Last week’s report from the Tax Working Group makes some comments that are sure to be contentious. The Tax Working Group was established back in May to assist the Government in considering the key tax policy challenges facing New Zealand. Their latest report targets the $200 billion rental property industry, stating that it not only pays no tax, but is actually getting refunds when it might be contributing tax of more than $500 million a year. [Read more…]
You get what you reward, right? Give a monkey a handful of nuts every time he jumps through a hoop, and he’ll jump through hoops all day. Compliment a young child every time they say “please” and “thank you”, and pretty soon you’ll have a well mannered kid. Give people massive tax incentives for investing in residential rental property, and before you know it that’s what is happening.
I’m hot on this topic right now, having just returned from Boston and seen firsthand what the American federal and state governments reward. Yup, entrepreneurial behaviour.
I had a coffee with a Kiwi guy in Boston on Sunday. He is an Auckland University graduate and has a very cool Life Sciences venture which might just change the way some aspects of mental health are managed. Potentially a big success story within a small niche of the US$2 trillion American health market. He is located in Boston with a staff of seven techies. The city of Boston pays the rent and utility bills for his offices, because they want to keep him from relocating to Cambridge City, 30 miles to the west. The federal government has stumped up serious six figure cash as an SBIR grant (not a loan) to fund his research and development.
The US machine bends over backwards to make sure his innovation stands the best possible chance of success. Why? Because if he succeeds – and if hundreds of others like him also succeed, then that is great for the American economy. Sure, some will fail. But for the Americans, investment in guys like him is a no brainer.
So if he had stayed in New Zealand, what would the same guy need to do to get massive government support for a venture? Yup, that’s right – he would probably be more incentivised by the system to get a salaried job, and then negatively gear himself into as many residential rental properties as his salary would allow. The benefits for him personally? Government subsidised wealth creation. The positive benefits for New Zealand as a whole? Absolutely zero.
Don’t get me wrong, I’m not dissing the New Zealand political machine completely here. There are some great initiatives going on to encourage entrepreneurship – and I have blogged about some of them before here.
But what if the massive tax incentives (I don’t know what the total is, but I’m guessing in the hundreds of $millions annually) were removed from investment in residential rental property and redirected to NZTE’s budget in support of Kiwi entrepreneurial activity that stands a chance of dominating some niche out there in the wider world?
Why are we still so fixated on the old hand’s off market doctrines of “sink or swim” when even the free market Americans have long ago abandoned that ethos and seen that everyone benefits from nurturing entrepreneurial activity?
Fraser Hurrell is one of three directors of Elevate CA Limited, Chartered Accountants & Business Advisors in Whangarei, New Zealand.