The latest Government budget had something for everyone but while most households will be a few dollars a week better off, there are some clear winners and losers. In the winners' corner are businesses, those on high incomes, and savers. The biggest losers are property investors who have built large portfolios financed partly by tax rebates.
Owners of investment property have been able to deduct depreciation from their rental income, thus reducing the amount of tax they pay on rental income and in many cases resulting in large tax rebates. These rebates were used to repay money borrowed for the purchase of the property. From April 2011, investors will no longer be able to claim depreciation on most properties. Some investors with large portfolios will find it difficult to make debt repayments without this tax break and may be forced to offload properties. Investors who tough it out and keep their properties will find they need to increase rents to get a decent return. There will be a shortage of rental properties which will ultimately put even more pressure on rents.
The other group of losers from this budget will therefore be those who are renting. On the plus side, the sell-off of investment properties will keep prices low for first-home buyers and it will become more attractive to buy rather than pay high rent.
While income tax rates have been lowered, GST has been increased and this creates an incentive for people to save so as to get the maximum benefit from tax cuts. Over 60% of eligible people have not yet joined KiwiSaver, and this should be a priority for savings. The minimum contribution for KiwiSaver is 2% of pay and tax cuts will be around 1.5%. The message is clear; save and you win, spend and you lose.
Liz Koh is a leading Kapiti Financial Adviser