From April 1st the tax ring-fence for rental property losses needs to be accounted for by investors. It is currently going through the ‘bill to law’ process,
which starts with a select committee and then ends up before Parliament for the final stage. In other words, although it’s not law just yet, it looks
pretty likely to pass and once approved will apply to the current tax year (ending March 31st, 2020).
After a lot of discussions and a long build-up, it means that mortgaged landlords will no longer be able to use a loss on a rental property to reduce the
tax bill on their non-property income(s). There’s been much teeth-gnashing about the potential effect, and certainly, some individual landlords will
have to look at their sums.
As it happens, Australia is paying similar attention to their negative gearing regime, with much of the commentary there focusing on how it’s only utilised
because of the concurrent existence of big capital gains. Without those gains, reliance on negative gearing looks less appealing.
But back to NZ, I’m relatively relaxed about the potential for mortgaged investors to sell-off (and/or new investors to stop buying) because of the tax
ring-fence on rental property losses. There are two factors here:
- Because of the LVR rules, investors have already required a deposit of at least 30% for the past few years and will, therefore, be more likely to be
making operating profits than in the past – hence, less likely to be utilising the tax advantage of a loss. - It’s a ring-fence, not a complete removal. Mortgaged investors can still use a loss on a particular property to reduce their overall tax across
a portfolio of properties or on a future gain...
