Hamish Rutherford: Government’s shift on tax resurrects doubts it has battled to shake off


The subject matter could hardly have been different, but last week’s housing package announcement and the 2018 oil and gas “ban” have a lot in common.

An early morning announcement with a quartet of ministers walking into the Beehive theatrette to announce much-anticipated policy which was both arguably central to Government policy, but also quite unexpected for those affected.

Ahead of her rise to become Prime Minister Jacinda Ardern described climate change as her generation’s “nuclear-free moment”.

But there was little detail about what that meant at a policy level, and certainly no clear indication that exploration would be targeted in quite that way.

When she announced the effective end of offering new exploration permits just over three years ago, a move taken with virtually no consultation with the sector or industry at large, it sent a signal that the operating landscape for particular industries could change on the basis of a political deal between the coalition and its support parties.

The decision was made on the basis of almost no policy work and when the advice landed later, officials warned it may do more harm than good when it came to emissions.

It created a perception about the coalition which it was never fully able to shake, although a change of government to one where Labour knew it had the support to carry out its plans in Parliament offered hope of more clarity over decision-making.

Promising intervention in the housing market has been a central theme since 2017 for Labour, but after Kiwibuild failed to deliver in the last term, but it was unclear what the party would do this time around to tilt the scales away from investors.

There was certainly nothing in Labour’s tax policy pointing to change before the election. On the day that was announced, finance spokesman Grant Robertson spent the day telling the media that there was nothing beyond a new top tax rate for very high earners.

Of the dozens of assurances that there was nothing hidden in the policy was a clear promise not to touch the bright-line test, as he disappointed his more progressive supporters by saying what the country needed was stability during uncertain times caused by Covid-19.

What was announced on Tuesday was a marked shift, doubling the bright-line test to 10 years and an intention to remove the tax-deductibility of interest payments for residential property investors.

While Robertson has explained away the bright-line test promise as him being “too definitive” in an interview, even had the question not been asked, Labour would have exposed itself to lying by omission by not signalling the change.

The change to interest deductibility was described as the Government closing a “loophole”, a description which caused alarm among accountants and business commentators.

Later Robertson would clarify that the “loophole” was the idea that while investors could deduct interest payments on mortgages, ordinary households could not. This language sent very different messages to different parts of the audience.

The distinction may seem real to many voters, especially those wanting to enter the property market or those struggling with hefty mortgages.

But for businesses used to assuming all legitimate business expenses were tax-deductible, the statement suggested legitimate ways of doing business could be dismissed as quirks any time a minister stepped to the Beehive lectern.

It would later emerge that the decisions were made on the basis of little detailed policy analysis, with the grunt work to give effect to the changes yet to come.

Exactly how significant the changes will be for investors remains to be seen. For investors who have all their assets in residential property, the changes could change the operating model.

Advisers have been quick to point out that the changes could be neutralised for those with more diverse portfolios, by (for example) loading all of their debt against other assets such as commercial property, using residential properties as collateral.

Business groups however have once again raised alarm. Kirk Hope, chief executive of BusinessNZ warned the move was likely to cause those considering investment to pause, while tax expert blamed the sudden announcement for a sudden drop in the New Zealand dollar.

“For anyone contemplating doing business in New Zealand, the words ‘political risk’ must now come to mind,” New Zealand Initiative chief executive Oliver Hartwich wrote.

Part of the reaction could be tactical; by crying foul and warning of dire consequences, business groups may spook the Government into slowing other reform.

Robertson has since indicated that the Government has no plans for wider changes to the rules on tax deductibility.

But once again, Labour ministers have opened themselves up to the legitimate accusation that the assumed rules could change abruptly without bothering to do the hard policy work or bothering to discuss what the changes might mean for the industries that are affected in advance.

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