Tax cuts for landlords will not reduce rents

Written By: - Date published: 11:23 am, March 11th, 2024 - 127 comments
Categories: Christopher Luxon, cost of living, national, politicans, same old national, tenants' rights - Tags:

Recently the Government has been working out how to cut funding for school lunches for poor kids while at the same time it has also announced that it will restore interest deductibility for landlords.

The interest deductibility changes are being pushed through by tweaking an existing bill when it is reported back to Parliament. The ability for the public to make submissions and to point out how bad the policy is will not be there.

The Government claims that the tax change is a return to conventional tax treatment of the business of being a landlord and will also mean that rents will reduce.

As to the former claim there is one difference. Landlords almost inevitably get into the rental business with the expectation that after a while they will be able to sell their property and make a significant tax gain. Rental income is not the primary driver.

As to the latter claim there is precious little proof that this will actually occur. When interest rates reduced there was no discernible reduction in rents.

This Treasury paper concludes that wage inflation and relative supply and demand of dwellings are the two key drivers of rent inflation for new tenancies at the national level. The paper also said that “[m]ortgage interest rates positively affect rents but relatively little, and the relationship is not robust across model specifications”.

Let’s think about one recent example which shows why the Government’s assumptions are overly optimistic.

The subject person, who for present purposes will be called “Christopher” is the head of a large organisation. He also owns a property in Auckland that he rents out to his employer as an office. Rental for this property is determined by an independent valuation.

Along with five other properties he also owns a Wellington Apartment that is mortgage free. As part of his entitlements under his employment contract he also has the use of a large mansion in Wellington.

Instead of using the mansion he chose to maximise his return by electing to receive $1,000 a week so that he could continue to use his mortgage free apartment. Clearly maximising his wealth is more important than anything else.

Would giving him a tax return make him reduce the amount he claimed? This is unlikely as shown by his earlier behaviour.

And here is the thing, the tax rebate will not affect him at all as his apartment is mortgage free. Clearly he is maximised by personal gain and not by anything else. And he was asked if favourable tax treatment would cause him to reduce rentals on his properties and he said that he was not sure. I am confident that when push comes to shove he will rely on market forces to set rental levels for his properties, and not let some generally expressed desire to reduce his return

The group that are most likely to be affected by the change are the mega landlords. There are 346 in the country and they each own at least 200 properties. The CTU’s pre election analysis was that they would each save up to $1.3 million over five years thanks to this tax cut.

Ka Ching.

Can you imagine them agreeing to reduce the rentals they charge? Especially at a time that immigration is strong and there is increasing pressure on housing stock?

This is a classic example of the Government rewarding its funders. The policy will not work. All it will do is increase money for the wealthy and drive up house prices as landlords look to increase stock.

If you wanted to increase stock you would do what the last Government did, allow depreciation but only for new builds. Competing with first home buyers to purchase homes does not add one new house to existing housing stock. Offering incentives to landlords to buy new stock would, but that incentive will soon be gone.

This is yet more evidence free Government reckons. Clearly they think that trickle down works, and all that is needed is more, not less trickle down.

127 comments on “Tax cuts for landlords will not reduce rents ”

  • Comments are now closed

  1. Kay 1
    11 March 2024 at 12:12 pm

    There are but three certainties in life – death, taxes, and every excuse under the sun for rents to increase.

  2. newsense 2
    11 March 2024 at 12:26 pm

    And on top of Ol King Lux’s House and chariot not being befitting, that the news peasants should cease their begging and their criticism of the government, we had the thousand dollar a week distraction. 52k a year.

    A distraction because here he’s sent himself millions surely? That’s the real rort.

  3. Nic the NZer 3
    11 March 2024 at 12:51 pm

    I think Mickey, you have miss-understood the argument for why rents will decrease.

    "As to the former claim there is one difference. Landlords almost inevitably get into the rental business with the expectation that after a while they will be able to sell their property and make a significant tax gain. Rental income is not the primary driver.

    As to the latter claim there is precious little proof that this will actually occur. When interest rates reduced there was no discernible reduction in rents."

    The basis for the claim rents will decrease is actually the first point, which you agree with, that there ought to be some reduction in the capital cost of rental ownership and that in the longer term this will result in more rental properties being available and the rates on those being minimized to close to the cost of providing them.

    The treasury analysis is suggesting that this will improve the rental market process so supply and demand will naturally bring rents in line with wages on that basis (while ensuring land lords don't have any discretion in that occurring, e.g that they won't have monopoly rent setting power in that process).

    I think that is a bit unrealistic myself, and actually rents could be set much higher if the land lord class set their collective capacity towards doing so. It's actually through a combination of reasonable-ness, convention and mostly the desire to operate your rental hassle free that rents are where they are. To some extent screwing the most out of tenants is not worth it when you are collecting a healthy anticipated capital gain. Obviously some costs are going to be passed on, specifically the capital costs which have been rising due to recent OCR increases and loss of the ability to write these off against income. This is mostly to say that land lords both have some monopoly pricing abilities and they can't really be bothered exploiting these to the maximum extent. Having said that its also a hassle of no benefit to reduce rent when costs decrease, so this tax break isn't doing renters any favours either. Treasury would argue that if the rental market was competitive then rents would immediately reduce. This at least suggests treasury's model of the rental market is not a model of the occurring NZ rental market.

    • mickysavage 3.1
      12 March 2024 at 8:06 pm

      The basis for the claim rents will decrease is actually the first point, which you agree with, that there ought to be some reduction in the capital cost of rental ownership and that in the longer term this will result in more rental properties being available and the rates on those being minimized to close to the cost of providing them.

      I am not sure I said that. I agree that reducing cost of ownership should reduce rentals but my point is that market forces will determine rental levels, not tax cuts.

      And if the desire is to increase the number of units then Labour's policy, giving interest deductibility to new builds, is the right thing to do. Giving interest deductibility to existing homes means that landlords will seek to buy existing homes and the result will be an increase in house prices but no increase in stock.

      • thinker 3.1.1
        13 March 2024 at 7:30 am

        The reality is that National and the gang that became ACT established a market economy in NZ. That means rents will only fall if demand falls.

        Expecting them to fall due to a cost factor is harking back to a cost-plus economy.

        • Nic the NZer 3.1.1.1
          13 March 2024 at 8:56 am

          Cost-plus is a concept of how prices are set also known as markup pricing, not a kind of economy. Most research has found prices are set by suppliers either based on supply and demand or by some form markup pricing in most studies with a majority of sectors using markup prices.

          In the cases where there is an obvious public auction system regularly operating we can be pretty certain about the pricing model (share-market, wholesale electricity markets, financial markets) but in other cases it seems pretty implausible and prices don't regularly change enough for this to be the thinking.

          If a set of prices are being set with markup pricing then profiteering often happens with a markup increase without that having been related to a cost increase. As far as I can see the main thing restraining these prices is just a notion of what is a fair price and its rate of profit. The response to price hikes is typically not a fall in demand or loss of market share in response anyway, which means supply and demand as a mechanism is certainly not restraining those prices. In this case it seems obvious that those prices could also increase/have increased if suppliers really set their minds to it.

          Even if demand for rentals was to fall and this is driving rental price setting this kind of market doesn't seem to mandate that rents will fall as a result. This could equally drive land-lords out of the market while increasing ownership rates with rental rates remaining relatively stable. This is just the structure of housing where you need to model multiple markets simultaneously to get a realistic picture of how pricing works with accommodation substitution going on.

    • SPC 3.2
      12 March 2024 at 11:43 pm

      We had a long period of low interest rates for existing landlords to borrow against their wealth to build new homes. And yet when did new home building increase – while the government was taking away interest deductability for existing property.

  4. Ad 4
    11 March 2024 at 12:55 pm

    It's just lies.

    I won't be reducing anything.

    It might mean I tread water with the mortgage interest rate increases. Nothing more.

    Straight policy lies make my blood boil.

  5. AB 5
    11 March 2024 at 1:17 pm

    They are careful to call it a downward pressure, not a decrease. Therefore if rents don't fall, or even rise, they can easily and unproveably claim that they would have risen/risen more without this change .

    • James Simpson 5.1
      11 March 2024 at 2:46 pm

      That is what I was going to ask. I can't see any claim

      that rents will reduce

      as mentioned by MS. I might be wrong but a quick search doesn't find that claim easily from anyone in government.

      Its a bit like the removal of GST policy Labour had pre election. Removing a cost does not mean the saving will be passed onto the end consumer.

  6. Drowsy M. Kram 6
    11 March 2024 at 2:03 pm

    Three great forces rule the world: stupidity, fear and greed. – Einstein

    “Tax cuts for landLords won't reduce rents“? Seems "very negative" – according to our PM, “everyone can get ahead”, presumably even those problematic “bottom feeders”.

    ‘Get ahead of who/what?’, I hear you ask – and therein lies Luxon's neoliberal genius, and ‘honest’ John ‘tax haven / new flag’ Key before him.

    Opportunities Ahead: Key Government Changes Affecting Property Investors and Tenants in 2024 [19 Feb 2024]
    Bright line test reduction
    Return of Mortgage Interest Deductibility
    Reinstating the 90-day ‘no-cause eviction’

    Everyone apparently gets ahead when self-serving govt MPs favour the already wealthy, landLords in particular, over the 50% of Kiwis who own ~2% of the nation's wealth, and who Lux and co. would have us believe are bleeding everyone else dry. Jesus wept!

    The Side Eye’s Two New Zealands: The Table

    Luxon unsure if he'll lower rents on homes he owns despite policy promise [10 Sept 2023]
    Christopher Luxon is unsure whether he will lower the rents on his own investment properties if National's housing policy is enacted despite saying the plans would put a "downward pressure on rents" if the party is elected.

    IRD report reveals ‘fundamental unfairness’ of how the wealthy are taxed
    [27 April 2023]
    A wealth gap reality check
    … median effective tax rate paid by New Zealand’s richest individuals is just 8.9%, compared to an effective tax rate of 22% for someone earning $80,000 a year with no other income. As The Spinoff’s Duncan Greive explains, “the low tax rates paid are achieved because this group earns just 7% of its income through wages …”

  7. tsmithfield 7
    11 March 2024 at 3:54 pm

    I agree, allowing landlords to claim interest expenses just like any other businesses may not reduce rents. But it mayincentivise landlords to be less choosy if they perceive less risk.

  8. mikesh 8
    11 March 2024 at 5:10 pm

    I think the Income Tax Act regards an expense as deductible if it is incurred for the purpose of gaining taxable income. The purpose of borrowing however is to gain capital, in the form of cash; capital is not income so interest, being the cost of borrowing, should not really be deductible in any case.

    Depreciation, on the other hand should be deductible (it is a legitimate expense related to the cost of running a business), though it should be subject to an "excess depreciation" claw back if and when the property is sold.

    The government seems to have things the wrong way round: keeping non deductibility of depreciation in place, while apparently planning on bringing back deductibility of interest.

    • Traveller 8.1
      11 March 2024 at 8:40 pm

      " The purpose of borrowing however is to gain capital, in the form of cash; capital is not income so interest, being the cost of borrowing, should not really be deductible in any case."

      That only applies if the purpose of borrowing is to gain capital only for capital's sake. However, if the purpose of borrowing is to obtain an asset by which assessable income is then derived (e.g. a machine, a shop), then it is reasonable that the associated borrowing costs of acquiring that asset are deductible in the same way costs of operating the asset are. Indeed, if borrowing costs were not deductible, that would represent a significant discouragement to investment.

      In the same way, rental properties are capital assets that intentionally generate assessable income. The expenses of operating a rental property (agents commission, maintenance, rates etc) are all deductible before deriving the owner's taxable income. There is no logical reason to treat the costs of borrowing to fund the asset that is deriving assessable income any differently for a rental property than for a machine or retail shop.

      Of course, that begs the question – owners of rental properties derive untaxed income in the form of capital gains, particularly over time. This is easily resolved via the current 'brightline' regime, or by re-introducing stamp duties on property sales.

      • mikesh 8.1.1
        11 March 2024 at 11:18 pm

        The cost of an asset is apportioned annually as a charge against revenue: i.e. as depreciation. Interest does not contribute in any way to actual gaining of revenue. If a property is freehold the revenue will be the same. What interest does is furnish the landlord with the capital he needs to purchase a property in the first place; it is a personal cost to the landlord rather than one applicable to the business.

        Capital may be lost through bad business decisions, or it may be spent, but it does not depreciate; $1,000 remains a $1,000.

        • Michael P 8.1.1.1
          12 March 2024 at 10:37 am

          " Interest does not contribute in any way to actual gaining of revenue."

          Landlords would argue that interest payments contribute negatively to revenue. The loan (mortgage) was taken out for the purpose of deriving business income (rent) from the asset.

          The interest paid on that loan isn't capital expenditure (doesn't increase the value of the business asset) so should be seen as a tax deductible expense for company tax purposes and subtracted from total income before company tax is calculated just as with any other business loan. The interest isn’t a personal cost to the landlord because the business is taking out the loan, not the shareholder.

          In my opinion this would be ok but only if there is a strong unavoidable capital gains tax in place with no exemptions. (for businesses).The government is reintroducing interest deductibility without a proper capital gains tax and is reducing the bright line test to just 2 years. This obviously won't put downward pressure on house prices and in turn won't pit downward pressure on rents.

          If the Labor party had introduced a tight, thorough and well thought through wealth tax, we wouldn't need to worry about this kind of stuff.

          • Traveller 8.1.1.1.1
            12 March 2024 at 12:02 pm

            Good points. My concern with a wealth tax is that it is either levied on unearned income, or it is paid so far into the future (for example on death). I am of the view there are equity issues with both of those characteristics. A transactions tax or stamp duty levied at the time of sale and purchase is (IMHO) a fairer and easier mechanism, with the proviso that there would need to be some form of exemptions over the primary residence.

            • Michael P 8.1.1.1.1.1
              12 March 2024 at 12:15 pm

              Yep good ideas, something has to be done.

              I would also start by changing the income tax act so there is no more.. 'income not treated as income for income tax purposes.' Income is income and if anything there should be less tax on work.

              In my opinion ALL income should be subject to income tax if you want fairness. At the very least start taxing unearned income as much as income from hard work is taxed

              People say there shouldn’t be a capital gains tax on the family home… why not? When the property is sold it’s obviously not the family home anymore.

              There should be a capital gains tax on any property sold and it should be a percentage of the difference between what the property was bought for and what it was sold for. they could always make it apply for properties bought from now on if they wanted to water it down a bit

              This way they could reduce income tax on wage and salary earners who can’t work the system to give them a low income on paper and who can’t claim expenses against their income.

              Our tax system is unfair and totally geared to reward unearned income with less tax than hard work

              • mikesh …
                12 March 2024 at 2:51 pm

                Income is income

                That's true of course. But, so what; a capital gain is not income; how can it be; no-one sells capital gains, they sell assets.

                Income has to have a source. That source is the production and sale of goods and services. All other sources are transfer payments; i.e. transfers of someone's income to another person, like a sort of gift. (Gifts are generally not taxable.) The original price of an asset is the sale of a "good", the rest of the price, capital gain, is a "transfer" of the buyer's (tax paid) income

            • Belladonna 8.1.1.1.1.2
              12 March 2024 at 7:44 pm

              Certainly in Australia – stamp duty/tax hasn't resulted in lower house prices – rather the reverse. And has had the perverse result of shutting first-time buyers out of the market (except those who are able to generate a very substantial deposit either through having a particularly high salary, inheritance, or the bank of M&D)

              You have to weigh up whether the consequences of the tax, are 'worth' the intended purpose of the new revenue stream (and whether that money actually gets there).

              Exempting the primary residence simply encourages house-flipping (which is a significant driver of upwards house prices)

              I'm not opposed to a stamp duty, per se, but have yet to be convinced that it would improve the housing situation in NZ.

              • Traveller …
                12 March 2024 at 9:09 pm

                Good points. My concern is for addressing the apparent inequity when earned income isn't taxed in some form, which in turn can lead to ill conceived suggestions such as taxing unearned income.

                • KJT …
                  15 March 2024 at 8:12 am

                  Even Adam Smith, the guru of capitalism, argued that unearned income, such as land rents, should be taxed rather than work income.

                  Your position isn't even logical. And definitely economically counter productive.

                  In NZ with the current tax settings, we are incentivising pure speculation, akin to ticket scalping.

                  As some have said "NZ is a housing market with a small economy attached".

                  If it increases an individuals wealth, it is income! And should be taxed equally.

                  It should be taxed on realisation. Sale, gifting or inheritance. Taxing income before it is realised, opens another can of worms.

                  • Traveller …
                    15 March 2024 at 9:06 am

                    Sorry KJT, I think my use of the term 'unearned' may have been confusing – I should have said 'unrealised'. I'm in complete agreement with you that realised capital gain should be subject to some form of taxation.

                    • KJT …
                      15 March 2024 at 10:40 am

                      No problem.

                      Not the first time a debate has hinged on semantics, not disagreement.

                      Something people who want to slant polling are also well aware of.

                      I often struggle on here with the need to write for many people's different backgrounds and training, with my natural inclination to use the precise terms from my various studies.

                      Hypotheses and theory is just one such set of definitions.

                      Though, even with those who've studied the same thing, eg, accounting. I find they are often very dogmatic about learnings from only having done one narrow field of study. For example confusing what are merely accounting conventions, with their real world results.

              • KJT …
                15 March 2024 at 9:32 am

                Objections to tax on a primary residence for capital gains can be removed by putting a floor on it.

                Even my National voting business mates, agree Key should have been taxed on his 10 million property windfall in Auckland. They don't agree the average house should be taxed.

                The bright line test, of course, discouraged house flipping.

                Interesting how many people of all political stripes I talk to, support CGT on land sales.

                • Traveller …
                  15 March 2024 at 9:47 am

                  "Even my National voting business mates, agree Key should have been taxed on his 10 million property windfall in Auckland. They don't agree the average house should be taxed."

                  That's pretty much my view. We can argue around the edges of thresholds etc, but not taxing large scale capital gains by those with significant property holdings is a clear inequity and inconsistency.

                • Belladonna …
                  15 March 2024 at 9:49 am

                  The bright line test – since it did not apply to the primary residence – had very little impact on house flipping.

          • mikesh 8.1.1.1.2
            12 March 2024 at 2:06 pm

            The loan (mortgage) was taken out for the purpose of deriving business income (rent) from the asset.

            Gaining business income may well have been the motivation for the loan, but clearly the purpose of a loan is the raising of capital. The income doesn't appear until after the the capital has been invested, and a tenant is found.

            The interest paid on that loan isn't capital expenditure (doesn't increase the value of the business asset) so should be seen as a tax deductible expense for company tax purposes isn’t a personal cost to the landlord because the business is taking out the loan, not the shareholder.

            It is the fact that it is a personal cost to the landlord is what makes interest non deductible, not whether or not it is capitalizable; though a case could be made that it should be deemed so for the purpose of calculating CGT if we had a CGT. . It might also be deemed capitalizable for internal accounting purposes.

            • KJT 8.1.1.1.2.1
              15 March 2024 at 8:29 am

              The "purpose of raising the loan" is to make a tax free capital gain on sale of the property.

              Land prices are too high to make rentals a viable ongoing business.

              And force many more people into renting. Paying the landlords mortgage.

              This, of course, has the economically detrimental affect of making any "business" that requires land to operate a "capital gains tax farm" rather than a functioning business.

              Our economy will continue to deteriorate, so long as the incentive to speculate in land, rather than putting capital into productive investment continues.

              Labour/Greens at least tried to slow the rate of misinvestment. Though they should have continued with a massive state house building project, and rent to own, maybe on State leasehold land like Singapore to de-couple housing supply from land scalping. As usual with Labour they didn't grow enough of a spine, to do what is necessary fast enough to have it in place, before the next lot of right wing barbarians demolish it,

              NACT have just relit a booster rocket under rents and housing.

        • Traveller 8.1.1.2
          12 March 2024 at 11:58 am

          "Interest does not contribute in any way to actual gaining of revenue. "

          Not true. If a business borrows to buy a machine to produce widgets for sale, the interest on the loan is contributing to gaining assessable income. That's why that cost is deductible. A landlord purchasing a rental property which then generates assessable income is in no different a position.

          "What interest does is furnish the landlord with the capital he needs to purchase a property in the first place; it is a personal cost to the landlord rather than one applicable to the business."

          If the landlord didn't borrow to purchase the property there would be no interest and no assessable income.

          • mikesh 8.1.1.2.1
            12 March 2024 at 2:27 pm

            "Interest does not contribute in any way to actual gaining of revenue. "

            Not true. If a business borrows to buy a machine to produce widgets for sale, the interest on the loan is contributing to gaining assessable income. That's why that cost is deductible. A landlord purchasing a rental property which then generates assessable income is in no different a position.

            It is the machine that produces the widgets, not the interest. The latter does not contribute to the gain of revenue that ensues. If you think otherwise please explain how interest becomes integrated with the production of those items.

            If the landlord didn't borrow to purchase the property there would be no interest and no assessable income.

            So what. Nobody is twisting the proprietor's arm, telling him that he has to produce widgets.

            • Traveller 8.1.1.2.1.1
              12 March 2024 at 3:20 pm

              "It is the machine that produces the widgets, not the interest."

              Correct me if I'm wrong, but now you appear to be arguing that no interest should be deductible in any business setting? Apart from not agreeing with your logic, that would have serious consequences for investment and ultimately employment.

              "So what. Nobody is twisting the proprietor's arm, telling him that he has to produce widgets."

              You missed the point. As soon as the borrowing is applied to deriving assessable income (e.g. buying a rental property) the cost of that borrowing is a cost of deriving that income, hence it is deductible.

              • mikesh …
                12 March 2024 at 5:23 pm

                Correct me if I'm wrong, but now you appear to be arguing that no interest should be deductible in any business setting? Apart from not agreeing with your logic, that would have serious consequences for investment and ultimately employment.

                You are not wrong.

                You missed the point. As soon as the borrowing is applied to deriving assessable income (e.g. buying a rental property) the cost of that borrowing is a cost of deriving that income, hence it is deductible.

                I think you've "missed the "point". Investing borrowed money in a business is, from the point of view of the business, no different from investing unborrowed money. In the latter case there would be no interest to be deducted, but that would make no difference to the business's productivity. Interest cannot be a cost of "deriving income" if that income can be derived in its absence.

                Income is merely revenue less deductible expenses, so we should really think in terms of deriving revenue rather than income. Income will obviously be reduced if the interest which its proprietor pays is deductible against its revenue.

                • mikesh …
                  12 March 2024 at 5:40 pm

                  "Correct me if I'm wrong, but now you appear to be arguing that no interest should be deductible in any business setting? Apart from not agreeing with your logic, that would have serious consequences for investment and ultimately employment."

                  You are not wrong.

                  The above comments seem to over simplify the problem, In the first place interest deductibility could be reduced in stages, just as Robertson sought to do with landlords' interest. Also, non deductibility could lead to a reduction in interest rates, or a switch to greater reliance on equity financing.

                  However, I accept the a government would probably proceed with caution when it came to other firms' interest deductibility, since other firms are productive while landlords merely exploit pre-existing assets without adding further assets.

                • Traveller …
                  12 March 2024 at 7:14 pm

                  "Interest cannot be a cost of "deriving income" if that income can be derived in its absence."

                  That is not a valid test. If borrowing is required to fund the means by which income is derived, then that income will not be generated unless that borrowing occurs and the interest is incurred.

                  "…since other firms are productive…"

                  Are firms that provide a service 'productive' under your definition? Providing housing is certainly a service.

                  "…while landlords merely exploit pre-existing assets without adding further assets."

                  If I buy a business with pre-existing assets, and don't add to them, I am exploiting those assets to make income without adding further assets. There is fundamentally no difference. Providing rental housing is a service business, and all costs should be treated as such.

                  Anyways, good discussion. I can’t remember the last time someone argued against interest deductibility in all cases, so your argument is refreshingly consistent. (That’s a compliment BTW).

                  • mikesh …
                    13 March 2024 at 11:01 am

                    "Interest cannot be a cost of "deriving income" if that income can be derived in its absence."

                    That is not a valid test. If borrowing is required to fund the means by which income is derived, then that income will not be generated unless that borrowing occurs and the interest is incurred.

                    It shows that Widgets cannot be produced without an investment being made. Where the investment finance comes from is irrelevant to the actual process of manufacture.

                    Are firms that provide a service 'productive' under your definition? Providing housing is certainly a service.

                    The amount of accommodation that was being provided prior to his purchase of the property has not increased. He is not providing new accommodation.

                    If I buy a business with pre-existing assets, and don't add to them, I am exploiting those assets to make income without adding further assets. There is fundamentally no difference. Providing rental housing is a service business, and all costs should be treated as such.

                    The depreciation chargeable on those assets will be deductible. Depreciation is a deductible expense since the assets in question contribute to production. However we have been discussing interest, not depreciation.

                    • Traveller …
                      13 March 2024 at 12:58 pm

                      "Where the investment finance comes from is irrelevant to the actual process of manufacture."

                      I'm not sure that's relevant. What is relevant is if the business has incurred cost in purchasing the machine from which assessable income is derived.

                      "He is not providing new accommodation."

                      'New' is not a test. A service is being provided, new or not.

                      "However we have been discussing interest, not depreciation."

                      My comment was about "all costs", including interest.

                    • mikesh …
                      13 March 2024 at 2:42 pm

                      'New' is not a test. A service is being provided, new or not.

                      If a barbour provides you with a haircut he is providing a service since he is providing you with a new, and hopefully, improved appearance. A landlord is not providing any new accommodation, but merely exploiting the property's existing accommodation. The capacity for providing accommodation comes with the property. Whether a service is new or not does make a difference.

                    • Traveller …
                      15 March 2024 at 9:20 am

                      "Whether a service is new or not does make a difference."

                      A commercial property owner that leases a building is not providing a 'new' service (by your example) yet can claim a deduction for interest on their cost of borrowing.

                      An internet service provider that provides access to the internet is not providing a 'new' service, yet can claim a deduction for interest on their cost of borrowing.

                      There are numerous examples. Singling out residential landlords was illogical.

                    • mikesh …
                      15 March 2024 at 9:51 am

                      There are numerous examples. Singling out residential landlords was illogical.

                      This is correct. However, this does not mean that interest should be deductible in the case of residential rentals; it just means that it probably should be non deductible in other cases also.

                  • mikesh …
                    19 March 2024 at 2:13 pm

                    Providing housing is certainly a service.

                    Then why is it not subject to GST ?

                    • Traveller …
                      20 March 2024 at 12:22 pm

                      Not all services are subject to GST. Financial services is the most obvious example. And you do realise that if residential rent was subject to GAT, it is the tenant who would pay, not the landlord?

                    • mikesh …
                      20 March 2024 at 5:22 pm

                      Precisely. Financial services are not productive. That's why interest.which is a financial charge should not be deductible.

                      The tenant pays all the landlord’s tax, including his income tax. Were else is his tax to come from, but from the tenant, if the landlord is not producing anything.

      • KJT 8.1.2
        12 March 2024 at 8:57 pm

        The difference is, with machinery, if you depreciate it and then sell it for more than the depreciated book value, you have to cough up tax on the difference. Remembering it when people sell big stationary Tanner power tooling that actually appreciates.

        The lack of CGT on property means that it is treated more favourably for tax than any other capital asset, including workshop machinery. Which in NZ distorts investment to the detriment of the economy, renters and normal home buyers.

        It also means that actually doing rentals, or farming, as an ongoing business, is not viable when you are competing with capital gains tax farmers to buy land. Any productive business which needs land to operate on is paying other rent, or interest, that is excessive due to the hiking of land prices for capital gains. Making many NZ businesses much less viable.

        If expenses such as interest are claimable, then reverse depreciation should be applied and taxed at the same rate.

        • Traveller 8.1.2.1
          12 March 2024 at 9:55 pm

          "The lack of CGT on property means that it is treated more favourably for tax than any other capital asset, including workshop machinery."

          I understand your point, but it's not entirely correct. For example, if I borrow money to purchase a business (a capital asset akin to a residential rental), I can claim the interest cost of those borrowings. If I later sell that business, I pay no CGT on any capital gain. In that regard, the return of interest deductibility simply takes us back to a situation where there is a level playing field between different forms of business.

          • KJT 8.1.2.1.1
            12 March 2024 at 10:34 pm

            Not correct.

            For a productive business to be worth more over time, generally value has to be added to it.

            Land appreciates just by existing, currently, as the result of speculation and rent.

            Look up" the chain across the river". Sunday Essay: The chain across the river | The Spinoff

            • Traveller 8.1.2.1.1.1
              13 March 2024 at 9:21 am

              That objection would be overcome with a targeted tax on the 'unearned' capital gain. It doesn't negate the point about the consistency of treatment of deductions for borrowing costs.

          • mikesh 8.1.2.1.2
            13 March 2024 at 11:23 am

            “For example, if I borrow money to purchase a business (a capital asset akin to a residential rental), I can claim the interest cost of those borrowings. If I later sell that business, I pay no CGT on any capital gain. In that regard, the return of interest deductibility simply takes us back to a situation where there is a level playing field between different forms of business.”

            I do not deny that that Robertson's move against deductibility of interest in the case of landlords means that landlords are being treated differently from other businesses in this respect; I would be inclined to treat all business interest as non deductible, though there may be some justification for the difference inasmuch as other businesses are productive whereas rental businesses are not.

            • Nic the NZer 8.1.2.1.2.1
              13 March 2024 at 11:48 am

              I think you have a miss apprehension about the treatment of interest payments in tax returns. Loan repayments have two parts including an interest part and a capital repayment part. In most cases loans are structured such that part of the loan is repaid with each payment. The interest payments on the other hand are income of the institution which granted the loan.

              It's only the interest payments which are tax deductible, while the capital payments which increase the borrowers equity are never deductible. Any competent tax accountant will specifically need the interest payments and not the loan repayments to complete a return.

              • mikesh …
                13 March 2024 at 1:07 pm

                I think you have a miss apprehension about the treatment of interest payments in tax returns. Loan repayments have two parts including an interest part and a capital repayment part. In most cases loans are structured such that part of the loan is repaid with each payment. The interest payments on the other hand are income of the institution which granted the loan.

                I have always understood that – for decades in fact. These are called "table mortgages". I don't think I have written any thing which might indicate that I don't understand such matters.

    • Belladonna 8.2
      12 March 2024 at 7:50 pm

      I think the Income Tax Act regards an expense as deductible if it is incurred for the purpose of gaining taxable income. The purpose of borrowing however is to gain capital, in the form of cash; capital is not income so interest, being the cost of borrowing, should not really be deductible in any case.

      I don't think that the IRD agrees with your definitions, here – and it would certainly not be the intention of the legislators.

      For all businesses (other than, currently, residential housing)- the cost of interest payments (but not capital repayments) is a tax deductible expense.

      • SPC 8.2.1
        12 March 2024 at 11:20 pm

        A business pays tax on their realised CG, unlike landlords.

        We could afford a change to the tax of productive businesses if we taxed all income – including CG.

        • Belladonna 8.2.1.1
          13 March 2024 at 7:55 am

          I'm not aware of businesses paying tax on CG.
          They pay tax on profits. But CG is only realized when the business is sold. And AFAIK – there is no CG tax applied.

          • SPC 8.2.1.1.1
            13 March 2024 at 4:58 pm

            Any business buying renovating and on-selling property has their CG included in their profits.

            A business that buys and sells companies – say BIL, did the same.

            Such CG is income and revenue contributes to profits.

            In 24/36 OECD nations there is CGT applied on sale of a (sole trader) business.

            In our case CG on all landlord property sales is required to direct investment to useful purpose to realise a more productive economy (lower property cost for workers for one).

            And in the matter of investment in new builds – restricting mortgage interest cost deduction against rent income to these properties only.

            • Belladonna 8.2.1.1.1.1
              14 March 2024 at 8:09 am

              I think what you're saying here is that there is no CGT – in NZ – but you think there should be.

              The forms of tax you're referring to on sales of property and business – are not taxed using a CGT – it's standard business taxes. Once sold, the asset turns into revenue, which is taxed.

              I have no objection, per se, to a form of stamp duty – but I've yet to see any rational explanation of how it will actually reduce the costs for individuals – either buying or renting property.

              If the argument is just that the Government revenue stream will increase and be spent 'wisely' – well just how 'wise' do you think this government would be?

              • SPC …
                14 March 2024 at 6:15 pm

                It is indisputable that there should be a CGT on the sale of landlord property – as there is in 35/36 OECD nations.

                And until that is the case there should be no deduction of interest against rent income derived from the purchase of existing property.

                Stamp duty has nothing to do with that.

          • KJT 8.2.1.1.2
            15 March 2024 at 8:42 am

            In fact, if you are, for example, a builder in the business of building houses and you build a "spec house" or renovate a house, whether you live in it or not, you are liable for tax on total earnings from the sale. Less expenses of course.

            That is treated as income/profit.

            One of the many anomalies in tax in NZ that makes accountants, rich.

            NZ is also one of the countries were an individual cannot claim, "expenses incurred to earn a wage" such as protective clothing or training, against income tax

      • mikesh 8.2.2
        13 March 2024 at 11:30 am

        It was was an actual provision in the Income Tax Act. But that was a long time ago, and whilst I haven't really kept up with changes to the Act, I doubt whether that bit would have changed, at least as the first part of your contention is concerned. On the other hand they listed interest as one of the expenses that were deductible, but in my opinion that represented an anomaly in the Act.

        • mikesh 8.2.2.1
          13 March 2024 at 11:45 am

          Interest is probably treated as deductible throughout the capitalist world, I doubt if any tax authority, least of all our IRD, is going to to stick its neck out and say otherwise, even if they considered deductibilty to be irrational.

          • Belladonna 8.2.2.1.1
            14 March 2024 at 8:13 am

            So, yes, your interpretation of the legislation is somewhat idiosyncratic. And not shared by any Western government, let alone the NZ one. It would be interesting to see if it's shared by any of the non-Western economic systems (China & Russia spring to mind).

            • mikesh 8.2.2.1.1.1
              14 March 2024 at 12:12 pm

              (China & Russia spring to mind).

              Why those two particularly? They are two countries which seem more enlightened economically than Western countries, at least now that they have abandoned communism.

              • Belladonna …
                14 March 2024 at 12:52 pm

                Well, if you have already formed an opinion of their level of ‘economic enlightenment’ you should easily be able to find out if they allow interest deductions.

                • mikesh …
                  15 March 2024 at 9:57 am

                  more enlightened economically than Western countries

                  is what I said. But that's probably not saying much. The West probably lost the plot when they abandoned Keynesianism.

  9. randal mcmurphy 9
    11 March 2024 at 5:24 pm

    Adam Smiths "VILE MAXIM" writ large!

  10. Mike the Lefty 10
    11 March 2024 at 6:21 pm

    Chris Luxon should lead by example and reduce the rent on the houses he owns.

  11. No-Skates 11
    12 March 2024 at 8:43 am

    Remember when Labour increased student living expenses/allowance payments by $50 per week?

    Guess how much rents per room in student rentals went up by?

    https://www.stuff.co.nz/national/politics/100485600/student-allowance-boost-blamed-for-rent-spikes

    Rents follow what the market will bear, not what it costs to supply.

    • Belladonna 11.1
      12 March 2024 at 7:53 pm

      The demand side is also a constraint. Following Covid, when there was a mass exodus of all the young people off on their delayed OE, rental prices in Auckland went down – since the supply was greater than the demand.

      Of course, since then, we've had massive immigration – and the demand pressure has increased once again, driving up prices.

      Really, the only way to resolve the situation is to build, massively.

  12. Incognito 12
    12 March 2024 at 9:26 am

    Over the last 20 years, wage rises and the relative supply and demand of homes were the 2 key drivers of rents at both the national and regional level, the paper shows.

    https://www.rbnz.govt.nz/hub/news/2023/08/what-drives-rents-in-new-zealand

  13. Tiger Mountain 13
    12 March 2024 at 9:45 am

    Heh, go Micky, “tax cuts for landlords will not reduce rents”–no shit!…

    The rentier class exist to exploit tenants with their mouldy, overpriced dumps, some of them are professional and do it coldly without a backward glance, others take it personally when renting a “family” investment dwelling. Sod’em I say and lets get back to mass public housing.

    • Belladonna 13.1
      12 March 2024 at 8:02 pm

      NZ has never had "mass public housing" in the way that would be needed to address the current housing crisis.

      The earlier state houses – were only intended for a tiny minority of the population – with the preferred pathway for working class upwards (in a good stable job with long-term employment prospects) was to get a mortgage and buy your own.

      It was never intended to be the housing for the middle classes. For one thing, the government couldn't afford to build the numbers required (the financial problems that Kainga Ora have run into is a case in point)

      Figuring out what is making building houses in NZ so expensive (and it's not just one factor) and fixing it – would get the vast majority of the people in unstable housing into homes of their own – and let the Government concentrate on providing housing for people who need a houser-of-last-resort.

      • Kat 13.1.1
        12 March 2024 at 10:05 pm

        Here's a go figure…..the mortgage interest deductibility for rental properties is approx $3b over three years for landlords………

        Instead of fueling housing as an investment industry the govt could instead promote and foster home ownership. With that mindset, the rest becomes elementary.

        • Belladonna 13.1.1.1
          13 March 2024 at 8:00 am

          If you propose ring-fencing this tax take for this purpose — which currently doesn't happen.

          Doesn't address the other drivers of high house prices. And doesn't magically make more houses appear (the scarcity issue).

          • Kat 13.1.1.1.1
            13 March 2024 at 11:47 am

            Ring fenced….good idea..

            And yes it does address the other drivers of high house prices…aside from unplanned global influences such as wars, financial crises and pandemics affecting material supply, removing the investment/industry aspect from housing does away with the main speculative drivers that push up house prices along with the resultant negative social impact.

            • Belladonna 13.1.1.1.1.1
              14 March 2024 at 8:21 am

              You do realize that interest as been non-deductible in increasing proportions for some time – and that depreciation has been totally non-deductible for even longer. Doesn't seem to have a downwards effect on housing affordability, or rent costs, does it.

              The biggest driver of high house and rental prices is availability. When something is scarce, the competition for the limited supply goes up, and so do the prices. Basic law of supply and demand, which no government has been able to repeal. Even those which have tried, have simply fueled a black market.

              The next biggest driver of house costs in NZ – and a key influencer on the supply of housing – is the cost to build. It is ridiculously expensive to build a house in NZ.

              Increased Government tax take does nothing to affect either of these issues.

              Finally, if such a tax had been enacted by the last government – and so well embedded that the current one wasn't going to change it – do you have confidence that this new and increased revenue spend would be used effectively by this government.

              • Kat …
                14 March 2024 at 8:53 pm

                Again……changing the mindset from a housing speculation industry to home ownership will have the desired effect of making mega landlords redundant.

                Why….because being a mega landlord would no longer be a viable business.

                • Belladonna …
                  15 March 2024 at 8:43 am

                  I guess your vision is that the only people involved in the provision of rental housing would be government or non-profit agencies.

                  Do you have a pathway to get there from here? Because right now – and the proposed tax legislation wouldn't change this – most people renting can't afford to buy. And there is no possible way that the government, et al – can logistically provide enough state housing for them.

                  Not forgetting, that most of the 'housing speculation' driving up prices is driven by individuals house-flipping – (the old Kiwi pattern of: buy, do-up minimally, sell, repeat). If you do it to your 'own home' then there are currently no bright-line test claw-backs.

                  I note that you've carefully not answered my question about whether you would trust the current government to spend this new tax revenue stream wisely…..

          • mikesh 13.1.1.1.2
            13 March 2024 at 11:56 am

            I have generally suspected, though I cannot produce evidence, that the rush by boomers to purchase investment properties is probably one factors driving up house prices – it increases the demand for houses. Of course borrowing to make those investments makes things worse; borrowing would seem likely to have contributed to increases in rents as landlords seek to recover their interest costs.

            • mikesh 13.1.1.1.2.1
              13 March 2024 at 12:28 pm

              The opportunities party seemed to have the best take on this particular problem: they would not have allowed an investment to proceed unless the investor could put a 100% of the purchase price as a deposit.

              • Kat …
                13 March 2024 at 6:29 pm

                Best to just kill off the speculative investment mindset in housing altogether and focus on houses being homes.

              • Belladonna …
                14 March 2024 at 8:24 am

                All that does is encourage the mega-landlords. You just increase the mortgage by 10% for each of your 10 rental properties, in order to fully fund the purchase of the 11th.

                • mikesh …
                  14 March 2024 at 3:27 pm

                  If rental income was not taxable then no expenses would be deductible under current tax rules. Assuming a 33% tax rate such an arrangement would mean a 50% increase in net expense costs.

                  • Belladonna …
                    15 March 2024 at 8:45 am

                    If rental income was not taxable

                    Are you actually proposing that no tax would be paid to the IRD on rental income?

                    • mikesh …
                      15 March 2024 at 10:08 am

                      No. But if a landlord experiences a loss that loss would not be deductible against other income. This would not be the case if rent was not taxable. Of course they would be better off if they made a profit and paid no tax on it; but, who knows, maybe rents would be lower in that case.

                      After all, it is the tenant who is paying the landlord's tax – as part of his rent; and rent is paid from income which has already been taxed.

                      PS: I was wrong when I said that non taxability would lead to a 50% increase in outgoings This obviously cannot be true since outgoings would remain the same.

                  • Belladonna …
                    15 March 2024 at 8:48 am

                    Really – it sounds to me as though you just want to make the government and non-profit organizations the only provider of rental housing. Actually legislating for this – would be a more effective pathway than trying to tinker with tax law to achieve your goal.

                    I don't think you have a hope of actually finding a political party which would agree with you. But, they're not going to agree with your tax legislation, either.

                    • mikesh …
                      15 March 2024 at 10:20 am

                      Really – it sounds to me as though you just want to make the government and non-profit organizations the only provider of rental housing. Actually legislating for this – would be a more effective pathway than trying to tinker with tax law to achieve your goal.

                      Are you suggesting that private landlords would not wish to invest if the investment was not taxable?

                      I don't think you have a hope of actually finding a political party which would agree with you. But, they're not going to agree with your tax legislation, either.

                      They certainly won't if nobody floats the idea.

      • Descendant Of Smith 13.1.2
        13 March 2024 at 12:54 pm

        It is the shift in GDP share from workers wages to profit that has made homes expensive for workers. The fact that you need two incomes to raise a family.

        This coupled with mass immigration without sufficient supply increase.

        State housing was for workers in the main – the problem is is that many low paid workers think they are middle class – hint they are not. They have no solidarity with the poor for this very reason.

        Much of GDP also goes offshore – not just in profits but in fees for using branded names money needs to stay circulating in the local economy to benefit.

        • Belladonna 13.1.2.1
          15 March 2024 at 8:54 am

          I think that you'd have to go back a very long way in the 20th century to find a time when "State housing was for workers in the main" – it certainly hasn't been the case – certainly since the 50s – with the development of the huge 'nappy valley' subdivisions – predominantly for the working class. The aspiration for home ownership by the working class has been a strong element in NZ.

          The issue now, is that home ownership is effectively outside the grasp of the vast majority of working and middle class families.

  14. Phillip ure 14
    12 March 2024 at 10:27 am

    The very idea that the scrofulous rentier-class will give some of the results from their profiteering back to their victims..

    ..is beyond ridiculous..

    (Obvious question for luxon: ' with your seven rental properties..how much will you pocket from this policy..?..and how much of that extra profit will you be returning to your tenants..?'..

  15. Poldark 15
    12 March 2024 at 11:52 am

    What brasses me off more than anything about this is the feeble approach from the media about the issue. The govt argument has been that there will be more houses available for rent. New builds have always had interest deductibility. So where are these houses coming from? Obviously pinched from first time buyers. Which was what this unorthodox approach to interest deductibility was designed to achieve and was successful to some extent. But the media and interviewers have not pushed this point.

    And so we are led to believe that this present regime is restoring orthodox taxation methods to our so called quaint "hermit kingdom".

    • mikesh 15.1
      13 March 2024 at 12:13 pm

      New builds have always had interest deductibility.

      That was because a new build would have been sold immediately to the subsequent owner. The builder would have deducted interest involved in the house's construction much in the same way that interest would have been deducted in respect of the manufacture of any product. Robertson seems to have provided deductibility for a new builds subsequent to the build, which would seem to have been something of an anomaly. He probably just wanted to encourage new builds, which may have provided some justification.

  16. Kat 16
    12 March 2024 at 1:09 pm

    The demise in the quality of politicians and specifically this current poor excuse for a govt is only matched by the demise in the quality of the investigative powers of the media.

    Listening to Morning Report is becoming painful. Not only is the format in need of a revamp but the presenters are weak. Coran Dann questioning talking with Luxon is about as investigative and holding to account as a friendly chat over a cup of tea. Ingrid is just too nice and when she does manage a question that deserves a serious answer she just accepts the glib response and moves on……..

    Barbara Dreaver, Susie Ferguson, Kim Hill(please come back…please) John Campbell and Jack Tame are all we have in the fourth estate that consistently appear to challenge politicians and ask the necessary questions on our behalf. If I have missed someone out I am happy to be corrected.

  17. Rodel 17
    12 March 2024 at 2:28 pm

    C'mon Micky S. Don't you believe Prime Minister Seymour when he assures us that 'kiwi landlords will do the right thing'?

  18. Chess Player 18
    12 March 2024 at 8:25 pm

    Of course, if there was a capital gain tax in NZ, just as there is in many countries, there would a broader tax base and there would be money to spend on nice things.

    Remind me again whose party had unfettered control for 3 years and couldn’t summon up enough backbone to implement a CGT?

    • mikesh 18.1
      13 March 2024 at 12:20 pm

      Of course, if there was a capital gain tax in NZ, just as there is in many countries, there would a broader tax base and there would be money to spend on nice things.

      This of course goes without saying. The introduction of any new tax is likely to produce money "to spend on nice things". This is something of a tautology. Perhaps a tax should be imposed on the use of nasty defences like the Sicilian.

  19. SPC 19
    12 March 2024 at 11:27 pm

    The government narrative is only if there is favour to landlords, can landlords be in a position to be generous to their tenants.

    1.So they should pay less tax on their rent income by being able to write off the mortgage interest cost of buying up an existing property.

    2.Have less oversight of their compliance with regulation – treatment of tenants or standards of the property.

    3.Be able to remove (problem) tenants easily (see 2).

    4.There being no expectation that any landlord charge anything less than market rent, it is a "private sector" business – not a charity.

    5.Those unable to pay market rent in their area can apply for an AS. So government subsidise the private business beyond the incomes of workers.

    6.Landlords do not contribute to the revenue to provide the AS because they pay little rent income tax, have no CGT liability and no estate tax (24/36 OECD nations have CGT and estate tax).

    It is class war, you would have to be blind not to notice.

    The only constraint on landlord profit making being made by the government is forcing those on the MW (increase 25 cents $10 a week) facing $60 pa rent increases to share with others via lounge surfing/garages/caravans to reduce demand for property.

    Here the government is catering to employer interest – maintaining a domestic low wage working class while importing migrant labour to service the middle class at minimal cost.

    • aj 19.1
      13 March 2024 at 8:17 am

      Nailed it SPC

      • mikesh 19.1.1
        13 March 2024 at 3:36 pm

        So they should pay less tax on their rent income by being able to write off the mortgage interest cost of buying up an existing property.

        I have long been of the opinion that a rental agreement is merely a private arrangement between the occupant of a property and the owner, and that therefore residential rental income should not be taxable; no new income is being produced; the rent is just a transfer of pre-existing tax paid income from the occupant to the owner, with no new value being created as far as the economy is concerned.

        Of course in this case no expenses would be deductible.

        • SPC 19.1.1.1
          13 March 2024 at 5:07 pm

          Do you regard income generated by shares and bank deposits as the same?

          If not, it is just a reward to (historic wealth – landed gentry) property ownership over all other "ownership" investment.

  20. mikesh 20
    13 March 2024 at 5:31 pm

    Do you regard income generated by shares and bank deposits as the same?

    Income from share dividends is generated by productive activity on the part of companies. The imputation credit system ensures that the shareholder pays his share, which he receives from dividends, of that income at his own tax rate. Interest presumably also flows from productive lending on the part of the bank or financial institution.

    If not, it is just a reward to (historic wealth – landed gentry) property ownership over all other "ownership" investment.

    True, providing one is not prepared to institute a wealth tax. That, or a land tax would be the appropriate way of dealing with that particular problem.

    However I was only talking about residential rentals, not commercial.

    • SPC 20.1
      13 March 2024 at 5:47 pm

      Companies operate by shareholder funding or debt (borrowing) finance. They pay rent/dividend for the capital invested in the business economic activity.

      Banks borrow money to on-lend – the economic activity is that of those they lend to. Those with money are rewarded with rent/interest.

      Providing housing to others is an economic activity, even more so if it is a new build.

      Here it involves those with spare cash/capital invested so that those without this capacity can have tenancy.

      The same way money goes via a bank to those without it, or via the collective of shareholders via a start-up to a functioning business.

      Two of the three offer the chance of CG, investment in property and investment in shareholder ownership. And the other does not. It is the odd one out.

      And interest often only maintains the value of the money across time.

  21. mikesh 21
    14 March 2024 at 11:55 am

    “Providing housing to others is an economic activity, even more so if it is a new build.”

    Building a house is a productive economic activity. Renting out after it is built is not. I would not allow interest paid afterward to be deductible because I think the cost of the build, including the interest paid for the build, to be an expense personal to the landlord.

    • mikesh 21.1
      14 March 2024 at 2:58 pm

      Actually all the interest should be non deductible. If someone wants to own a property, whether he wants to live in it himself, of whether he wants to rent it out, he should meet the full costs of acquisition, including the interest, himself, and not expect the taxpayer to subsidise it.

      • Traveller 21.1.1
        14 March 2024 at 4:22 pm

        The taxpayer doesn't 'subsidise' landlords any more than they subsidise any business that claims legitimate expenses incurred in deriving assessable income. Renting is a business activity, in which a service is provided for a price. Interest is a cost of generating income from that activity for landlords with borrowings specifically for that activity. Consistent with other business activities, the interest cost is therefore deductible. It's entirely logical and consistent.

        • lprent 21.1.1.1
          14 March 2024 at 5:01 pm

          You simply haven't bothered to think this through logically (I won't speculate as to why) by exactly the same logic. There is a reason that businesses and income taxes are roughly the same.

          Exactly the same tax break should also extend exactly the same to all residential home-owners. They too are paying interest rates to the mortgage holders. That is also a "legitimate expense". But it has no such tax deduction – why?

          They are exactly the same as a landlord in that they are paying a cost (interest against a loan) to have a residence that they provide to their household. They pay this interest using a income (like rents are income).

          All residential owners should be able to claim exactly the same costs as a landlord does and claim that as a break against income related taxes. That would be logical because there really shouldn't be any tax difference between taxable entities – businesses or employees or retired or even beneficiaries.

          There really isn't much of difference legally or tax wise (outside of consumption taxes) between taxable entities. But it does appear that you have identified a generic anomaly that should be rectified.

          For that matter rents are "legitimate expenses" for tenants of a household, perhaps they should be treated in exactly the same that businesses are – rents should deducted as costs against income and thereby reduce tax paid.

          Which is all a way of saying that you are an idiot.

          What is the economic justification for treating businesses or landlords different from every other taxable entity?

          I will bet that you cannot logically make one where the average landlords makes a effective contribution to the overall economy.

          After all, virtually no landlords do something productive and actually do something that contributes material goods or services like building new housing. What they typically do is organise a loan with seed capital to buy an existing residence. Most of the time they do minimal fixes and then rent the property out. They seldom do any actual work on the property, they usually just farm it out to property manager who charges for their minimal services.

          Basically landlords are just turning capital into more capital without providing any economic benefit to anyone else apart from their eventual bank balance when they sell the property and take the capital gain. What they are doing is making sure that because of the high relative to income rent payments, others cannot buy their own property.

          As far as I can see landlords absolutely provide no extra value to the economy that justifies treating them as a special case. Most businesses are productive, they provide economic activity and employment that strengthen the economy.

          Currently landlords because they invariably provide purchased accommodation that they purchase from existing housing stock (and seldom if ever get built themselves) and then only provide at market rates based on a government driven artificial shortage. The govt pushes the nett inwards migration without providing the housing infrastructure to accommodate them.

          In our current economic system, landlords can easily be regarded as being simple economic parasites sucking off that artificial shortage and providing nothing of economic value. If the National's nett inwards migration ceased or diminished to a sustainable level of housing addition and we caught up on our housing deficit, rents would drop.

          At that point a real market value rather than one based on National's housing shortage would return.

          • Traveller 21.1.1.1.1
            14 March 2024 at 5:36 pm

            "Exactly the same tax break should also extend exactly the same to all residential home-owners. They too are paying interest rates to the mortgage holders. That is also a "legitimate expense". But it has no such tax deduction – why?"

            Because residential home-owners aren't operating a rental business.

            "…rents are "legitimate expenses" for tenants of a household, perhaps they should be treated in exactly the same that businesses are – rents should deducted as costs against income and thereby reduce tax paid."

            They can be, if that rent paid passes the same test in so far as deriving assessable income.

            "As far as I can see landlords absolutely provide no extra value to the economy that justifies treating them as a special case."

            They are not being treated as a special case. They operate a business, and interest incurred in deriving assessable income is deductible. For any business.

            Government's need to be extremely careful that tax policy is consistent and absent of distortionary impact. The lack of any kind of tax implication of unearned capital gain, for example, distorts investment decisions. Likewise, the removal of interest deductibility, as Alison Pavlovich pointed out, was "bad law", and (as she refers to the comments of the IRD) "added to the compliance and administrative burden on affected taxpayers and eroded the coherence of the tax system overall."

            Yes, landlords gain from the repeal of interest deductibility rules—but it was a flawed law from the outset | News | Victoria University of Wellington (wgtn.ac.nz)

            • roblogic 21.1.1.1.1.1
              14 March 2024 at 5:46 pm

              Businesses that employ people can claim interest and depreciation costs, except landlords are not running a normal business and most of them are basically farming humans and extracting capital gains as well as rent.

              The moral argument against monopolising our basic need for shelter, into a for-profit business, is one that historically rips societies apart and leads to violent revolutions.

              Landlords and their handmaidens in Parliament should be careful not to over-reach, as the number of renters in our society increases and their lot in life gets worse.

              • Traveller …
                14 March 2024 at 5:54 pm

                "except landlords are not running a normal business…"

                What is a "normal" business?

                "…and most of them are basically farming humans and extracting capital gains as well as rent."

                There are approximately 600,000 rental properties in NZ, of which the private sector provides 510,000. 75.8% of residential landlords own just one rental property. Just 0.1% of all private landlords own 10 or more properties.

                (Fixing the rental crisis – part 1 :: New Zealand Property Investors Federation (nzpif.org.nz)).

                That leaves a hell of a lot of 'human farmers'!

                The moral argument against monopolising our basic need for shelter, into a for-profit business, is one that historically rips societies apart and leads to violent revolutions."

                As above. There is no 'monopoly'. There are hundreds of thousands of NZ'ers who own a single rental property.

                • roblogic …
                  14 March 2024 at 5:59 pm

                  Whatever, it's a group of privileged people exerting unfair leverage over the market.

                  Luxon loves tax cuts but does nothing about rent, the biggest expense for unhoused Kiwis, leaving them to the wolves.

                  The Nats have gone pretty quiet about the cost of living and their promise of $150 a fortnight for everyone.

                • roblogic …
                  14 March 2024 at 6:17 pm

                  A 'normal' business operates in a market with supply and demand and some competition to keep prices honest. What we have in NZ is a captive market with demand hugely distorted by decades of under-supply, and a FIRE industry milking Kiwis with huge mortgages and unjustifiable rent increases exploiting people's desperation.

                  It's fucked six ways to Sunday – IMO it’s a Ponzi scheme that endangers the whole economy

              • mikesh …
                15 March 2024 at 11:01 am

                There is a case for rental accommodation inasmuch as some people, for various reasons, actually prefer to rent rather than own there own real estate. The problems arise when these numbers are added to by persons who would prefer to own but rent only because they cannot afford a property.

            • lprent 21.1.1.1.1.2
              15 March 2024 at 12:59 am

              Because residential home-owners aren't operating a rental business.

              Ah – what is this business nonsense? You simply aren't thinking. You are a parrot crying "business, business" like a stupid bird who heard it and repeated it without thinking.

              An employee or a business (both taxable entities) sells their labour, goods, services, and skills and receive income.

              Some entities are arbitrarily allowed to deduct the tax for some costs of providing those labour, goods, services and skills. Some are arbitrarily not. Why?

              Both are paying interest on a mortgage. They are effectively the same at cost. Both are receiving income that require a place of residence with a mortgage.

              After all, for a few dollars and a bit of online paper work I could create a company called 'lprent ltd', be its director and sole shareholder for a nominal annual stipend.

              Add the mortgage and asset, and start deducting interest from the lprent ltd. The company pays the rent for lprent because they need me as a onsite night guard.

              It is a absurd merry-go-around. But effectively it wraps a 'business' ove rme and my mortgage.

              Now explain to me what the difference is? and why should one or more tax entities be privileged and the other(s) not. Also what is the economic benefit for the state that gives a 'business' that preferred tax treatment.

              Incidentally this is not a trick question in its essence. This is a basic issue in economics, tax, and legal principle. It came up in both my first year management papers that I did in my science degree and my masters courses. It also came up in my ex-partners law papers.

              Rather than being a dumbarse simpleton parrot incapable of thinking. If you are claiming that a business is special then you should be able to articulate even one reason why the government should rationally differentiate the different tax treatments between these two entities and why it should still be in place today?

              • Traveller …
                15 March 2024 at 1:32 am

                “Both are receiving income that require a place of residence with a mortgage.”

                One is receiving assessable income from the property (the ‘business’), the other is not. It’s a clear and obvious distinction.

                • lprent …
                  15 March 2024 at 7:57 am

                  One is receiving assessable income from the property (the ‘business’), the other is not. It’s a clear and obvious distinction.

                  Ha! you are just claiming a special role for “business” again. That is just an idiotic statement without looking at what makes a “business” unique in tax terms.

                  But the point is that the tax deduction is not for earning income, you get taxed on income. It is for an expense incurred while earning that income.

                  Now think your way through this carefully. Someone who earns a salary is also getting tax assessable income, that the also get taxed on (no different). To perform the role will require a place to sleep in order to be able to earn that income. They may have a home office (I certainly do as I will explain further down).

                  Following your logic – costs incurred to gain tax-assessable income should be able to be deducted from tax paid.

                  So over this past year, both myself and my partner have mostly worked from home, as we have done so since 2020.

                  You'll probably note about this point that a home office setup like I have (adjustable desk, multiple monitors, expensive office chair, multiple computers, keyboards etc) is in fact deductible as an expense from my income tax if I chose to claim it. I do most of my income generating work from this desk.

                  My partner has exactly the same thing next to mine for a completely different set of jobs.

                  Both are mostly used for assessable work income. Even writing this comment is work for asessable income. There is a microscopic income stream from donations for this site, which I operate from this apartment for the trust.

                  In our 55 sq metre apartment, the two desks and their servers take up about quarter of the living space.

                  The kitchen that we use takes up another eighth. That is also partially deductible against assessable income. The toilet is about another eighth, it too is partially deductible.

                  So the tax system recognises that I and my partner have legitimate costs in this residence but realised as space costs. So why not on the interest if we had a mortgage?

                  The gross income earned by renting this apartment out would be about 31k max. But the place is paid off so we could claim a tax deduction for interest anyway.

                  My income alone this year is more than 5x that. Most of it has been in making intellectual property that is then sold offshore.

                  Economically this has very high value to our economy. Just putting up capital tor purchase this apartments and renting it has a very low return to our society and economy, and has virtually no impact on overseas earnings. It is even less productive than the average National MP.

                  But if we had a mortgage and interest paid on it, what exactly is the economic and legal rationale for giving a dumbarse unproductive landlord a tax deduction on that interest and not our productive dinkie apartment?

                  (I can just see your mind has "business, business" circling like a parrots mantra…)

                  //—-

                  sidebar…

                  The bedroom which I have just arisen from, somewhat short of sleep, is also essential for generating assessable income from me. You simply can't code in the short-medium term without having adequate sleep.

                  Plus I get almost all of my solutions to insoluble code problems when I lie back on the bed frustrated at the problem and think about something else for 15-20 minutes.

                  About the only things in this apartment that aren't directly used for assessable work are the hallway, shower and the sofa. Even the TV is on the wall above the servers and takes up no floor area.

                  So about 75% of the apartment is largely used for things that generate assessable income.

                  Less than 15% is used for recreational purposes, and you could easily argue that the TV and sofa as my partner does various film work and is starting to work as a screen writer.

                  I challenge anyone to work with a daily shower for any length of time. The hygiene issues would pop you in hospital eventually.

                  • Traveller …
                    15 March 2024 at 9:28 am

                    "But the point is that the tax deduction is not for earning income, you get taxed on income. It is for an expense incurred while earning that income."

                    Of course. And the landlords borrowing cost of funding a mortgage over a rental property that earns assessable income is an expense of that landlord.

                    "Someone who earns a salary is also getting tax assessable income, that the also get taxed on (no different). To perform the role will require a place to sleep in order to be able to earn that income. They may have a home office (I certainly do as I will explain further down)."

                    That 'someone' isn't renting out the house to derive assessable income. That someone is not deriving assessable income from merely living in the house.

                    Now to your personal example:

                    "So about 75% of the apartment is largely used for things that generate assessable income."

                    Well argue that with the IRD. Along with the landlords who will then try to claim a deduction for 75% the apartment they live in because they lie awake at night worrying about the guttering on their rental.

                    • lprent …
                      18 March 2024 at 10:32 am

                      Basically the rules about tax on property and property usage are completely arbitrary, and follow essentially no rules.

                      I'm pretty sure that I could designate the apartment a rental and claim the deduction by simply charging myself rent.

                      Our apartment is in a mixed use area. I could probably designate it as office space, even wrap a company over it, and charge myself as a individual rent for an office with living space. Get a full deduction on interest.

                      I could buy an commercial office in any mixed use area, have living quarters in it and claim a full tax deduction on it while living in it.

                      Apparently what I can't do is to work at home for a paid income and claim a tax deduction on mortgage interest or principal.

                      I'm pretty sure that I could do it is as a contractor / sole trader paying provisional tax and GST. Which is kind of silly.

                      Fundamentally there is little difference in legal terms between a individual and a company. But somehow an individual owning a property and renting it out has a special tax deduction on mortgage interest, that as an individual paying the same mortgage on same property and living it simply does not get.

                      What is noticeable is that as a landlord, you haven't been able to state a single reason why you should have that lucrative perk.

                      Except to say (inferring here) that being a a landlord is a 'business'.

                      Guess what – being an employee is also a 'business'. It carries pretty much the same risks of not finding customers (ie employment) or being dropped by customers (redundancy). Should also be taxed the same way for mortgage interest.

                      I guess that sums up the debate

                  • mikesh …
                    15 March 2024 at 11:16 am

                    So over this past year, both myself and my partner have mostly worked from home, as we have done so since 2020.

                    If you work from from home expenses relating to your home, or a portion thereof, would be deductible. However this would would probably not apply to mortgage interest as the latter is/was incurred for residential purposes rather than business purposes.

                    I'm not sure that this is entirely logical but I think that that is how IRD would see it

                    • lprent …
                      18 March 2024 at 10:37 am

                      Yeah. Kind of ridiculous.

                      We're looking around for a 3 bedroom house at present. Or rather a one bedroom house with two offices. The only reason to do so is to get working space…..

                      I think I should start looking to buy for commercial space in a mixed use area and carve out a bedroom for those occasional all-night work sessions.

            • mikesh 21.1.1.1.1.3
              15 March 2024 at 10:56 am

              They are not being treated as a special case. They operate a business, and interest incurred in deriving assessable income is deductible. For any business.

              It is questionable whether interest should deductible in the case of any business. But if it should not be, it does not seem unfair to make it non deductible where rental accommodation is concerned. One really would need to ask what is the justification for deductibility in the case of other businesses

          • mikesh 21.1.1.1.2
            15 March 2024 at 11:19 am

            As I have argued earlier in this thread I think residential rental income should not be taxable. This, I think, would be a better way of equalizing the taxation of homeowners and landlords.

The server will be getting hardware changes this evening starting at 10pm NZDT.
The site will be off line for some hours.