Sometimes, the things that senior members of this government do not understand are frightening. Thus it was last week when Jacinda Ardern and even Grant Robertson described the ability for investment property owners to claim deductions for mortgage interest as a ‘loophole’.
Tax loopholes are things that inadvertently allow taxpayers to reduce their tax liability. Interest has always been deliberately included as a deductible business expense. Now it is being phased out for investment property owners, but remember that interest deductions are still allowed for all other businesses. Just not landlords.
It is bad enough for our prime minister to fail to understand this, although she is merely parroting things that are being said elsewhere, because her knowledge of economic matters is non-existent, but for the minister of finance to fail to understand this is extremely troubling. Bill English would never have made such a basic error.
Robertson went on TV and, by way of justifying the cancelling of interest deductibility, he asked the question – why should a landlord be able to claim interest deductions on his mortgage when an owner-occupier cannot? As shockingly unschooled and artless as this question might be for a minister of finance to raise, the answer is simple. A rental property is a business. A landlord has to pay tax on rent received. An owner-occupier is engaging in a private transaction.
But I should not have to tell the minister of finance that. He ought to know.
Most of the landlords I have spoken to since the announcement have said they have no intention of selling, even though they have owned their properties for long enough to receive a handsome tax free capital gain if they do. Instead, they will simply raise rents. So those who do not, or will never be able to own their own homes are going to be heavily penalised for this latest government policy.
One message came through though, and it may be a surprise to the government. With their attitude towards those mean nasty ugly landlords, they have no idea of the number of landlords who do not charge the maximum possible rents because they take pity on their tenants, or those who have bought property for family members so that they have a roof over their heads.
With Julie-Anne Genter’s kind ‘cry me a river’ attitude over the interest deductibility question, no one seems to recognise that not every landlord is out to make the maximum possible amount of money, but that some do it for family or altruistic reasons. Those people are now going to be severely penalised financially, and Genter’s ‘cry me a river’ comments are downright offensive as a response from a politician.
Some parents buy a rental property, using their own home as security, so that their children have a house to live in. Some children do the same thing for elderly parents. These people are not using tax loopholes or getting rich quick. They are helping out family members who would not have a home otherwise.
Where do the new interest deductibility rules leave them and their families? Some might be able to increase rents to cover the shortfall, but what if their children live on low incomes or if they are paying for houses where their parents live on fixed incomes? Is it really acceptable to penalise people who are trying to help their family? Is that what we have been reduced to?
After all, this is the government of kindness. But, as we have seen with Jacinda Ardern in recent days, the government definition of kindness is whatever suits her at this particular moment in time. Those who go out and buy houses for family members are fat cats… not kind, apparently.
It appears that the government introduced this policy on the fly, without consulting experts such as Treasury. It is amazing how this government just does things without consultation. Think oil and gas as a good example. If it fits with their ideology, then to hell with the experts. It is clear that they just want to be seen to be doing something. It doesn’t matter what. But in this case, that ‘something’ may do more harm than good.
On Friday, I heard a story that caused real concern, and this may be one of those ‘loopholes’ (unintended consequences) that the government is so keen to close. A number of property investors, working with developers, are pausing their projects because of a lack of detail in the government’s latest policy. Some of these projects – one that I know of in the Hutt Valley – are build-to-rent projects, aimed at the lower end of the rental market. The problem here is that the government has stated that new builds will be exempted from the interest deductibility rules, but insufficient detail is forthcoming. What these investors do not want is to find that they can claim interest on their new builds for the first five years and then have it cancelled, as they are not ‘new builds’ any more. As this government has done what it typically does and has produced policy on the hoof, this is quite possible. Truth is that no one knows.
It seems most likely that Jacinda’s 15 point drop in ratings has been the catalyst for these poorly drafted changes, but in truth, her popularity is almost certain to fall further. I have seen little, if any positive feedback to the proposed changes. Most people seem to have woken up from all the fairy dust to realise that this government is unable to improve the housing market for most people. For many others, particularly those who rent, things are likely to get much worse.
I ask you this, Jacinda, and I will write it in crayon if necessary so that you will take notice. How will penalising renters help people to get on the housing ladder? Where is the kindness in any of this?
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