Welcome to our March Newsletter,
With the new government now surpassing its first 100 days in office a prevalent tax ‘loop-hole’ is about to be closed.
On the Labour party’s pre-election tax policy wish-list was the ring-fencing of residential rental losses.
During the month the Revenue Minister, Stuart Nash, in his speech to IFAC in Queenstown, confirmed that this was a current priority of the Government and we are therefore likely to see draft legislation to this effect in the next Tax Bill.
If passed, the law will exclude investors by no longer enabling them to offset tax losses from their residential investment properties against their other income to reduce their tax liability.
Generally, any income that you receive from renting out property is liable for income tax, so you must include it in your tax return with IRD. This income could be from renting out land or buildings, or it could be income you earn by having private boarders or flatmates living with you. However, as the law currently stands there are circumstances where you can claim tax deductions through a practice commonly referred to as “Negative Gearing”.
Negative gearing is when the annual cost of your investment is more than its return. Basically, it’s when the cost of maintaining your property and paying the interest on your loan is more than the rental income you receive from it. With a negatively geared investment property you may be eligible for a tax deduction if you have a loss on your investment. This tax advantage has seen negative gearing been primarily adopted by residential property investors a strong influence upon housing unaffordability.
The Government sees reform of negative gearing as a key measure to ensure the tax system no longer remains unfair by increasing housing unaffordability for first time owner-occupiers.
Unlike what is happening with the extension of the bright-line test, the Revenue Minister has stated that this ring-fencing proposal will go through the usual Generic Tax Policy Process which means there will be a consultation period and opportunity for submissions from affected parties.
It will be interesting to see what parameters are placed around the ring-fencing, such as how an ‘investor’ and a ‘residential investment property’ will be defined? Is a taxpayer with 5 rental properties an investor or are they in the business of renting? Is a holiday home rental or Airbnb property a residential investment property? Will the policy be phased in over 5 years as was indicated in Labour’s tax policy manifesto?
Once the ring-fencing is in place we are likely to see a large number of ‘mum and dad’ rental property investors selling their investment properties as often these investments were only sustainable due to the PAYE refund the taxpayers received as a result of the loss offset. With investment properties typically being highly geared, even given the low interest rates, the negative cash flow is sure to bite. Likely the Government’s intended result to increase the housing supply, but has the impact on renters been fully thought through?
With their retirement nest-egg gone, what other forms of investment will these mum and dad investors turn to? Will Kiwisaver and the sharemarket for instance provide the same security as bricks and mortar did? How will they respond to the tax changes ahead?
If you have a query on your rental property situation of on any other legal matter please do not hesitate to contact us to organise a time or to just discuss your matter over the phone.
DAVENPORTS WEST LAWYERS LIMITED
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