Closing Tax loopholes

TOP’s policy to make New Zealand fair again; Some numbers

Take 8% of your gross income, and that’s your tax cut. Take 1.5% of the equity in your house and that’s the additional tax to pay. This gives you roughly (and I mean rough) the order of magnitude of how closing the loophole in the income tax regime affects you.


Feedback from the beach BBQs so far this summer tells me people want some idea of how TOP’s flagship policy – making New Zealand fair again – affects them. While I’ve said 80% of people will be either better off or insignificantly affected, self-interest is hard for many to resist.

There are very good reasons for why I don’t want to be precise. The final shape of any package depends on so many variables – will we have minimum thresholds for asset values included or not (I favour none, I love the fact GST is so clean)? Will the income tax cuts apply across-the-board or be skewed towards those on lower incomes (my preference)? What minimum taxable income on assets will be imposed? What does the time profile of the transition to full implementation look like (remember there is no intention to “collapse” house prices)? And so on – the questions are endless. And well they might be until the final form is known. And that has to be negotiated with the government of the day.

The above are some very crude rules of thumb to work out what such a closing of the tax loophole might mean for you. This is how I can simplify it.

Most people have an average income tax rate of about 24%. For those people you can expect a cut in your average tax rate of about one third – around 8% of your declared income. As I’ve said I’d prefer the poor to receive larger tax cuts, but for now lets assume it is proportional across the spectrum. Meanwhile, we can assume the tax collect on your assets is maximum 1.5%.

We’ll start by looking at the median household; which earns $76k and has just under $300k in assets ($264k is in housing). They are saving $6k in income tax and paying $4k more. So under our tax plan the median household would be $2,000 better off each and every year; that is $40 a week. This should be no surprise, because like I said, 80% are better off.

Now lets look at the top 20%. The top 20% of households earn over $135k and have assets over $815k ($710 of which is in housing). Now wealthy households may not have a high income and vice versa but on average they do. So for households at this 80th percentile of society, their income tax falls by $11k, which is about the same as the extra tax they will pay. Assets tend to become much more significant after this point, so we’d expect the wealthiest 20% to pay more tax, and I’d argue they can afford it.

Final example – to ensure you’ve got the principle here, even if the numbers are crude. You earn $100k and you have net equity in the house of $200k. The tax cut is 8% of $100k or $8k and the effect of closing the loophole is to raise tax by 1.5% of $200k or $3k. You are $5k better off each year.

Now please, appreciate that these numbers are indicative only but should give you a feel for the nature of this revolt against tax unfairness.

If I have no declared income but own a $2m house without debt then my tax rises by $30k. If I’m a pensioner, that could be paid by a rising mortgage to the IRD (an amount that falls each year because your equity in the house drops). If not – well yes – it’s time for me to “rearrange my portfolio”. Now the reason I’d phase in the closing of the loophole, is precisely to give these people – who let’s face it are in the business of investing for capital gains – time to reposition, without house prices collapsing on them.

The way I evaluated the package is by simulating a whole lot of various combinations of rates and thresholds. The range of outcomes showed that anywhere between 75% and 90% of people would be left insignificantly affected or better off – so that’s why I talk about 80% in that category, and 20% being caught by the closing of this loophole.

So there’s a really rough set of numbers that you can use to think about this. It’s all about fairness and bringing to an end the vast dollops of wealth that people are accumulating through no effort – while merrily shutting more and more people out of the housing market.

To me it’s a no-brainer and overdue. You might say – bugger that, I like making money for no effort. Your call of course – but let’s not forget why this is necessary.

The tax loophole sees owners of assets (like me) escaping a lot of income tax that would not be possible if all forms of income (as income is identified in the GDP accounts) were taxed equally. The consequence of decades of allowing that anomaly to persist includes

(a) Housing is stupidly unaffordable now, rents chew way too much of family income and in short – those of us that own property, increase our wealth at the expense of those who do not. Nobody in his or her right mind should see that as okay. Of course there will be some of those who are benefitting greatly from this, and who don’t give a stuff about others. They would not vote TOP. But those of us who actually care about New Zealand, and not just ourselves – do see the need for change.

(b) Businesses are starved of investment capital because you and I don’t save and invest nearly enough. We don’t need to, I get richer and richer just by owning property, no effort required – yippee. Pity about the grandkids trying to get on the gravy train.

(c)  If businesses don’t get normal access to capital they don’t expand and create jobs to their potential. They certainly can’t afford to pay higher wages. While average per hour wage rates in New Zealand have risen about 1% pa above inflation over the last 20 years, the median wage rise is less – and of course allowing for fiscal drag (tax bracket creep) and the rise in housing costs, disposable incomes have been stagnant for many.

(d) inequality keeps rising – I’m okay Jack, I’ll buy another house or two and then let’s pull up the ladder behind us.

(e) We keep falling over ourselves to make it easier and easier for foreign companies to invest here. We give them tax breaks, subsidies and all manner of privileges – so gagging for their capital we have become, given we don’t save much ourselves nor invest those meagre savings productively.

So the problems are obvious, the cure is straightforward. But are we up for it? Hopefully some numbers might help you clarify for yourself whether you are prepared to make New Zealand fair again – and as a result see greater prosperity for all.

Showing 79 reactions

  • James Maunder
    commented 2017-01-06 21:44:34 +1300
    I have been reading the posts on this topic with interest, thank you. I’m not ready to comment on the merits of the TOP tax policy, but I would like to present another scenario which might be of interest to the community.
    We are a couple in our early 30s, and have a goal of owning a rural property mortgage-free in the next few years. Having worked and saved hard over the last ten or so years, we are close to being in a position to achieve that goal. Our intention (consistent with our values and world view) is to practice simple living, and reduce our ecological footprint as best we can.
    In this case we will have, say $500k of equity, and a low household income, say $20 – 30k annually. It would appear from a cursory reading that we would be significantly hurt by TOP’s tax policy. On the face of it, this doesn’t seem fair to my mind. We have saved hard to escape the dreaded work-spend treadmill, and we don’t mean to get rich off of capital gains, or to avoid paying tax. We just want a place to be.
    What think you, fellow NZers?
  • Oliver Krollmann
    followed this page 2017-01-06 11:29:01 +1300
  • Chris O'Halloran
    commented 2017-01-05 15:29:12 +1300
    Please ignore previous post – typos.
    John Charlton – If you paid your child $100K to paint the house – they could pay up to $33K in income tax (assuming they had other income). So yes – Ouch – a symptom of the high reliance the govt places on income and business tax.
    Yet if you gifted them the $100k, ie they didn’t have to work for it, Gareth’s proposal would see them paying $1.25K (100K*5%*(0.33-0.08=0.25)) tax per year regardless if they put the money in the bank or used it as equity in a house (I’ve assumed an 8% reduction in income tax). Not quite so dramatic.
  • Chris O'Halloran
    commented 2017-01-05 15:26:31 +1300
    John Charlton – If you paid your child $100K to paint the house – they could pay up to $33K in income tax (assuming they had other income). So yes – Ouch – a symptom of a lack of the high reliance the govt places on income and business tax.
    Yet if you gifted them the $100k, ie they didn’t have to work for it, Gareth’s proposal would see them paying $1.25K (100K*5%*(0.33-0.08=0.25) tax per year regardless if they put the money in the bank or used it as equity in a house (I’ve assume an 8% reduction in income tax). Not quite so dramatic.
  • John Charlton
    commented 2017-01-05 13:52:15 +1300
    Alistair Newbould – by my reading the tax only applies to businesses not returning an (undetermined) inadequate RoI. That is not the same as taxing the assets of the business if it is returning profits above the threshold. If you tax a business that is performing below the threshold you’ll kill it – the last thing a badly performing business needs (maybe a start-up, or suffering a downturn due to bad customers – think what the Mainzeal collapse did to a lot of small businesses ). Who in their right mind would impose an land tax on dairy farmers during years when the milk price dropped below break-even? Do you want to destroy the NZ economy?
    Chris OHalloran – so I earn $150K, pay $50K income tax (top rate) and give the remainder to one of my children as deposit on a house. You’re advocating that gift is taxed again? So they pay another $33k gift duty and get $67K. Meanwhile the Government has got $83K of the original $150K. Ouch!
    “Having capital means you have the ability to pay.” Nope. THAT is the politics of envy. Having disposable income means you have the means to pay. Having saved and invested so I’m not a burden to others when I retire doesn’t mean I have the income to pay an asset tax that didn’t exist when I decided to buy the asset.
  • Steve Cox
    commented 2017-01-05 12:59:50 +1300
    I looked at the numbers from a different angle. If we go with Gareth’s 80% better off and 20% worse off.
    Firstly about half the housing in NZ is owner-occupied, the other 50% rented (as per Statistics). Now we generalise and say that the population is divided similarly.
    Everyone who rents is going to get the income tax cut and be better off. That’s 50 of the 80 percent.
    So to have 20% overall worse off then actually 40% of home owners have to be worse off.
    And many of them are going to be retirees (people who vote).
    However if this tax is going to be applied to farms, factories and family homes (that is, all rate-able land and improvements) then maybe 40% of homeowners won’t be worse off.
  • Alistair Newbould
    commented 2017-01-05 12:33:36 +1300
    John Charlton. The proposal applies to business and farms also see eg
    In principle I don’t see a problem with this change. Some details need resolving (eg how to help transition people with high (ish) capital assets but low income, business start-ups) and implementation timeframe would be important, but it is essentially a mechanism to encourage more productive use of capital and housing stock. For more background Gareth’s book “Pension Panic” is an easy read
  • Chris O'Halloran
    commented 2017-01-05 12:32:00 +1300
    John Charlton – I’m sympathetic to why you thinks its unfair. But consider this hypothetical scenario.
    Person owns $5M house in Auckland but declares no income in NZ. NZ resident – should they be eligible for state funded cancer treatment? Having capital means you have the ability to pay. Remember, everyone else’s taxes are paying for that treatment otherwise.

    If I work for a year – earn $100K say, the government quite happily takes 25%. Everybody thinks that’s fair.
    If parent or friend gives me a $100K, people think is unfair if the government were to take some of it.
    And yet, I have given one year of my life working for the former but did nothing (other than being born to parents who could afford it) in the latter.

    The point of an equity tax is to subtlely correct this imbalance and try to and redirect capital to income earning industry and not buildings/property.

    There IS a structural problem. Auckland property up 14%. NZ mortgage debt up 9%. See what is happening. NZ Inc. isn’t getting the wealthier. The baby boomer generation is simply requiring the younger generation to borrow to pay for the boomer generation lifestyle through massively inflated property prices.
  • John Charlton
    commented 2017-01-05 11:20:28 +1300
    Chris OHalloran – if by cash positive you mean they generate an actual income stream then yes (e.g. a rental property). If they just reduce expenditure because you have use of the asset without any actual income stream (e.g. a residence) then no. Gareth is claiming the benefit of the investment should be taxed as if it was an income stream whether or not an actual income stream exists. But he’s only suggesting this principle is applied to residential owner-occupied property, not other assets where the owner gets a benefit from reduced outgoings. That is what is unfair.
  • Chris O'Halloran
    commented 2017-01-05 10:58:12 +1300
    John Charlton – Gareth’s argument is that property is getting the free ride. ALL other forms of investment are subject to tax if they are cash positive.
  • John Charlton
    commented 2017-01-05 09:30:29 +1300
    The “fairness” of this policy rests on the argument that those who invested in residential property get the untaxed benefit of that investment while those who didn’t, for whatever reason, don’t get an untaxed benefit but have to pay rent out of a taxed income stream. It does not claim to be a CGT as it doesn’t only tax the gain, it is an asset tax as it taxes the entire asset value.
    It is unfair as it only taxes one class of asset holder, those who own residential property. It does not tax business assets, it does not tax other personal assets, and it does not tax assets of local or national government. It targets one particular section of society, because they have invested in their own residential property. I’m not an accountant, but as far as I know there is no other asset tax in NZ now death duty has been abolished. There are two pieces of muddled thinking behind this: home-owners getting an untaxed benefit from not paying rent, and homeowners benefiting from the increase in property values without doing anything themselves other than investing in property.
    The second is easy to deal with: benefit from capital gains should be taxed by a CGT, not an asset tax. There is a case for that, if it is bought in gradually so as not to penalize unduly those who bought under one rule and sell under another. The first fallacy is more pernicious. It ignores the fact that the whole point of investing in anything is to get the benefit of it for free (excluding maintenance costs) once its purchase price is paid. The whole reason to buy a house is so you don’t have to pay rent. The reason businesses buy plant and equipment is that it works out cheaper in the long run than leasing it. Farmers buy land so they don’t have the ongoing overhead of paying the landowner for the use of it. Nobody pays tax on the benefit of their investment. Targeting one particular class of asset owner to the exclusion of all others is patently NOT fair. Doing it after the investment has been made makes it even more unfair.
    If you want to make property affordable, go back to Economics 101, the law of supply and demand. For 30 years the supply of property in Auckland has been lower than the demand, due to town planning restrictions. Meanwhile property investment has been more attractive than the stock market due to poor regulation of the latter. Fiascos such as the finance companies, Feltex, and Dick Smith have deterred ‘Mom and Pop’ investors from turning to the finance and stock markets. The lack of transparency in Kiwisaver fees is yet another example of how non-property investment is made unattractive. Increase the attractiveness of alternative investments to lower the demand for investment property. Don’t penalize ordinary folk just trying to plan for their retirement.
  • John Hyndman
    commented 2017-01-04 22:32:26 +1300
    A Calcott raises a very relevant issue and TOP should take note if it wants to reach the 5% threshold. Gareth says 20% will be better off under this tax regime. However it is hard to see how this person is in the “top 20% who can afford it”. Most fair minded New Zealanders will see this case as patently unfair. Unless TOP can address these concerns it will have difficulty winning widespread support. Perhaps an exception could be made for people on low incomes.
  • A Calcott
    commented 2017-01-04 20:13:38 +1300
    I am an elderly widow living in my own mortgage-free home valued at $400,000. It’s my only asset, worked for and saved for over many years. My sole income is NZ Super on which I pay approx $3500 per annum income tax. TOP’s proposed tax policy would double that amount if I refused to take out a mortgage with IRD. How is this a fairer system?!
  • Chris O'Halloran
    commented 2017-01-04 10:58:49 +1300
    If the comments in this forum reflect the general concerns of pensioners and those close to retirement, for this policy to gain any political traction, some assurances about people’s own financial future will be required. If this proposal is likely to improve the financial position of their children then some retired or retiring parents may be more easily persuaded.
    If the tax burden of owning your home outweighs the income tax benefit, then retired/retiring people will either need to have great confidence in reverse mortgage proposal or great confidence in the health services in the provincial centres.
  • Gary Pauley
    commented 2017-01-04 09:33:00 +1300
    Despite Gareth’s protestations to the contrary introduction of this tax will quickly give a well deserved reality check to property values across NZ and especially in Auckland. The main thrust of this policy is to get NZ to wake up to the fact that buying and selling houses to each other in an ever increasing spiral, driven by the ridiculous encouragement of our tax system which makes it the only game in town, has the terrible effect of depriving capital to ventures which would generate real wealth for NZ.If the pensioners are worried about the impost of tax on their million $ mansions in Glen Innes dont worry values will soon halve lowering their tax result by half.
  • Gary Pauley
    commented 2017-01-02 19:41:05 +1300
    Seems to me the biggest opposition is from retirees hell bent on preventing their ability to pass on their wealth to their kids and ensuring the state allows that and keeps their wealth intact let’s just have an inheritance tax then and stop the the obfuscation
  • Alistair Newbould
    commented 2017-01-02 19:37:21 +1300
    Michael Dragonheart. Yours is a much better example than some others. Such a person would need to find a property under $200,000 to be better off. There are such about in the country but not so many. And the income on the freed up $245,000 would not be that much (especially at bank deposit rates!). But then the rates and other costs for the smaller house would also be less. Essentially though, the policy is just highlighting the shortsightendness of making your house the main saving towards retirement.
  • Alistair Newbould
    commented 2017-01-02 19:23:24 +1300
    Gordon Chamley, to be due an assett tax of $30,000 p/a (according to the example given in this post) the house value would be $2,000,000. NZ super for a single person living alone ( is $23,000 p/a. in the examples in this post this would increase by 8% ($1843). For a couple, both on super the total is just shy of $35,000 gross. So I am not sure where you get the “under $12,000 a year” from. But the main point is that such a person needs to consider downsizing their house to free up capital to earn income to live a comfortable retirement. Sell the $2M house, buy a nice efficient house outside the main centres and add 5% of $1,500,000 (75,000) p/a gross to your annual income. You have stimulated productive use of capital and increased the amount of property available in the main centre.
  • Alistair Newbould
    commented 2017-01-02 19:04:33 +1300
    John Charlton, re changing the rules halfway through the game. A slow introduction is needed to prevent crashing house prices so people not just about to retire would have time to adjust. People like me, a bit closer to retirement would need to rethink their retirement planning, but if the family home is the major saving towards retirement you have made, then the plan would have to have been to sell up (or reverse mortgage) and down size to provide income $. This proposed tax change only encourages that plan
  • Alistair Newbould
    commented 2017-01-02 18:58:33 +1300
    Mark Harvey: In many of the posts explaining the policy, it has been made clear that the total tax take would remain the same. Not sure where you get the top 10% paying less tax under this policy. Sure less income tax (if that is the way ot is set up – it could be set up to give an income tax break only to lower income earners) but overall more tax due to the assets the top 10% own. Re house valuation see here:
  • Alistair Newbould
    commented 2017-01-02 18:46:09 +1300
    John Hyndman. Your situation seems to be not uncommon. But many people have thought of their home as a retirement asset. As you cannot eat bricks and mortar, that asset must be liquidated to be used through your retirement. Choices are to sell and downsize, thus paying less assett tax and having more money to live on, or a reverse mortgage, or pay the assett tax out of your increased pension and accept that the benefit you receive from living in a $1.5M house is worth it to you. If you sell and downsize, you may decide to invest your money in something more productive than housing – which is one of the benefits of the proposed regime – freeing up capital for more productive uses. At the same time, the downsized house you buy, may be outside of a main centre, thus you will have increased the amount of housing available (albeit a high value house) in the main centre where there is an apparent shortage. These options are being insentivised by the new regime, but the choice is yours.
  • Alistair Newbould
    commented 2017-01-02 18:36:53 +1300
    John Charlton. Re Farms. See FAQ:
    Re other assetts, Mr Morgan discusses taxing other assetts such as those you describe. There needs to be a minimum value of the asset before it is taxed so the cost of compliance doesn’t outweigh the benefit of the tax
  • John Charlton
    commented 2017-01-02 11:59:31 +1300
    Chris OHalloran – if it only applied to the increase in value from the previous year you’d be correct – and it would be a CGT. As far as I can see it applies to the total value every year, and so it is an asset tax. My point is that if you want to be ‘fair’ you should tax ALL assets, not just houses. Cars, boats, etc should be included. Why shouldn’t it include farms? The fact that it doesn’t, it just targets those who have scrimped and saved to provide for themselves by buying a house shows how unfair the tax really is. If you want to tax the increase in value, argue for a CGT, not an asset tax. Not that they work, look at Sydney.
  • John Hyndman
    commented 2017-01-02 09:30:14 +1300
    The TOP economic policy strikes me as fair and workable. However when I consider my own situation I would certainly be worse off. i have a home with equity of $1.5 million. I am about to retire and our total income (including pensions) will be around $70,000. Under Gareth’s policy I can expect a $5,600 tax cut on income and pay a wealth tax of $ 22,500.
    There are a lot of New Zealanders in our position and this policy will be a tough sell.
  • Chris O'Halloran
    commented 2017-01-01 20:45:24 +1300
    John Charlton – All the other asset classes you describe get less valuable over time. With an increasing world population – land, and especially developed land becomes more valuable. Property is the large low hanging fruit in terms of an asset tax. You can’t hide it, regional authorities already have good data on ownership and valuation s, and mortgages are registered to properties. Prior to Ruth Richardson/Roger Douglas we used to have land tax and death duties. Gareth’s proposal isn’t that radical.
  • John Charlton
    commented 2017-01-01 15:37:59 +1300
    I wonder why Gareth has just targeted housing. What about cars? If I purchase a new, late model car I get the benefit of that car tax free. Otherwise I’d have to rent one. I’d have to pay income tax on the income I used to pay the rent, so why not tax that benefit? Given the cost of renting a decent car it is a substantial amount. Let’s not stop there. The same argument can be applied to any capital asset. And to avoid people setting up shell companies to hide their assets, it should be applied to companies as well. They get a huge benefit from all that plant and equipment they’d otherwise have to rent. And if they do rent it, the expense is tax deductible. Outrageous! If they buy the asset they get depreciation. Even more outrageous! Gareth’s Law should be applied across the board to be fair. If you get a benefit from any investment, yours or anybody else’s (to stop shenanigans where I live in your house and you live in mine) you should pay tax on that benefit as if it was income. That should fix things. (#irony)
  • Mark Harvey
    commented 2017-01-01 13:11:19 +1300
    This policy looks promising, but it looks to generate far less tax for the government and the top 10% pay far less tax compared to current rates. How does this benefit the country? When national cut top earner’s tax rates we lost a lot of revenue as a country for state services. This TOP policy could mean a lot less money for social services, like health (we already are way under-funding), the possibility of free tertiary education and conservation etc (each of these essential services will see far more cuts if we are to rely only on this tax policy). Plus how do we actually measure house prices, from region to region – a problem here is that the market very often differs to private valuations, in addition to council eatable valuations. I’m not convinced by this policy, it needs much more work and fails to take enough money away from the super rich. It seems it’s designed to let the market dominate things. While it appears progressive it runs the risk of doing the very opposite…
  • Scott Walsh
    commented 2017-01-01 11:17:34 +1300
    Would be interested to see some further examples of our this would work with other asset classes using the ball park rates of 1.5% & 8%. e.g.
    A rental house generating rental income
    Financial assets e.g. shares with div income.
    Financial assets e.g. shares without div income.

    In the FAQ I saw financial assets were to be excluded, however if a tax of this nature is introduced, with a related income tax drop, wouldn’t it need to apply to all asset classes to ensure that that tax is skewed to capital growth financial assets with low div rates?
  • Audrey Holmes
    commented 2016-12-31 18:04:58 +1300
    Thanks John, I found your comment interesting to read. Thanks for your insight and analysis.

    I too am still not convinced of the tax policy although I can see the merits of the overlaying concept. Again I’d need to see whether the benefits to the nation outweigh the personal cost; but I also want to see it stacked up against other tax policy options.

    It’s the intended result and the comparison with other options that are missing for me. And probably for most thinking people.

    I also agree with you John on the point about changing the rules half way through the game. The retirement commissioner recently suggested that changes to the superannuation age should be introduced on a staggered basis over a long period of time (this approach interestingly will direct affect me). If this tax policy is the one we go with, having considered all options and undertaken robust analysis, then maybe this is the way it’s introduced.
  • John Charlton
    commented 2016-12-31 14:50:47 +1300
    As much as I hate to admit it, I can see why Gareth thinks this policy is ‘fair’. If I invest my surplus income in a nice house in Auckland and pay off the mortgage before I retire, I can live rent free in a comfortable home and use my pension for bills and luxuries (like meat once a week, maybe). If I had invested the same income in stocks, bonds, or other assets and rented a comfortable home using the investment income, I would have to pay income tax on that income as well as paying the rent. Therefore the home owner is getting a tax-free advantage of living rent-free. Not only that, but the home has probably (if it is in a metropolitan area) appreciated faster than inflation, so if I sell and move to the provinces I get a nice tax-free windfall which is denied to those who haven’t invested in property. So the tax system is benefits some more than others. It is in equitable (treats people unequally), which many people equate with unfair.

    BUT so is changing the rules half way through the game unfair. Many, many people (more than Gareth’s 20%, I think) made lifetime investment decisions based on the current system of income tax, and may well have made different decisions if this scheme of an annual tax on capital assets was in place at the time. If such a policy came in to effect all the retirees who could not afford to pay the tax would see their equity being slowly transferred to the state as their tax liability grew. If they can’t borrow the money to pay the tax then where is the tax revenue going to come from? No bank will lend to them, so there will be no increase in tax revenue to compensate for the income tax cut. It would be fairer if pensioners were excluded from this.