Wednesday, March 08, 2006

Bank profits and household savings

We've heard alot about Kiwibank being out there to help stop these evil offshore banks making huge profits off our backs, and more recently the KiwiSaver scheme to help improve our savings levels (and make buying a first home easier...)

Personally I have one policy I like that would strike at the heart of all three of these. Make all mortgages tax deductable.

The current high level of property price growth is fueled at least partially through the diseconomies of capital costs, in which there is a 39% difference in the interest rates paid by different parties.

Changing this really is a situation that would only be to the detriment of the lawyers and acountants that are required to create the tax deductable structures around investment; and the greatest benefits would be reaped by the poorest sectors of the productive economy, where the greatest competition between buyers and investors is fueled.

The only point on this about which I am somewhat ambivalent is whether this should then always make the capital gain on the house taxable - I have a feeling that this should be so, but could easily be persuaded either way on that one...

11 comments:

burt said...

IIQ

Quietly as we go eh.

Under the current laws (using some less obvious tax structures) it's quite possible to do just as you say. But only if you know what you are doing. Follow the Leaders I say...

How many Trusts has or PM got ? (It was published once - and I was surprised)

burt said...

Oh, here is a summary. I assume it's up to date.

http://www.dpmc.govt.nz/cabinet/ministers/register.html

iiq374 said...

Thanks Burt - that actually is a key portion of the point that I'm driving at:

It is already possible to do this but it involves legal contortions to do it. So why not just make it the status quo and remove the disparity?

burt said...

Yes got that point.

Adding weight by showing that there are some amoung us that cleary live one example and preach another.

In real terms the costs are actually minimal to use the structures available. But it's an education and understanding issue, not a wealth issue. For god's sake my 6 year old understands family trusts - how hard can it be.

iiq374 said...

There is also the fact that it is only a legal contortion for the first / main home.

It seems somewhat ironic that without the wrapper trust / company it would actually be cheaper for me to rent another house while leaving the house empty until the mortgage is paid down.

Of course the alternative is to lower the tax rate which would create a diminished difference and probably start outweighing the hassle anyway...

burt said...

The law is an ass alright.

"A friend of mine".... Owns a house, rents it out and rents elsewhere....

You need to ask yourself one question. Did you buy the house because you love it and want to live in it (in which case it is 'your home' and you have no advantage from tax laws - that is fair) or did you buy the house as an investment ?

The law makes it hard to win both ways.

burt said...

Oh back to the 6 yr/old. Trading Trusts and Corporate Trustee's still confuse the shit out of him, but the 9 yr/old kinda gets it. They also question why Maori Trusts have the same tax status as Charitable Trusts.

iiq374 said...

"Did you buy the house because you love it and want to live in it (in which case it is 'your home' and you have no advantage from tax laws - that is fair) or did you buy the house as an investment ?"

Actually I think the fact that someone is DISADVANTAGED by tax laws because it is their home that is not fair. And I do not know that the two purposes are mutually exclusive.

burt said...

Then you must take the ultimate plunge into Trust law iiq.

Vest you house in a Trust, have the Trust declare (via a trust deed) that it is to provide a permanent home for you/your family. This makes the house worthless for a comercial perspective, as it cannot be legally sold. There are pit falls (getting a mortgage is one) but there are also benefits. Needless to say, check it out with a tax advisor, which I am not.

Ha - I have proven you point :-)

iiq374 said...

I thank you for your proof! ;-)

The thing about that is it still only vests $54,000 of the house each year (with partner) and takes 5 years for full benefit.

As opposed to an actual investment home that is 100% straight away. There is still a huge inequality between the developer / landlord and buy to live investment which wil continue to drive an inflationary spiral

CreditCoach said...

Yup. You should have more advantages buying your first home.
I like your policy.