Now they are coming for your family bach

While Jami-Lee Ross is throwing grenades out in all directions, the government is getting away with murder. Nobody is looking at them, especially not the media. They can do anything they like at the moment; everyone is watching the National party implode.

Here is just the sort of thing that just might slip under the radar. According to this article in?Stuff, the Tax Working Group has found a way to tax your family bach or your holiday home. It is not via a Capital Gains Tax, which would probably apply to such properties anyway, once they are sold. No. This is in the form of a wealth tax and we really do need to shine a light on this. quote.

Buried in the Tax Working Group (TWG) report to the Government is a concerning and ill-considered idea: deemed income.

It can only be described as a wealth tax on families who own a bach or a second home. end quote.

One of the fundamental principles of taxation is that it is supposed to be fair. For that reason, ‘deemed income’ is generally not taxed, although there are exceptions. Because ‘deemed’ income is not income at all. It is an amount determined by the government, on which you will pay tax. This principle already applies to owners of overseas shares or business interests. Now, it seems that Michael Cullen, who was the architect of the FDR rules (applied to foreign investments), has proposed a similar system to apply an annual tax on the family bach or holiday home. quote.?

The proposal would introduce an annual tax, paid regardless of whether the owner has earned any income from the property or whether it increased in value.

It is only one proposal that is being considered, but the mere fact it has been put forward is worrying.

A tax that only applies to the value of an asset regardless of the income the asset generates ??or whether it is sold at a gain, loss or break even ??is a wealth tax. end quote.

So, it will work something like this. On April 1st 2020, the value of your holiday home will be established, by valuation or CV. The government will decide what rate will be applied to this property – the FDR rate is 5%, so let’s use that.

So, if your holiday home is worth $500,000 and the ‘deemed’ income rate is 5%, the amount to be taxed will be $25,000 – per year.

You then pay tax on the ‘deemed’ income at your marginal rate – 33% in a lot of cases. So, that will be $8,250 payable in tax for the year. For nothing more than the privilege of owning a holiday home.

If you are earning income on your holiday home, you are required to pay tax on that anyway, so this is a completely separate tax. Make no mistake. This is a wealth tax.?

Before you ask – which you will – if there is a loss on the value of the property from one year to the next, you will not get a wealth tax refund. The FDR rules do not take losses into account. If there is a drop in value from one year to the next, there is no adjustment. You just don’t pay the tax in that year. quote.

There are a range of issues with this tax that offend the fundamental principles of good tax policy.

Tax policy needs to be seen by many as fair. That is a subjective judgment, but we know what it is when we see it.

It should be consistently applied so that tax is collected from individuals and entities that have earned income or generated wealth and doesn’t produce silly outcomes.

It should also be simple to collect and ideally progressive, meaning it hits harder the more we can earn or afford.

This new wealth tax proposed on baches has none of those qualities and should never have made its way into this report. end quote.

Wealth taxes are inequitable. There is no actual income to apply the tax to. It is a totally fabricated amount and it may cause hardship to people who own holiday homes, possibly inherited from family members, who do not have the money to pay a fabricated tax. This is most likely.

This type of tax has precedent. Fringe Benefit Tax is based on a deemed amount – the value of your company vehicle may be based on the original purchase price, but the private use percentage is a totally arbitrary figure and ditto the FDR rules, for foreign investments. These deemed amounts are based on nothing concrete. That does not mean that you will not owe the tax. You will.

We need to get some sunlight on this. With the current political firestorm going on, things like new tax policy will get no traction but we need to bring this out into the open. A lot of people will end up losing their family baches if we do not.