Ashley Church: Has the Government really fixed its faulty housing tax policy?

COMMENT: If you weren’t paying close attention you probably missed last week’s news of the announcement that the Government appears to be doing a U-turn on one of its anti-landlord tax policies.

The announcement was made by Housing Minister Megan Woods and appeared to reverse last year’s decision to abolish the ability of landlords to deduct mortgage interest as a business expense. The announcement received far less media attention than I might have expected, particularly given that it was such a controversial and widely debated move at the time but, to be fair, it’s one of those egghead policies that tends to go over the heads of people who aren’t directly affected by it.

So what was it about and why does it matter?

Put simply, last year, the Government changed the law so as to phase out the longstanding right of Property Investors to claim the mortgage interest that they paid on investment properties as a tax deductible expense. That may not sound very exciting but we’re talking tens of thousands of dollars and the policy was grossly unfair in that it treated investment in residential property differently to all other forms of business activity.

If you own a retail business, for example, the cost of the interest on your business loan is tax deductible which means that you can deduct it from your profit before that profit is assessed for tax. That’s a fundamental principle of accounting law throughout the world, yet the Government decided that it knew better and introduced a policy which flies in the face of that principle – apparently in the belief that, by doing so, it would dissuade investors from the market.

Ashley Church: “National has refused to confirm whether it will also reverse Labour’s pernicious ‘ringfencing of tax losses’.” Photo / Ted Baghurst

So why does it matter to you?

Because the Government is right, the policy has scared investors out of the market – but as I said at the time, this is the worst possible thing that they could have done. Rather than the exiting of landlords leading to some sort of socialist nirvana where everyone buys a house, the reality is that it inevitably creates a rental housing crisis. Here’s why:

1. A census measure called ‘average household occupancy’ tells us that fewer Kiwis now live in an average kiwi home than did a generation ago – and that number is continuing to drop, which means that, even if our population was static, we would need more homes (rental and occupied) just to stand still.

2. But our population isn’t static. It’s been growing strongly for the past 15 years and will continue to increase.

3. We also know that around 35% of Kiwis choose to rent, rather than own. This statistic has been remarkably consistent for most of the past 100 years and it’s reasonable to assume that it will continue at around that level even as the population grows in real terms (which means we will need more rental homes).

But the panic is over because the Government has restored the right to claim interest as a tax-deductible expense, to property Investors? Right?

Well, not really.

The minister’s announcement specified that as a result of the reversal, mortgage interest can still only be claimed by investors who own 20 or more units in one development, and that those investors must offer tenancies of ten years or more. Since last year’s changes exempted investors who purchased new dwellings anyway, the only change that has really taken place is that asset-rich investors will now also benefit while mum and dad investors, who provide the overwhelming bulk of rental accommodation in New Zealand, will continue to be shafted by a naïve Government more interested in socialist ideology than the needs of the hundreds of thousands of Kiwis who rent their home.

It’s also worth noting that this was just one of a number of punitive policies introduced by this Government to attack property investors and that a fundamental realignment of policy is required to restore confidence to the rental market.

Those changes are unlikely to happen under the landlord-hating Labour Government, but National have indicated that they will roll most of this nonsense back. Sadly, however, and despite repeated questioning from me, National has refused to confirm whether it will also reverse Labour’s pernicious “ringfencing of tax losses”. This is important because, without this key change, any other changes to investor tax policy will be rendered pointless and any changes will be cynical.

I look forward to positive news on this front.

- Ashley Church is a property commentator for OneRoof.co.nz and a real estate business owner. Email him at [email protected]