Article: Property Investment

Budget 2015Budget 2015

Economically the 2015 Budget was steady as it goes. Politically it was masterful.

The surprise was the $790m child hardship package which includes a $25 increase in core benefits for beneficiaries with children (the first increase in 43 years). For welfare towns this will be a significant cash injection. Other changes in the welfare area include requiring most sole parents to be available for part-time work of 20 hours a week (instead of 15) once their youngest child turns 3 (instead of 5), an increase in Working for Families for low-income working families not on a benefit, and an increase in childcare assistance for low-income families.

The poverty policy appeared to stun the opposition. In many ways they were set up days before by National down-playing what the Budget may do to address poverty. John Key summed it up masterfully when he described their approach as “compassionate conservatism”. That’s a message that will resonate with most New Zealanders and one should not be surprised if its National’s 2017 election slogan.

On the supply of housing, the government will free up 500ha of state-owned land, which is likely to add between 4,500 and 10,000 houses in Auckland. That’s sensible, but not a quick fix given the time frame is measured in years rather than months, and longer if council planners hold up the process as is usually the case.

The $1,000 kick-start has been removed with immediate effect. That will make it less attractive for parents signing up their kids for a free $1,000, but what remains is the $521 annual tax credit for all, the employer subsidy for salary and wage earners, and the substantial first home buyer benefits. It’s free money and one would be a bit dense to not take advantage of it.

Property tax
Although announced before Budget day, there are significant tax changes for property traders and speculators. Under current law a gain on the sale of an asset is taxable at the taxpayer’s marginal rate if that asset was purchased with the intention of resale (the “intentions test”). The problem is the is confusing and easy to avoid.  The change assumes a residential property was purchased with the intention of resale if it is sold within two years of purchase. Exemptions apply where it is a person’s main home, inherited, or transferred in a relationship property settlement.

Whether the new law is a capital gains tax or not is a debate over semantics, but it does make it easier for a future government to make incremental changes to turn it into a capital gains tax by extending the time frame to say 5 years or 10 years, and/or increasing the range of assets to include commercial property, shares, businesses, art, and so on.

IRD audits
The Budget gives the IRD an additional $29m to chase property investors, bringing the total over the next five years to $62m. That is expected to generate $420m of extra tax over the five years. From 1 October overseas buyers will be required to have a NZ Bank account and IRD number. This is in part to track down foreigners speculating in our property market.

Other changes
• ACC levies will reduce by $375m next year and $125m in 2017.

• New funding of $210m for more ultra-fast broadband and $150m for improvements
to rural broadband.

• $12m has been allocated for the New Zealand Business Number which is a
foundation stone for data sharing by government departments and online services.

• $425m has been allocated to support Business Growth Agenda initiatives. $25m
will go to establish three regional research institutes to focus on creating new jobs
in the regions.

• Border security will be beefed up with funding from a new “levy” for arriving and
departing passengers of $16 and $6 respectively.

The Outlook
The Budget is anticipating a deficit of $684m this financial year, and a wafer thin surplus of $176m surplus in 2015/16.

Government spending represents about 34% of New Zealand’s gross domestic product. Its long-term target is 30%.

Economic growth is expected to average nearly 3% over the next four years and unemployment is expected to fall below 5%.

It’s a budget that continues the government’s focus on incremental change.  By addressing poverty National has undermined the presumption that leftie parties are the only ones who care about the most disadvantaged. John Key’s personal story of going from state house to having a holiday home in Success Street, Omaha, is one most kiwi’s applaud. It’s the destructive naysayers who seem to think success is something to be criticised.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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