February 2010

Tax Reforms Likely?

Property Taxes.... Well, not much happened here - as I predicted. I still believe that there will be changes in relation to property taxation; however I expect these to catch ALL people, rather than just targeting property investors. It seems extremely inappropriate to target a group in the community just because they are perceived to be doing well. As property investors know, it is not all plain sailing.

I feel that there will be changes to depreciation schedules. I expect that buildings will not be allowed depreciation (Currently 3%). BUT, this will not only affect property investors. It will affect all property owners who use their properties for income. Hotels, Farms, Commercial Properties, etc will all probably lose their depreciation rights. But that is not that bad - because if you currently claim depreciation and then sell the property for a profit, there would be clawback tax payable.

I find it difficult to believe that there will be changes to other items in the asset depreciation schedule for rental properties. For example furniture in a rental property may currently be depreciated. But how is that any different to furniture in a car rental business, or a government department, or my office? It is no different, so I feel it would be very difficult to treat that any differently.

I do expect that there could be some form of tax on capital gains from property investment some time down the track. And possibly excluding investment properties from applying losses to anything other than future profits is a probability as well. People who trade in property already pay tax on their profits. If investors sell their property for a profit (even though they state that they didn't purchase it for capital gains) then why shouldn't they pay tax on the "income" from the investment?? However, don't believe that this type of tax would stop at property. Share trading or share investing is no different therefore I would expect capital gains from shares would be taxed as well. That would also bring the opportunity to write off losses in property investments against future income, surely? That would suit all the investors in property schemes, apartments, and finance company investments who lost money but can't claim those losses against their tax. Tax is not an easy thing for the government to simply change. There are many implications. GST IS easy for them to change though.

Having considered the above, there will no doubt be many changes (and I may not be correct) which will take several years to put into effect.

Insurance Reviews

Insurance reviews... We have completed many insurance reviews so far - but we probably still have at least another full year of reviews to get through. We have found that some people are paying for cover that they cannot use, others are not covered for what they need. Changing insurers is not always a good option, however there may be considerable benefit in doing so, including better cover or cheaper cost. It is now a very appropriate time for you to review your income protection cover and maybe even consider mortgage or loan repayment insurance.

How would I cope if I could not earn my income due to illness or injury? Would it risk my capital base?

If yes you need to determine your plan. (ACC will not be your saviour).

Health Insurance can be surprisingly inexpensive. You could take a cover with a high excess (say $2,000 or $4,000) this keeps the cost low and means that when you need to make a claim, you merely pay the excess (which you could have in a separate account). This makes cover affordable; will cover the big ticket items; and ensure you don't end up in an ever increasing queue at the public health system. Public health in its existing form is not sustainable.

Market comment

With the turmoil in the market it is a great time for first home buyers... Remember two years ago when the media was commenting that our children could never afford to buy a first home anymore? Well they can now. I expect the current slump to last for about another two to three years (possibly more). Be prepared to weather a rather long storm.

With the economy still in jitters and some signs & others bad, I would expect that we will see another year of uncertainty.

Personal Loans

We have access to several personal loans suppliers. However, like banks, they are only interested in lending to people who can prove that they can afford to make the repayments. I would recommend always trying to increase your mortgage rather than taking a personal loan (and making the repayments at the same rate as a personal loan) as mortgage interest rates are considerably lower than personal loan rates. Should you feel the need for a mortgage top-up or a personal loan, please contact us.

Interest Rates

As I write this I am in two minds as to whether interest rates will increase quite quickly or slowly. (Yes, I feel that they will rise. I am just not sure how much and when). There is still a real shortage for funds for mortgage lending - pushing money costs higher. This has forced lenders to take more care with their lending and pick only the safest of applications. That has reduced the accessibility of mortgage funding, leading to people finding it extremely difficult to sell less desirable property. The reserve bank has indicated increases probably won't commence until mid year... Australia has not increased their rates this year so far either. Sudden increases could unsettle the market.

Banks have rapidly increased their longer term interest rates over the past year, trapping their customers into short term interest rates (so the banks don't lose money). This could have a massive impact on the economy if interest rates were increased substantially as increases will hit customers relatively quickly. I feel that they have gone too high too quickly... But time will tell...

Looking Ahead

Europe seems to be in considerable financial difficulties; USA still has a long way to go. Australia & China seem to be comfortable. I feel that there are many New Zealanders overseas at present seriously considering returning home. Give them a nudge, we need them back here. Also tax rate parity at the top end could attract back economic refugees from OZ.

Let's face it; Spiders, Flies, Snakes and Bush Fires - who needs that?