Twyford PhilNew Part 4 Amendments to Income Tax Act 2007PHIL TWYFORD (Labour—Te Atatū): I am very glad to take a call on new Part 4 of the Housing Legislation Amendment Bill—yet another great housing policy that we are having the opportunity to debate this afternoon in our Committee. I must say how refreshing it is to finally have some good housing policy to debate. For those of you who take an interest in #ChangeTheGovt this afternoon in the House is a little opportunity to get a feel for what it is going to be like after the election next year because we are going to be in the House here discussing meaningful transformational housing policy like building 100000 affordable homes for first home buyers and like taxing speculators. New Part 4 of this bill basically pushes out what has come to be known as the brightline test from 2 years to 5 years. Let me explain to folks what that means: in September last year in one of its many rushes of blood to the head about the housing crisis the National Government presumably prompted by David Farrar's overnight polling decided that it had better make some kind of announcement on housing in order to try to placate an electorate that was increasingly worried about the effects of the housing crisis. What it announced was a 2-year brightline so that if a property investor sold a rental property within 2 years of buying it then they would pay income tax on the capital gain. Ostensibly this was the Government acknowledging even though it had been denying it for the last 2 years that speculators were a problem in the market. Minister Nick Smith does not even like to use the term speculator". He does not agree with the use of that term. This policy flip-flop by National implementing a 2-year brightline test was effectively an acknowledgment that speculation is a problem in the housing market. We subsequently found out from Government papers released under the Official Information Act that Treasury had done the modelling for the brightline test and estimated that the 2-year brightline would be likely to have an impact on a maximum of 1000 of the nearly 80000 house sales each year that it would raise just $18 million and that it would affect less than 2 percent of all house sales. So Treasury basically said a 2-year test on taxation requiring income tax to be paid on the capital gain from the sale of a rental property within 2 years of its purchase—Treasury and a host of other Government advisers basically said it would have virtually no impact. Did that stop the Government from announcing it? I do not think so because it saw a headline. It saw a press release and a headline and if we have learnt anything from Nick Smith's long parliamentary career he starts with the press release and then works his way back through the policy development process in reverse right back to trying to find the evidence to justify the policy to support the press release. He is a master practitioner in the art of—Hon Members: Policy-based evidence.PHIL TWYFORD: —policy-based evidence-making—thank you very much colleagues.I think it is plain for anybody to see that under this National Government property speculators have been allowed to run riot. Property speculators are rampant particularly in the Auckland market and we see from the latest CoreLogic data that speculators account for 46 percent on average of all property transactions. Nearly half of all homes purchased at the moment in the Auckland housing market are being snapped up by speculators and if anyone here reads the New Zealand Herald newspaper they will know that people are making a killing—an absolute killing—buying and selling properties sometimes within even days or weeks of the original purchase making hundreds of thousands of dollars in the process. It is so out of control that it is clear that many of these speculators are in fact paying income tax on it but the housing market as Nick Smith said today is so out of control that the massive capital gains that people are making are such that they are not deterred by the prospect—[Bell rung]Grant Robertson: I raise a point of order Mr Chairperson. Under Speaker's ruling 87/5 it says that the Minister who is responsible for the bill has to be in the chair or leave the Chamber. The Minister responsible for this bill is in the Chamber but not in the chair. Either of those two options works for me Mr Chair.The CHAIRPERSON (Hon Chester Borrows): Oh that is very good of you to make that concession.Hon Judith Collins: Do you want to be in the chair Minister Smith? Fabulous. Thank you so much very good. That's so nice—the nicest thing you've ever done for me Grant.The CHAIRPERSON (Hon Chester Borrows): Are flowers going to follow now or something are they? I call Phil Twyford.PHIL TWYFORD: Very good decision Mr Chairman. One of the reasons that property speculation is bad—and I mentioned in my first 5 minutes that property speculators currently account for 46 percent of all transactions in the Auckland market at the moment—is that property speculators are going around the suburbs of Auckland and basically hoovering up affordable homes. If you look at the data for a suburb in South Auckland like Ōtara which has always had very affordable housing—it is one of the places in Auckland where young families can go and housing has been affordable. It is where people go to get a start in life. In Ōtara speculators account for not 46 percent of all property transactions which is the average across Auckland but they are snapping up 80 percent—eight-zero—of all property transactions. So it should not surprise us that homeownership rates are falling in Ōtara four times faster than the national average. As the speculators go in and hoover up all these houses homeownership rates are plummeting. Homeownership rates are falling over most of Auckland except in the very leafy wealthy suburbs. So in a place like Herne Bay the beautiful suburb of Herne Bay homeownership rates are actually going up but across much of Auckland including west Auckland where I am from homeownership rates are falling and entire streets now are owned by property investors many of whom are offshore absentee landlords. So this new Part 4—basically what it does is it pushes out the brightline test from 2 years to 5 years. I want to explain for people who have not followed this debate what the brightline test is. Under New Zealand tax law you normally would be expected to pay income tax if you were deemed to have purchased this rental property for investment purposes—with the intention of making a profit on the future sale of that property. It is a very subjective test about intention. What the brightline test does is it says: "No ifs no buts. If you sell it within this period"—2 years in the case of the current law and 5 years in the case of our amendment—"you pay income tax regardless of your intention." So it overrides the intention test and it effectively puts in place a capital gains test for residential property speculation. We think that is a good thing to do because it is very important that we start to squeeze property speculation out of the housing market. There are massive capital gains that people are making—entrenched expectations of capital gains—which has a self-fulfilling effect. It drives more and more people into the market who think that in John Key's New Zealand the only way you can get ahead the only way you can make a dollar is by speculating in real estate. We have to stop that not only for the good of our children and our grandchildren so that future generations can have some prospect of owning their own homes in this country but also because it is enormously damaging to our economy to have real estate speculation sucking vast amounts of capital into what is an unproductive business activity that generates no jobs and no exports. Let me give you this statistic. In the last 12 months banks in this country lent $5 billion to the manufacturing industry—$5 billion to the manufacturing industry. In the same period they lent $25 billion to property investors. I think that gives you a snapshot of the state of our economy and the fact that there is a vast inflated bubble in the housing market that is sucking huge amounts of productive capital into property speculation. Labour believes that if we push the brightline test out to 5 years that will make a significant difference. The basis of Treasury's advice—that the 2-year brightline would not make much of a difference—was of course that property speculators would hold on to a property for 2 years and a day and then flick it on. So not only would it generate virtually no revenue; it would have very little effect in changing the behaviour of property speculation. We believe that 5 years would make a significant difference but for us this is a down payment. It is merely a down payment. Andrew Little has signalled that Labour will move on negative gearing—that is the ability for property investors to write off any losses they make on a rental property against other taxable activity. So if you buy a property and you are leveraged up so high that you are paying the bank more in interest than you are getting back in rent you are making a loss on that property. Taking into account all the other outgoings like rates and insurance and maintenance if you are making a loss you can then offset that loss against other tax that you are paying perhaps for your job or for some other business or some other investment. That is a huge huge public subsidy for property speculation and we are told by the Inland Revenue Department that last year property investors snaffled up $650 million in tax breaks. The public of New Zealand gave property speculators some of whom own six seven or eight properties—they pocketed $650 million. "Thank you very much Mr Taxpayer." If we do not deal with the problem of property speculation we will never ever fix this broken housing market. If we build houses if we reform the planning rules and if we do all those things we can get the market back in balance hopefully that will reduce the capital gains and drive the speculators out but in our view fixing the tax settings that now incentivise a speculative mania in the housing market and threaten the very financial stability of our economy and our banking system has to be a top priority and that is what new Part 4 will do."