This week has been dominated by a volcano which erupted over Labour's housing announcements. In particular, the government is changing the law regards claiming interest on loans used to buy residential properties for "investment purposes" (which in many cases means speculation) as an expense against rental income from those properties. A range of pro-business commentators have slammed Labour's proposals.
Kiwiblog stated "Claiming business costs vs business income is a fundamental part of the tax code. What the Government is doing is not closing a loophole. They are making an exception to a normal tax rule". Meanwhile the Chief Executive of Business NZ, Kirk Hope, along with other business leaders, criticized the proposals along similar lines. He accused the Government of being "misleading" in the way it is describing the issue as a "loophole", because in 'all other sectors of the economy business expenses are tax deductible'.
I don't concur with these comments for two reasons. First, the tax deductibility of interest costs against rent for landlords is a benefit paid to many of the wealthiest people in the country. Shame on our (Washington-style) business lobbyists trying to pressure politicians into supporting such policies.
Second, on more technical grounds, how can one argue that speculators on the property market are running a "business" just like any other? Isn't the point of a legitimate business one that helps make a country richer by adding value by producing goods and services? In such a case, costs incurred in the creation of value should be deducted from revenues before taxes are calculated. However, when an existing residential property is sold, it doesn't attract GST (the UK version is called "Value Added Tax") because it is a second-hand market. That is, there has been no "production" of value which adds to the GDP of the country.
In summary, why should the above folks assert so strongly that playing the housing market game is the same as running a business which actually adds wealth to a country?
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