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Home Tax A Decoy?

Nick Barber
Employment and Economic Development

The proposal for tax on homes is so fraught with pitfalls that it can only have been presented to divert media attention away from some other proposal.

The committee says we spend too much on houses. Have they accidentally or deliberately overlooked the fact that housing in New Zealand costs more than in Australia and has need of further upgrading before reaching the standard of housing in the average well-developed OECD country? They should also have noted that there is already a high tax factor included in the cost of housing which is not present in shares or dividends.

There is 12.5% GST plus the income tax content of all building and materials applied to both the original house cost and all new construction and maintenance work thereafter. (Commercial properties have their GST refunded and receive a large tax discount on a nominal allowance for maintenance and depreciation). Do they really believe there is a low tax on investment in houses which have to be painted, papered, recarpeted, refurnished and have fittings and plumbing repaired on a regular basis all with GST and tradesmen’s income tax included? Not to mention GST on local body rates.

The Review Committee gives example in their report on how the tax might be applied to a $200,000 house.

What about compliance costs arising from more than a million homeowners arguing about the valuation and deductibility’s placed on their houses? A 100-year-old house can have more value and be in better repair than a 20 year old one. Who is going to verify whether a house needs repiling, better insulation or some major maintenance? Government valuation has never been an acceptable valuation for selling a house so why should it suddenly be acceptable for taxation where errors will be enlarged by only the mortgage free portion being counted? What about poor people neglecting maintenance in favour of lower valuation, rich people increasing their mortgages in favour of overseas travel etc?

On the other hand the Cash-flow Tax proposal received very positive comments from the committee regarding low compliance costs and high savings and investment effects, and, by replacing income tax it also has obvious employment benefits. The three reasons for rejection were clearly going to put a lot of pressure on IRD management while in the long term total IRD staff numbers would be greatly reduced. The abrupt dismissal of CFT suggests Inland Revenue departmental heads may have had a persuasive hand in the decision.

The three reasons: High transitional revenue costs, implementing compensation measures for some firms, and being the first to do it, are challenges being faced up and down the country by thousands of businesses. It may be necessary to give real business managers directorship over IRD heads during the implementation of this sort of tax reform.

I suggest the “tax on homes” nonsense was a strategy by IRD officials to divert media attention away from Cash-flow Tax with its hard to deny social and economic benefits.


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