Have your say: Should the govt ring-fence rental property losses from LAQCs?

The Sunday Star Times has reported that the government looks likely to "escalate its tax attack on investment property" by ring-fencing losses made on rental property against other income. It cited IRD figures showing losses on rental properties owned by Loss Attributing Qualifying Companies (LAQCs) had risen to NZ$812 million by 2009.

There is already a wide expectation the May Budget will axe depreciation on buildings, one of the tax reform options raised by the Tax Working Group (TWG) in January, along with cutting income tax and raising GST. However, the government will be under pressure to make further changes to the way investment property is taxed because axing depreciation alone will not raise as much money as the TWG report suggested. As it looks for ways to plug the gap, the use of loss attributing qualifying companies (LAQCs) to reduce investors' tax bills is likely to come under the spotlight. Figures obtained from the IRD show that LAQCs play a huge role in reducing the tax take from investment properties. According to IRD, the number of LAQCs filing returns more than doubled between 2003 and 2008, from 63,400 to 129,900, and the total tax losses relating to residential property investments owned by LAQCs increased nearly 800% over the same period, rising from $105m to $812m.

My view I'm actually against ring-fencing of losses on LAQCs or stopping people from using family trusts to own rental property. There is a big risk that attempting to paper over the cracks creates more opportunities for clever tax lawyers and accountants to dream up new boondoggles. It creates more opportunity for unintended consequences. There are many legitimate uses for LAQCs. The core of the problem is the gap between the family trust rate (33c), the top personal tax rate (38c) and the corporate tax rate (30c). The government should be going all out to reduce those gaps, as the Tax Working group recommended. A land tax would have given the government the ammunition for a revenue neutral cut in these top rates. It would also have been impossible to avoid and could have been structured so as not to force Remuera grannies out of their homes or alienate the farmers. Deferral of payment until the sale of a property and a tax-free threshold would have done the trick. Instead John Key decided against a land tax, arguing it could hit land prices and would cramp the style of local governments. Perhaps there are too many National Party supporters who are tax lawyers, accountants and rental property investors? Your view? I welcome your thoughts and insights in the comments below.