NZPIF VP on "costly tenant tax" and why it should be scrapped fast

The punitive tax imposition is actually losing the government money, he says

NZPIF VP on "costly tenant tax" and why it should be scrapped fast

Peter Lewis, vice president of New Zealand Property Investors’ Federation (NZPIF), has explained the deductibility of mortgage interest for tax purposes relating to residential investment property, and pushed his case for scrapping what he said will soon become “costly tenant tax.”

In an opinion piece, titled Who pays the tax, Lewis said every business in New Zealand – from brothels to banks – deduct the interest of their loan off their income before calculating their taxable profit – that is, apart from those who provide rental housing.

And yes, residential renting is a business, according to both MBIE and OSH.

But some question that as home owner-occupiers cannot deduct their mortgage interest costs, then why should landlords?

“The owner-occupier of a house derives a valuable benefit – shelter – from living in their house but pays no tax on that benefit whereas the landlord pays tax on the benefit – cash income – they receive,” Lewis said. “That is the logical reason for the difference in treatment of the cost of mortgage interest.”

He said it appears that imposing the regime aims to eliminate private-sector landlords, rather than raise tax money.

A case in point is Jane, a school teacher in her late 40s who is renting out the apartment she’s bought with her savings, in a bid to boost her income above the universal pension.

“Up until recently, the rent she received covered the rates, insurance, and mortgage interest payments on that apartment, with a little bit left over for maintenance,” Lewis said. “She is now suffering the impact of the tax burden imposed by the recently legislated inability to deduct her mortgage interest costs from her taxable income. Jane is now being taxed on fictitious earnings, earnings that don’t really exist.

“Already, with that tax now being imposed at the 50% level, she is having to subsidise that apartment by $200 each week, and if the non-deductibility reached 100% that will cost her $400 each and every week. On her fixed salary, she just cannot afford that.”

Jane’s only option? To sell the apartment.

“Almost certainly her tenant will not be able to buy it, so the buyer may well be someone coming out of a relationship breakup or a younger person moving out of a parental home,” Lewis said. “In those cases, that’s one less rental house available in the market.”

So, what happens to the tenant?

“It is highly likely that, given the current shortage, her ex-tenant will end up on the government housing waiting list and moving into a motel that costs the taxpayer $1,000 per week or into Kainga Ora house where, on average, the taxpayer subsidises each and every house by over $16,000 every year,” Lewis said.

He said the regime, bought in against the advice of both landlord groups, tenant groups, and the government’s own advisors, would rapidly become a costly tenant tax that would make life tougher for people like Jane.

As more Janes sell up, tenants will be forced to move out of cost-effective private-sector rental housing into high-cost state accommodation that require substantial taxpayer subsidies far exceeding any possible cost recovery from such a landlord tax. Lewis said.

“The government – any government – is actually losing money by retaining this targeted and punitive tax imposition,” Lewis said. “It should be removed, not by a staged removal over three years as some political parties now propose, but immediately, which will lessen the costs both to taxpayers and tenants.”

Read the opinion piece by Peter Lewis.

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