groups to develop affordable housing, would also receive a boost of $19.8 million.