Currently, the government is preparing legislation to ring-fence losses from residential rental property. At this stage, the bill to go before Parliament is not yet drafted but is being given urgency so that it is enacted before 01 April 2019.
Residential Property investment has always been attractive to New Zealanders. The principal reasons being that ongoing rental losses could lower a persons income and therefore pay less tax and the capital gains have traditionally been tax-free.
The new government sees these 2 issues as skewing the investment market and contributing to NZ having affordability issues around housing. The previous National Government made an attempt to curb the rental property market by doing 2 things
- Remove depreciation on building structures in the 2012 tax year
- Introducing the Brightline Test that taxes the gain on investment property. This commenced on 01 October 2015.
The current government is extending the rules around rental properties with the following actions currently being legislated for. This includes
- Extending the Brightline Test from 2 years to 5 years
- Bringing in loss ringfencing rules
- Introducing a capital gains tax subject to advice from the Tax Working Group
The rules for ringfencing losses will apply from the start of the 2019/2020 income tax year. There is a suggestion that it may be “phased in” over 2 to 3 years.
The rules will apply to “Residential Land” as defined by the Brightline Test. It does not apply to
- A person’s main home
- Boarders or occasional rental, B&B etc..
- A property subject to the mixed asset rules
- Revenue account land
Residential land means
- Land that has a dwelling on it
- Land for which there is an arrangement to build a dwelling
- Bare land that may have a dwelling built on it under the district plan
Does not include
- Farmland
- Land used predominantly as business premises
Information to date is suggesting that it is not limited to land in NZ. We need to wait for more information on this point.
Dual use property which is a mix of residential and business may be subject to the ringfencing only on the residential portion. This will add complexities and difficult to calculate.
There will also be special rules for Mixed Use assets. These are assets used partly to derive income and partly private. Mixed-use assets are already the subject quarantining rules.
The ringfencing rules apply to all taxpayers – companies, trusts and individuals. With an LTC the shareholder is treated as the owner of the property.
The test for losses is applied on a portfolio basis so that profits from one property can be offset against losses from a different property. Any surplus losses are carried forward to offset against rental income from future years. Future taxable income from either the Brightline Test or property development can also be offset by rental losses brought forward.
The bill will also have some anti-avoidance measures to prevent specific tax structuring to avoid ringfencing. One example is where a taxpayer borrows to buy shares in a company owning residential property. In addition, a “Residential property land-rich” entity where more than 50% of assets are residential properties are also ringfenced.
Conclusion
Ringfencing of losses from rental properties is nearly here. It will affect all investors who have a high LVR because it is these properties that produce the rental losses because of the interest component. It means that the rental losses won’t be able to be offset to get a tax refund. But they are not lost. They are carried forward to be able to be offset against future rental profits or profits from the Brightline Test or a capital gains tax.
Contact:|
John Lowther
Director (BCom) (MComLaw Hons) (MTaxS Hons)
Email address [email protected]
Lowthers Auckland Limited
Level 10, 34 Shortland Street, Auckland
PO Box 1963, Shortland Street, Auckland 1140
Telephone: (09)921 0232 Facsimile: (09) 921 0233
www.lowthers.co.nz
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