Budget bad news for property speculators

UPDATED: Property investors are to be the target of a boosted Inland Revenue auditing effort.

Friday, May 18th 2007, 11:01AM

by The Landlord

Finance Minister Michael Cullen’s eighth Budget includes an extra $14.6 million for the IRD in what has been named “the property audit strategy”.

“While there is no political consensus on any major remedial measures I am mindful of the fact that under the current law investing in housing for the purpose of making a capital gain, that is trading in housing, is taxable,” Cullen said in his Budget speech.

The extra money has been allocated “to send a clear signal to housing investors about the purport of the current law”.

Vice-president of the New Zealand Property Investors’ Federation (NZPIF), Andrew King, says he “doesn’t have a problem” with this measure because it applies to those who trade in properties rather than those who buy to hold them for the long-term.

“An investor isn’t a trader – it’s fair and reasonable for traders to be paying their taxes,” King says.

Property commentator Kieran Trass agrees the Budget is “simply providing some funds for the IRD to improve its policing of taxpayers to ensure they are paying tax on property trading profits”.

“That’s great news as it will have about zero impact on the property investment market and simply will help ‘catch out’ some of the cowboys who are trading properties and not paying their taxes.”

Martin Evans, NZPIF president says the federation supports the announcement.

“Investors who buy properties for the purpose of resale are well aware of their tax responsibilities and the majority pay their taxes accordingly. Those who purposely evade taxes deserve to be investigated by the IRD.”

“The NZPIF promotes long-term property investment, from which rental will eventually provide a passive income to supplement retirement income,” says Evans.

Many investors will be relieved that some of the other possible measures that were mooted to discourage property investment like ring fencing tax losses and the introduction of mortgage levies were not introduced, says property accountant Mark Withers. He says property investors who are properly advised by their chartered accountants will be fully aware of the existing legislation that taxes speculative property profits and are likely to be operating within the rules.

“Genuine property investors have nothing to fear from increased enforcement measures,” says Withers. He commented that accountants have been surprised for some time at the apparent lack of audit activity in the property sector.

“Obviously the longer properties are held as investments the more aligned a taxpayer is with the concept of genuine property investment. Investors who maintain good records of their intentions when they acquire property will generally be well placed to defend their tax positions. If you don’t sell it, you won’t need to book a profit and there will be nothing for the IRD to contemplate taxing,” he advises.

Mark Lodder, senior manager at PricewaterhouseCoopers agrees it's good for property investors that moves haven't been made to ring-fence rental property tax losses, but cautions, “the genuine property investor should be ever more vigilant in protecting their position. We can't emphasise enough the need to ensure the relevant evidence is available to support the true intention”.

“Clearly, we will see greater IRD activity, more questions and more disputes, which all adds up to an increased compliance burden” Lodder says.

The Budget also includes Treasury’s economic outlook for the housing market, and it expects a fall in house prices next year. The Reserve Bank’s interest rate hikes over recent times are expected to slowly have an imapct as fixed rate mortgages roll off and onto a higher rate.

The overall impact of that is not small – an extra $3.9 billion dollars will go in interest payments over the next three years, the Treasury says.

On top of that, reduced immigration is also expected to slow demand for new housing, and residential investment is forecast to fall by around 5% in the year to March 2009.

Again however, King is optimistic, saying he ‘doubts’ there will be a drop in house prices and reduced immigration may not eventuate, but that people might opt not to sell if demand for housing does slow.

King says rising interest rates and dropping affordability are enough to soften the market without extra stimulus to stop house price growth, and that the volume of residential investment has already been falling for about the last 18 months. Investment volume declines before prices in a softening market, he says.

Evans says the property market has been high for a long time now and is due to slow down anyway. “If the Finance Minister is correct that only a 5% drop can be expected, property investors will hardly be out looking for further properties.”

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