Hawke's Bay Property Investors' Association

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30-07-2015

Property investor or trader?

Latest Reserve Bank lending data showed that the proportion of lending to investors has risen from 29 percent to 33 per cent over the last year.

Following this release, some headlines have read "Investors head first-home buyers", "Auckland is a ‘speculators’ paradise" and” Investors dominate first home buyers".

However existing home buyers made up the bulk of residential property buyers at nearly 60% of the market.

In addition, rental properties account for around 35% of all properties in New Zealand, so you would expect that the number of sales at any given time would be around this percentage, which they are. 

Many property investors, that's people who own property for tenants to live in, feel attacked at present. It appears that many view us as one of the major problems with the housing market and believe something needs to be done to stop us.

The Reserve Bank has already introduced measures to make it harder to provide rental properties for tenants. They have forced banks to apply higher risk weightings to rental property loans and have reduced the amount you can borrow to buy Auckland rental property.

Government has also beefed up the property tax rules by introducing a two-year Bright Line Test, meaning anyone buying and selling a rental property within a two year period must pay income tax on any increase in value that the property has made. Once this is introduced, this test will not apply to any other investment.

Some have said the Bright Line Test doesn't go far enough and should be extended to five or even ten years. I don't believe that the people who think this clearly understand at whom the changes are aimed.

Many people think that a property investor is someone who wheels and deals in property, but that isn't the case. Someone who buys and sells property is called a property trader or speculator. They are very different from a property investor who is someone that buys a property to rent to a tenant.

Tax rules are also different for investors and traders. A property trader makes a living from buying and selling property and pays income tax on the difference between what they pay for a property and what they sell it for. This is no different from any person or business that buys and sells goods.

Like any other trading business, they need to turn over their stock in order to make a regular income. There are also large costs involved in holding property, so there is a real incentive to turn over property quickly. They do not have tenants, so there is no rental income to pay tax on.

Property investors are different. They provide a home to tenants and receive rental income for doing so, on which they pay tax. Some believe they don't actually pay tax, but this is incorrect. IRD data shows that in 2013, rental property owners paid tax on $1.5billion of rental income. This is likely to have increased since then.

It is these misunderstandings about property investors that is likely to cause confusion and lead to calls for measures to discourage rental property ownership. This is probably behind the misguided calls to increase the two year bright line test.

The Bright Line test may apply to rental property owners, but it is really aimed at property traders or speculators. The purpose is to stop traders from saying they are Investors to avoid paying tax on their property trading income. The NZ Property Investors' Federation represents rental property owners all over the country and we support moves to correctly tax property traders.

While the new policy is a restriction for rental property owners, the vast majority will not be affected by it. However this would change if the two year test was extended.

If the test was extended beyond two years, it transforms from clarifying existing income tax rules for property traders and becomes a Capital Gains Tax for rental property.

A CGT would impact on a rental property’s return and severely limit investment at a time when we actually want more rental properties. It is likely that shortages would occur and rents would rise more than they would otherwise. Like any business, when costs rise, either directly or through higher regulations and compliance costs, the end consumer ends up footing the bill. If they don't, then it usually means an end to the business and loss of supply to the consumer.

So when people call for higher taxes and more restrictions on property investors, make sure they don't mean property traders. Tenants struggling to make ends meet or raise a home deposit are unlikely to thank them for higher rental prices.

Opinion piece by Andrew King, Executive Officer of the NZPIF

 

Tags: andrew king - property investor - property traders - media release

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