Buying property in NZ - the short and long term

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This is not the time to buy property in NZ for international buyers. The public deficit is at a high point, and the government is targeting conspicuous consumption or largess as the basis for future tax receipts. So its really an addendum to the GST, which has just increased; except this tax will apply to the wealthy. This is mostly going to entail luxury sales taxes, extra property taxes on holiday houses, etc. The family home I suspect will not be touched, however there many well be an attempt to target high-value homes. i.e. Tax-free sales below $250K.

The implication of these decisions of course is that anyone sitting on luxury items like houses or yachts looks like facing a tax. The implication is that '2nd properties' are going to be entering the market. You would tend to expect most of these properties to be in the rural areas, as well as places like Wanaka, Queenstown, Wanganui, Nelson, Blenheim and the various fishing and ski resort areas. The 'bach' has long been a simply of NZ's affinity with lifestyle. It just got that little bit harder to 'live the life' in a country with a stilted domestic economy.

Queenstown

The best buying opportunities is likely to be in those slower demand centres like Wanganui, and even places like Napier. Tourist locations more than residential growth zones like the cities. The best opportunity is likely to be in 1-2 years, as this will correspond to:

1. A slight rise in global interest rates - given the high levels of consumer indebtedness I don't see governments willing to allow foreclosures to blow out, and NZ will benefit from high commodity prices.

2. A short term problem of high deficit placing pressure on the AUD

3. The offloading of all these properties.

4. The population decline in some rural areas means that they are likely to feature more strongly as sales opportunities. We must remember that rural areas will benefit from strong commodity prices, so the effect will be short-lived. Already there is a lot of rural 'bachs' on the market in anticipation of such taxes. Of course not everyone will sell. Some can afford the lifestyle, some use their city home as superannuation money, and their bach is the 'retirement home'; and others might rent the bach out in the off-season as a trade off.

I would be looking for the rural residential market to fall over the next year years; I'd expect the NZD to fall to a low against the AUD in 2 years given stronger outlook for food prices rather than metals; and by then NZ will have taken some steps to resolve its deficit. In 10 years, NZ will probably have a few more oil discoveries, and it will then become the land of milk and honey.

The problem of course is that John Key is doing very little to curtail the drain on the economy by taxing those who actually earn their way in the economy. There is too much parasitism in NZ, and governments are always reluctant to target them. Why? It requires an education policy, and they cannot think. Taxation requires the creativity of squirrel which collects nuts, and the roar of a lion which threatens to steal your nuts when you do something wrong. At least I know how to talk to the parasites. But I want to also tell them that its not their fault. The rich has enabled the poor and government to perpetrate this crime against humanity by not developing their critical thinking capacities. We will be driven towards fascism - not by the collectivist looking to plunder the wealth of the rich - but by the wealthy who thinks they can escape the powers of government. They will catch up with you eventually - and they will do it by paying off consultants to track you down. That's rich the private sector is being used to undermine the private sector. So your message - either develop some intellectual integrity or OBEY!

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Is NZ a welfare state?

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Mainland Western European countries are famous for their welfare programs. These programs have long been the bane of business who argue that it leaves them with uncompetitive wage structures, less able to finance development and generally tending to incite welfare dependency and cultures. In these countries, government spending can account for around 50% of GDP - half of the entire economy. Some countries have even higher levels of domination.

One might ask is NZ the same - and are there any possibilities of this changing. Consider that:

1. NZ has increased its goods & services tax from 12.5% to 15%

2. NZ local government land rates are relatively high at $1250-1800/annum - because govt provides localised welfare services.

3. NZ has relatively under-funded infrastructure spending

The evidence suggests that NZ is not a welfare state to the same degree as European countries. Government spending as a proportion of GDP I recall being around 30% for the Federal government. It could be better, and its certainly not conveying the right trend with the increase in GST. It did however cut some fat from the bureaucracy.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Cheap living and avoiding tax in NZ

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The NZ tax system greatly relies on indirect taxes. There are a number of things you can do in order to reduce costs:

1. Buy your clothes overseas - particularly if you are an expat who spends casual time in NZ

2. Grow your own fruit and vegetables and trade the balance with neighbours. NZ has good rainfall and soils, so its very easy to grow food and flowers. You can also save money by composting the household vegetable matter for your garden fertiliser.

3. Catch your own fish, shoot your own deer, pig or rabbit. You need a licence and the approval of landowners, but it makes more sense than paying $25-40/kg for fish in the store.

4. Ride a bike rather than drive a car. NZ petrol taxes are very high at 58c a litre. Fortunately you don't really need to use a car very often, there is nothing to do in most towns. A car makes sense in NZ though because of unreliable weather. It rains a lot.

5. Retain your offshore passive income - as an immigrant for 4 years before you have to pay tax on it. This is a particularly lucrative strategy if the NZ dollar is weak against your home currency.

6. Insulate your body, not the home: Where warm clothes rather than pay high gas and electricity prices space heating homes with poor insulation. Better to just wear a very warm jacket. NZ has the highest energy prices in the world. It is a particular sham considering it has the lowest generating cost for electricity in the world. Failing that consider using an open fire as the wood is cheaper than paying $1/day for gas connection, on top of the $1/day you already pay for electricity, whether you are living there or on holidays, 1 person or 10. This is clearly an incentive to share your home.

7. Buy most products online from TradeMe, online specialist stores in NZ or abroad; whether second hand or new. Local stores have limited range and there is a lack of competition.

8. Buy an existing house rather than building: Old houses in NZ are far cheaper to buy than building a new one. Labour is overpriced and the industry is over-regulated, and unfair pricing terms for house builders and renovators means you will pay too much for materials. Its a scam that results in builders pocketing a profit on building materials through the major warehouse chains, and you subsidising their 3-day working week lifestyle.

9. Online entertainment makes more sense than buying your music and movies from a store. The same can be said for reading materials.

10. Outside activities can be expensive, but this need not be the case. Anything which you can do in a social setting is preferred. My philosophy group costs me just $2/week, Toastmasters $70/year, tennis $70 per 6 months. Fishing is $100 for a year licence I think, and walking in the local gardens and at the beach is free.

It is apparent that the same path to tax reduction is the same path to reducing your carbon footprint. Should you be concerned about either? Only if you are grasping for money or air. But some people take pride in their ability to survive independently. The reality however is that labour specialisation is not a 'sin', but rather a very productive and meaningful way for people to relate to each other. Trade is based on the mutual respect of each others contribution. i.e. Value for value. Compare that with the grudging annual tradition of exchanging unwanted Xmas presents, or the passing off of presents you don't want, or the resentment felt by some having to race through crowded shops to please indifferent souls. Is it all worth it? No. Just do what is natural and you will be far happier. An economy structured on the basis of some arbitrary government policy is destined to make you unhappy.

Check out how much tax New Zealanders pay on petrol - 58c in the litre - that's about one-third of the final retail cost.

None of these suggestions is going to greatly contribute to the NZ economy. I would however argue that any (and every) country that considers you a slave to the interests of those who need you, ought to treat you with more respect. The unconditional extortion of wealth from those who possess it is surely the reason why social values are in their current state. Such is the nature of altruism. Unconditional value judgements = non-accountability.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Excessive taxes on alcohol - backpacker beware

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If you value drinking alcohol, you might want to consider not coming to NZ for a holiday. NZ is already charging a tax of $2.47 per litre on alcohol between 2.5-14% concentration, whether beer or wine. The government is also taking measures, probably punitive, to regulate the campervan trade in NZ.

These are big disincentives for foreigners to travel to NZ, and yet the government is considering another increase in alcohol tax to 'reduce binge drinking among the young'. This is the most insane policy you could imagine. First of all, the tax has already been increased for the same reasons before, to no avail. Is this not simply about using 'punitive taxes' to resolve holes in the national budget. Business will of course need to pass on the costs, which will see a bottle of beer priced between $7-8, and a glass of wine between $16-18. I suggest the increases might even be greater if businesses experience a fall in patronage.

My guess is that the policy would result in several negative effects:

1. Increases organised crime activity in the realm of boot-legging. Maybe the sellers will give you a rebate if you bring your own potatoes.

2. Closure of businesses - restaurants and bars are big employers in NZ, so more taxes is simply going to stop people going out. Expect rural town employers to be particularly hard hit, which will mean population declines in rural areas as rural people are forced to move to the city. I suspect they will move to Australia instead.

3. Less tourism - The backpacker trade will die off because alcohol would be a major expense for this group. They might not spend as much as the premium traveller, but they spend 1-6 months in the country (compared to a few days for business travellers and 1-2 weeks for wealthy retirees), with all funds being recycled through the economy, as well as spreading to the rural areas through the backpacker network. Expect more tourists to head to Australia. OK, Australia does not have the mountain vistas of NZ, but USA, Canada, Europe does, so travellers from those countries will not miss them. Australia will be a more holiday friendly place.

4. Greater use of alcohol substitutes - You can't use punitive measures to correct some action you consider inappropriate. There is a need for education - but not the idiotic messages we are accustomed to on TV. The problem is more fundamental. The problem is that academics do not understand the alcoholism issue. What they don't realise is that kids are going to explore other options like 'glue sniffing', meth, etc. The implication is that the government is driving people into more illicit activities as well as more dangerous activities. Having researched this issue I can tell you that the behaviourist school of stupidity is driving public policy on such issues. Governments are therefore labouring under the misconception that humans are animalistic. The reality is they totally lack any theory of values.

I will be among the first to suggest that alcoholism consumption is a problem, but the solution is never greater taxation. Taxation is slavery - not education! It might change behaviour at the margin, or in the short term, but the 'externalities' of such policies are far greater than any benefit. The implication is greater use of meth, greater use of methylated spirits (i.e. cheaper), greater illicit activity.

NZ might just learn that one of the appeals of travelling to NZ is the low cost of living. After all it is so far away, and does not have a lot of culture to offer. Basically its an 'outdoors experience'. My advice is - ditch the taxes, as well as the bureaucrat/academic reports which suggest punitive measures are the best way of avoiding youth binge drinking.

Send a message to the NZ government that taxation is NOT the solution! Take a holiday in Australia if you are in this part of the world. Better still punish the Australian government (who do the same thing) and tax a holiday in the Philippines or Vietnam. Alcohol there is just $1/beer. With the savings you will be able to buy an apartment for $50K. :)

Another paradox of these silly policies is that youth unemployment is pretty bad in NZ, and kids wanting a sense of efficacy are turning to alcohol or drugs to medicate their low self esteem. The government I believe is quickly taking this country into an escalating crime regime. You guessed it! That means more taxation to regulate behaviour because we didn't learn in the N^{th round of tax increases. We need a change in government administration so we can avoid the spiraling crime and incompetence as practiced by Western governments around the world. They are truly the pits. There is simply a complete lack of good sense and reason needs to be the standard of value. What qualifications do these people have? What life experience? The problem is they are not analytical thinkers. They are lawyers with 'good memories'. Precisely not the type of people you want drafting law.}

^{Details on NZ tax - see Wikipedia.}

NZ taxation under scrutiny

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New Zealand is considering changes to its taxation policy in order to make the country more competitive for foreign investment. In this task they are destined to fail. Let me suggest why. There are several failures the NZ government will make.
1. It will fail to consider efficiency measures - it will focus on raising money rather than improving efficiency/productivity or cutting expenditure. e.g. From hospitals
2. It will fail to recognise where the prospects for economic growth come from. It will focus on cutting the corporate tax rates in order to attract large companies. The scope for expanding business in NZ does not rest on big business, it rests on small business. The reason I say this is because NZ is a very small market, and any decision to align with Australia is only going to reinforce the belief that any regional office in Australia (Syd/Melb/Bris) can service the NZ market. For most countries, NZ does not even justify a presence. This could actually be a strategic advantage for NZ small business.

There are likely to be two serious contenders for tax increases:
1. Capital gains tax on investment property - this would be consistent with the tax regime in Australia, and there is considerable appeal in aligning the tax systems.
2. Stamp duty on property transactions - expect a tax of up to 3%
3. An increase in the GST - I don't expect this tax increase to succeed, least of all at at time of recession. Frankly the suggestion that it is a serious prospect I believe is intended to make people feel like they actual 'won' a concession, when in fact the government will look at the other taxation options.

These tax increases will be used to fund tax reductions for business. The question is - do these tax cuts make sense? Given my arguments above, I believe any revenue increases should be used to invest in NZ small business rather than big business who really only invest in primary resources. Resource producers stand the best chance of passing through costs in this recession, so they are not the group of investors I would be looking to support.

Some time ago NZ joined the chorus of governments which adopted libertarian policies. I consider myself libertarian, but one has to maintain a sense of reality. It I was a taxpayer with any voting power I would not sell an asset based on prices of $0.12/kWh, only to allow the new owner to raise prices to the marginal cost required to commission new generating capacity, which is $0.24/kWh. The reason is because the power companies can generate ample profits at $0.12/kWh, given the cost of generation capacity is zero for most hydro plant (which is 70% of total capacity). Privatisation was a bad deal for NZ'ers. That does not mean it always is; just in this case. This is hardly an incentive for business investment. Of course big business can negotiate harder by 'threatening' to build their own generating capacity.

Another case of bad policy was the decision by the NZ government some years ago NOT to support 'winners'. I understand the sentiments of not providing subsidies to business, but there other choices. Small business in most countries have difficulty raising capital. Its even harder in small markets like NZ. This country needs strategic industries. Students need an assurance of jobs if they are going to study such subjects. This country needs to support niche industries, whether its manufacturing of niche sporting equipment, whether its subsidising a cargo vessels to make regular low-cost shipments to certain markets, whether its a trade shared vision for trade. I see that 10 wine growers in Australia are gathering to promote their wines. NZ needs the same shared vision. The challenges are:
1. Ensuring accountability so the money is not wasted
2. Ensuring that its not a tax scheme but an investment scheme because I hate the idea of trampling on people's rights.

It is all to often forgotten that taxation is a breach of the taxpayers rights to determine their own destiny. I can understand the counter-argument that there needs to be shared expenses like road funding, say with a road petrol tax, rather than tolls everywhere. Such taxes should be user pays as much as possible, and I think people should be able to sue the government for relief from such taxes. People should not not funding schemes they have no benefit from. We don't want bad schemes funded. There needs to be a pay-off. We need schemes to have objective standards of value, so that people and judges can establish their value. This is the vision of this report.

I am reminded of the book 'Bad Samaritans' by Ha-Joon Chang. It looks at history and discovers that the industrial giants, whether Britain in the 17th century, the USA in the 19th century, Germany and Japan in the 20th century, all existed as a result of protectionism. Only when these industries had established themselves did the governments wind back the subsidies. This is not to suggest the model of these countries is desirable. In fact there are many better ideas to boost investment. One option might be a family-based subsidy for business. It needs more thought by myself.

I think there are many successful business people in the world who succeeded because of help from family and friends. The reason that some form of incentive is needed is because people have a tragic sense of live. They are inclined to be cynical about others, and thus people end up with no savings, no customers, no feedback and no service. Ultimately a more prosperous economy today tends to arise only because of government stimulus, though such stimulus arises for the wrong reasons, in order to maintain demand, to keep governments elected; even if it hurts the economy.

Upon completion of this book I will demonstrate a scheme which will provide for the most efficient use of funds. Give me time...so many other books to write. :)

Foreign Income Tax Exemption for new residents

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In 2006 the NZ government made changes to the New Zealand’s income tax code which make immigrating or resettling in NZ particularly attractive for foreigners. New residents will be able to have an exemption on all foreign earnings for four years. This does not strike me as a particularly sensible law because the recession will last 4 years, so people might be prone to just leave the country in 4 years. But hell - who doesn't love a tax break!

New immigrants to New Zealand qualify for the automatic tax exemption on their individual overseas income under the Taxation Act 2006. The tax exemption is targeted to encourage prospective migrants to consider New Zealand as a viable and competitive place to live and work. The exemption also applies to returning New Zealanders who have not been resident for tax purposes for at least 10 years before their arrival.

It operates to exempt all “transitional residents” from New Zealand tax on their foreign-sourced income by treating it as being derived by a non-resident. A person will be deemed a transitional resident if on or after April 1, 2006:
1. They have a permanent abode in New Zealand, and
2. Immediately before acquiring that permanent abode, they were continuously non-resident for at least 10 years, and
3. They have not previously been a transitional resident.

It is possible for a person who has visited New Zealand before acquiring a permanent abode – for example, to attend interviews or to look for housing – and who would otherwise be deemed resident in New Zealand (because they had been in the country for more than a total of 183 days in any 12-month period) to benefit from the exemption.

The transitional resident status will last for four years, ending on the last day of the 48th month after the month in which the person acquired a permanent abode in New Zealand; or the day the person ceases to reside in New Zealand. After expiry of this period, the person is treated as a resident, and their foreign-sourced income becomes liable to income tax in New Zealand.

The only types of foreign income not tax exempt in New Zealand are those derived from overseas employment performed while receiving the exemption, and business income relating to services performed offshore. All other foreign-sourced amounts (including interest, dividends, and employment and bonus income from previous employment) derived by the transitional resident are exempt.

The new legislation also provides that, where a settlor of a foreign trust becomes a transitional resident in New Zealand, they or any beneficiary or trustee of the trust will now have up to five years to elect for the foreign trust to become a qualifying trust. A foreign trust means that no settlor is resident in New Zealand from when the trust is settled until a distribution is made. A foreign trust is not required to pay New Zealand tax on its foreign-sourced income. If the election is not made, the foreign trust becomes a non-qualifying trust, with distributions of accumulated income or capital derived taxed at a penal rate of 45 percent. Previously, if a settlor of a foreign trust became resident in New Zealand, any of the settlor, trustee or beneficiary had only one year to elect to convert the foreign trust into a qualifying trust.

GST on New Zealand property

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GST on NZ property depends on the nature of the property acquisition. GST is an indirect tax, and as such it is treated separately from income taxes, and its imposition is contingent upon the purpose of the property acquisition. There are 4 types of property buyer:

1. Home buyer - buying for residence or occupancy, say home or holiday house. Under the GST Act an home investor is exempt from GST, and need not register for GST, in fact they can ignore it, but they will nevertheless have to pay GST on costs associated with their purchase, e.g. Conveyancing.

2. Property trader - flipping property for capital gain. Property traders will confront GST upon sale of the property unless they can demonstrate that they did not intend to buy it for re-sale. If the property is purchased for on-sale, the buyer can claim back the GST. Refer to the 2nd hand goods provisions. of the Act Refer to the Inland Revenue website for more info.

3. Property investor - holding property for a yield investment return. A further distinction is made here between residential and commercial property investors. There is no GST on residential property, but there is on commercial property.

a. Residential property investors: The investor can claim GST as a management expense, thus as a deduction on their income tax return. With commercial property, GST is payable if the gross annual rental income exceeds $40,000. If the income is less than $40K, then GST registration is optional. You will need to decide upon two methods of payment, whether you use the payment method or invoice method. The payments method, which applies to actual transactions in the period, is the most common method for commercial investors.

b. Commercial property investors: If you are a commercial investor there is another concept - zero rating - that is important to understand, however this is beyond the scope of this blog. Ivestors in serviced apartments need to take particular care.

4. Property developers need to pay GST at the time of settlement, which is deemed to be at the point of settlement. If the developer's turnover exceeds $1.3mil, they must apply the invoice method. Developers expecting to claim a GST deduction need to demonstrate an ongoing pattern of property development. An adjustment is made for developers who cannot sell the property, which allows them to pay GST on the rented portion of the property (refer to (section 21 of the Act) or any portion occupied by them.

The distinction between being a property investor and trader depends on your motives for buying the property. A trader seeks profit, and pays income tax on it. An investor seeks rental yield and pays tax on it at the marginal tax rate. There is no capital gains tax as an investor because any gain is considered incidental or unexpected. A trader however expects to make a gain, so they will pay capital gains tax on that profit. Traders can refer to sections CB5 and CB21 of the Income Tax Act. The onus of proof is on the buyer (not the tax office) to prove their intent for purchasing a property. If you require more information on property tax or buying NZ property, I refer you to the following books:

1. ‘Buying NZ property’ by Andrew Sheldon – buy here for residential investors

2. 'Property Tax - A NZ investor's guide' by Mark Withers – buy here.

Tax rates in NZ

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NZ tax rates are actually pretty low - you are essentially paying just 14% on the first $40,000. Bear in mind that you are also paying 12% on most consumption (Goods & services tax), though at least that is consumption. If your perception is that NZ is a poor man's country, you might find support for your hypothesis in the average income statistics as well as the tax rates.

The flipside is that NZ makes less sense if you are on a high income. That might explain as much as anything why New Zealanders move to Australia - not just for higher incomes, but being aspirational, they might be moving there for tax relief.

Individual marginal tax rates as at 1 October 2008 [applicable to net taxable income]

a. 0 – 14,000 12.5%
b. 14,001 – 40,000 15%
c. 40,001 – 70,000 33%
d. 70,001+ 39%

One of the big disadvantages in NZ is the inability to split income between spouses. So if your husband earns $100,000, and your a housewife earning nothing, you are a tax burden in NZ. In Australia and some other countries you can split your income so your wife can get a credit for what she is not earning. This seems fairer. mind you these is PLENTY of unfairness in the Australian tax system. And it would also have to be the most complicated tax system in the world. Australia basically plays favourites. The government gives concessions for political reasons, eg. Baby bonuses of $5K, $21K first home owners grant. This might seems like 'lovely lever pulling' government policy to some. To me its smacks of the worst aspects of Indian-style fascism with government directing human action. There is little difference between price controls and baby bonuses. We should not be incentivised to consume so governments can attempt to reach full employment. If you ever wondered why we never get there - its because governments exist for self service. See my tax blog.