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WT.... on Tax
3 bullets dodged but there is still a round in the breach!
John Key's statement to parliament has sent a relatively clear signal of his intentions in their drive to overhaul the tax system.
He confirms that specific measures will be announced in the May budget.
Specific announcements for now include:
- Confirmation that personal tax cuts will be across the board
- Changes to property tax will be made but many of the dreaded suggestions put forward by the Tax Working Group are "off the table"
These include:
- land tax
- a comprehensive capital gains tax
- risk free rate of return for taxing residential investment properties
John Key's speech though failed to specify what property tax changes he will make but he clearly hinted in his post speech TV interview that they will include the removal of depreciation allowances on buildings.
Interestingly, he also confirmed "mum and dad" investors would remain able to offset genuine costs against their income, which would also suggest that ring fencing of tax losses is unlikely.
It is our view that residential property investors should breathe a collective sigh of relief that the other potentially devastating tax regimes are off the agenda.
Whilst an increase in GST and the removal of depreciation are obviously not welcomed by investors, they must be kept in context when compared to the significant cash flow impact and downward pressure the other options would have had on property values.
We shouldn't forget that depreciation is generally nothing more than a timing advantage to investors and we will stomach it's removal if it places the necessary tick in the property tax change box.
In the detailed comments from Mr Key's speech, he recognised that a land tax would have only impacted people who hold their wealth in that asset class and would create cash flow problems for many landowners, especially those on low incomes.
On risk free rate of return, he confirmed its conceptual appeal but acknowledged it would create cash flow problems for taxpayers, especially those dealing with actual losses on investment properties. He accepted that property owners could face sizeable tax bills with little or no ability to pay except by increasing rents.
We agree with these interpretations of the impacts, and are relieved the government was able to recognise the potential downside of the new tax regime.
Whilst the threat of a comprehensive capital gains tax is gone, the term "comprehensive" refers to all asset classes. This still leaves some scope for the government to contemplate a targeted capital gains tax. Investors will need to remain vigilant to the threat of a targeted capital gains tax in future.
Much of the remainder of the speech confirmed the government's intention to promote economic growth and reduce spending by targeting eligibility criteria for benefits like the sickness benefit and the domestic purposes benefit.
Whilst we acknowledge the perceived tax advantages to those in the business community that can structure their affairs to reduce their tax liability, we are not of the view that the majority of taxpayers are deliberately pushing this to the point where they qualify for concessions like Working for Familes.
This has certainly not been our firm's experience.
Overall, we hope that many clients will benefit from the drop in the personal tax rate and believe that this will go a long way to softening the impact of the likely removal of depreciation allowances on buildings.
As always, we commit to keeping you fully informed of the tax changes that will affect you as they come to hand.
For clients wishing to hear a commentary on the tax changes, we have recorded an interview with Empower Education.
This interview will be available in 24 hours by visiting the Empower Education website www.empowereducation.com
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Withers Tsang & Co Ltd
24-26 Pollen Street
PO Box 47-145
Ponsonby
Auckland
phone: 64 9 376 8860
fax: 64 9 376 8861
email: reception@wt.co.nz
web: www.wt.co.nz
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