TalkTax

It’s been great getting some feedback on thoughts around the design of the tax system. Following on from those thoughts, given the Government’s heads up for property investors it would be great to hear some thoughts on this subject.

In this regard it is noted that it is difficult to reconcile is the view (accepted) that “the tax system lacks integrity and fairness because of differences in the treatment of entities” with the statement that the Government will “be making changes to the way property is taxed.”

It is true that the application of the current rules that apply to all property investments have lead to a net loss in the rental property sector. However, this can attributed in large part be to historically high interest rates and inflated depreciation claims. Interest rates are now significantly lower and the flow on from that will be smaller interest deductions. Another significant part of the net loss has been the result of depreciation claims that do not match the true level of depreciation. That said to a large extent this is a matter of timing as much depreciation loss will be recoverable over time as property is sold.

Experience suggests that certainly historically, residential depreciation legitimately claimed is at a level that does not match true depreciation. Although this may reflect the economic climate, experience suggests that depreciation recovery is the norm rather than the exception. Accordingly, rather than changing how property is taxed as a discrete subject, perhaps a more principled approach could be applied whereby building depreciation for residential buildings should be available only when supported by a valuation. Such an approach would not delight many but perhaps would be somewhat less distorting and “fairer” than what might be proposed.

No numbers to support these views. Why let the facts get in the way of a good story? That said, if there is any interest, happy to dig out some figures in (hopefully) support.