Taxation of residential investment property and tax evasion

Last week I wrote a short commentary on the taxation of residential investment property and the tax evasion that seems rife. Among the reasons for the piece was what I see as the very clever ‘conning’ of a whole sector of our nation’s savers with promises of investment outcomes and taxation benefits that just cannot be achieved without transgressing the tax laws of our country.

The Inland Revenue Department is reported as being successful in identifying and collecting around $12 million in tax (and penalties) on residential investment property transactions over the last 36 months or so.

Let’s just agree that we all pay tax at 33% for the minute and that all $12 million was tax due on property sale margins, not including penalties. This would be the tax on around $36 million profit and at 20% project margin would be about $180 million of property and at around $395,000 average sale price per property just over 450 properties.

Forgive me for being cynical but surely that is just the tip of the iceberg. If there has not been somewhere between 4,500 and 45,000 properties, ten to one hundred times that 450 number of the approximate total 100,000 per annum residential sales, for investment purposes over recent years I will eat my proverbial. Simply keep the percentages constant and this means that $120 million to $1.2 billion of tax per annum is not being paid – is this a massive fraud on the wider population – you bet.

All this tax stuff aside - has the huge volumes of leveraged debt that has piled into residential property helped one jot to grow the real wealth of New Zealanders and their country. The answer has to be an ear shattering, resounding NO!

Some might argue loudly that I’m wrong, but look at it this way. I’m in Bollard’s camp on this one; we have sold the silver along with the equity of many, and our best, companies therefore much of the profit goes offshore. Our current account deficit has ballooned on the back of insatiable consumption and our national income retained, as a percentage of GDP (gross domestic product), has fallen. To paraphrase his recent speech, ‘if New Zealanders fail to identify and invest in higher yielding equity (shares in companies) we condemn ourselves and the country to lower returns and economic growth’. The road back to real wealth will be a rocky one.

If you really must buy a property or two, well OK! However for the future financial health of yourself and our country invest in assets that really earn their keep as well.

PS. Please pay the tax on your property sales, forget the lie of the false intention, any gain is income just as surely as your salary or wages.

Original Article published November 2006