I think Cameron is starting to mince his words more than is helpful. For a guy who writes blogs about how bad ideas don't ever die, I thought he would be a little more front-footed in confronting Jonothan's take that investors got bigger tax benefits than owner occupiers. That's a really terrible misconception, and I think a really damaging one in the debate. The complete CGT exemption, land tax exemption, benefit test exemption, and imputed rent exemption overwhelm the interest deduction question in the long term. Negative gearing can free up a bit of cashflow for some investors, in some conditions, but owner-occupiers are strongly enough incentivised to beat investors at auctions. But they're capital constrained, so still sometimes lose. I had to stop cutting the vegetables for a while because I was so frustrated listening to Cameron slowly circling around this point as though it was somewhat uncertain or a question of perspective.
Though I stand by the view that question can only be answered by appealing to some underlying perspective of how the world SHOULD work—what is a reasonable benchmark? We don't charge capital gains on cars, nor impute the value of driving oneself versus taking a taxi, but we require paying cost in after tax income. Should we change this to even it up with "driving investors"? There is ALWAYS a major difference in the tax system between operating a business and personal activities.
Sure housing is somewhat unique because the net returns from ownership generally rise with the overall economy. But then again, we don't get to deduct capital losses from own homes from taxable incomes either.
I think I explained the comparison of tax treatment between owner occupiers and investors quite well, and argued that people in general would think that the owner-occupation tax treatment is a better deal.
I think I should write a more detailed article on this topic!
An article on this would be good! And yes you did eventually cover most of the facts. I actually don't think it's too hard to establish a 'neutral' baseline, if we look at other forms of investment and consumption.
You're right, we don't charge capital gains tax on cars, but only because they don't appreciate. (I think for collectors items that do, like art, you are liable?)
Imputed rent is the one that's most confronting to explain. But I think that including it is pretty obvious and natural. If I get ~30k in dividends from a business I own, and use that money to pay rent, I pay tax on it. But if I sell the business and buy a house and save 30k in rent, I don't. I don't think there are really many counter-examples that are serious. Eating vegetables from the garden perhaps? You could try to value that food, but that's just trivial. Arguably, having a water tank, and saving a water connection is the nearest one, easiest to price. And if it displaced a cost that might be 30% of your gross income, I think that taxing imputed water would be economically defensible, even necessary, to avoid a serious distortion of incentives.
Just a note re CGT in NZ, this has changed a bit over the last 10 years after being introduced in 2015, but NZ does have what they call the 'Bright Line Test', which basically now again means that CGT only applies to properties bought and sold within 2 years. In association with the Bright Line Test investors are able to claim interest payments as a deduction against rental income, although this has also changed a bit over time so that for 3 years from 27 March 2021 that deduction only applied to new builds.
In Perth there was a 24% increase in the median price of housing in July with a steep increase in the lowest quartile obviously not driven by new entrants. Its obviously driven by investors chasing 50 cents in the dollar via reductions in their taxable income. For these people the rate of interest they are paying on their loans is of little concern. It's not driven by migrants either because they take time to get established.
We should cut out the incentives for investors. The flow on effect will be that a reduced rate of inflation of house prices will enable more first home buyers to borrow.
If you take the Victorian example across Aus, a scenario where, theoretically almost all investors sell their properties soon after land tax increases make their IP an unattractive investment, AND assume all of those properties are bought by first home owners - what happens for the remaining renters when the music stops ? Where do they live, how much does rent go up ? What happens to the investment money that is no longer invested in property - does it cause a bubble in the share market ?
I think Cameron is starting to mince his words more than is helpful. For a guy who writes blogs about how bad ideas don't ever die, I thought he would be a little more front-footed in confronting Jonothan's take that investors got bigger tax benefits than owner occupiers. That's a really terrible misconception, and I think a really damaging one in the debate. The complete CGT exemption, land tax exemption, benefit test exemption, and imputed rent exemption overwhelm the interest deduction question in the long term. Negative gearing can free up a bit of cashflow for some investors, in some conditions, but owner-occupiers are strongly enough incentivised to beat investors at auctions. But they're capital constrained, so still sometimes lose. I had to stop cutting the vegetables for a while because I was so frustrated listening to Cameron slowly circling around this point as though it was somewhat uncertain or a question of perspective.
Fair point.
Though I stand by the view that question can only be answered by appealing to some underlying perspective of how the world SHOULD work—what is a reasonable benchmark? We don't charge capital gains on cars, nor impute the value of driving oneself versus taking a taxi, but we require paying cost in after tax income. Should we change this to even it up with "driving investors"? There is ALWAYS a major difference in the tax system between operating a business and personal activities.
Sure housing is somewhat unique because the net returns from ownership generally rise with the overall economy. But then again, we don't get to deduct capital losses from own homes from taxable incomes either.
I think I explained the comparison of tax treatment between owner occupiers and investors quite well, and argued that people in general would think that the owner-occupation tax treatment is a better deal.
I think I should write a more detailed article on this topic!
An article on this would be good! And yes you did eventually cover most of the facts. I actually don't think it's too hard to establish a 'neutral' baseline, if we look at other forms of investment and consumption.
You're right, we don't charge capital gains tax on cars, but only because they don't appreciate. (I think for collectors items that do, like art, you are liable?)
Imputed rent is the one that's most confronting to explain. But I think that including it is pretty obvious and natural. If I get ~30k in dividends from a business I own, and use that money to pay rent, I pay tax on it. But if I sell the business and buy a house and save 30k in rent, I don't. I don't think there are really many counter-examples that are serious. Eating vegetables from the garden perhaps? You could try to value that food, but that's just trivial. Arguably, having a water tank, and saving a water connection is the nearest one, easiest to price. And if it displaced a cost that might be 30% of your gross income, I think that taxing imputed water would be economically defensible, even necessary, to avoid a serious distortion of incentives.
Just a note re CGT in NZ, this has changed a bit over the last 10 years after being introduced in 2015, but NZ does have what they call the 'Bright Line Test', which basically now again means that CGT only applies to properties bought and sold within 2 years. In association with the Bright Line Test investors are able to claim interest payments as a deduction against rental income, although this has also changed a bit over time so that for 3 years from 27 March 2021 that deduction only applied to new builds.
Cameron are you joining Gerard Rennicks party as Housing minister? Leith can take the finance portfolio.
Ha! I like Gerard. In fact I like all independent voices. But I don't think politics suits me. I'm a thinker, not a negotiator.
In Perth there was a 24% increase in the median price of housing in July with a steep increase in the lowest quartile obviously not driven by new entrants. Its obviously driven by investors chasing 50 cents in the dollar via reductions in their taxable income. For these people the rate of interest they are paying on their loans is of little concern. It's not driven by migrants either because they take time to get established.
We should cut out the incentives for investors. The flow on effect will be that a reduced rate of inflation of house prices will enable more first home buyers to borrow.
If you take the Victorian example across Aus, a scenario where, theoretically almost all investors sell their properties soon after land tax increases make their IP an unattractive investment, AND assume all of those properties are bought by first home owners - what happens for the remaining renters when the music stops ? Where do they live, how much does rent go up ? What happens to the investment money that is no longer invested in property - does it cause a bubble in the share market ?