Let’s talk about tax (and imputed rents).

In one part of the now infamous interview between Gareth Morgan and Paul Henry; when Gareth is trying to explain to Paul that Paul owning a big house or a flash car did have value to Paul – Gareth is talking about imputed rents.

Michael Cullen’s tax review in 2001 – the one that had Shirley Jones as a member that wasn’t the mother of David Cassidy – produced an interim issues paper. In that paper from page 37 there is a proposal to tax imputed rents. I will define it in a minute promise – currently just doing the preamble flow. The media and news – coz in those days people didn’t get their news anywhere else – went absolutely nuts. There was a line doing the rounds that the Beehive’s switchboard was jammed following the release of the issues paper – and that was just from the 9th Floor (HC) to the 7th (MC).

I don’t think Helen Clark’s government could distance themselves from it fast enough.

So what is an imputed rent?  Told you I would get there in the end. The way I like to think of it is the rent you save to the extent you own your own place. That value is then income to you as is the case with the dividend rules where a shareholder lives rent free in a house owned by the company.

Strictly speaking the ‘correct technical’ analysis has you both paying non- deductible rent and receiving taxable rent. In the same way renters pay non-deductible rent to landlords for whom it is taxable income. In this analysis you are both renter and landlord.

Yep I prefer my way too.

So it is a benefit or a tax break that owner occupiers get that renters don’t get. And it has been there for like EVAH so no one really realises. Except in their heart they do. Imputed rents is the basis of the received wisdom that you should always pay off your mortage ahead of making other (taxable) investments.

Now the thing is that strictly speaking under the ‘correct technical’ analysis if you start taxing the income you need to also allow deductions. But I am not sure if our friend the private and domestic exclusion for deductions would let it thru.

This isn’t a problem for TOP as their tax will be based on productive capital as measured in the capital account of the National Income Accounts. Ok good. There is though the small matter that nothing else in the tax system is actually based on this concept . So maybe – just maybe – there could be some tax design issues.

Now being the solutions focussed individual that I am – I thought I’d put together another way of taxing imputed rents. Yes I know there is more to the TOP tax policy than this – but there are limits to my powers. I also can’t do a blind thing about political acceptability either – so I am sticking with what I know.

How to tax imputed rents in four easy steps.

Step one. Divide the value of your mortgage by the value of your property. Council valuations will be fine.

Step two. Go to the MBIE website and look up your area, number of bedrooms and find the potential rent for your property. There are three bands. Take the median one. Why? Made it up. No one can be trusted not to self assess the lower band and  I can’t cope with the arguing.

Step three. Take the rent in step two and multiply by 52 weeks or how ever long you have lived in your property. If no mortgage put this number in your tax return in the rents box. Joint owners – yes you can divide it by number of owners. Put that number on your tax return.

Step four. Those with mortgages who are still playing. Multiply step one’s number by step three’s number. This is the amount you aren’t paying tax on. Deduct it from the full amount in step three and put it on your tax return. Yes joint owners can divide here to.

Of course it still suffers from the problem all made up or presumptive taxes do that there hasn’t been any cash come in to help pay the tax. But I would hope – to paraphrase one of my commentators – it was more intuitive and less weird to the punters than something based on a percentage of value. Even if the outcome is broadly similar.

Now of course the economists may hate it. But as economists don’t have to explain things to clients or taxpayers – give the accountants this one.

Namaste.