Ring-Fencing of Rental Losses
The proposed loss ring- fencing rules will mean that speculators and investors with residential properties will no longer be able to offset tax losses from those properties against other income for example, salary, wages or business income to reduce their tax liability. The losses can be used in future years when the properties are making profits or if the person is taxed on the sale of land.
Under the current New Zealand tax setting, tax is applied on a person’s net income. We do not ring- fence income and losses from particular activities or investments. This means that there is generally no restriction on losses from one source reducing income from another source.
Investment housing is currently taxed under the same rules that apply to investments. This means that rents are income and interest and other expenses are deductible. Capital gains on sale of the property are not taxed unless the property is on revenue account ( for example, land dealer or developer)
Aim of the proposed changes
The introduction of loss ring –fencing rules is aimed at levelling the playing field between property speculators/investors and home buyers. Currently, investor’s particularly high geared investors have part of the costs of servicing mortgages subsidised by the reduced tax on their other income sources helping them to outbid owner occupiers for properties. Rules that ring fence residential property losses so they cannot reduce tax on other income , and is intended to help reduce this advantage and unfairness.
Types of properties subject to the rules
It is proposed that the loss- ring fencing will apply to residential land.
The rules will not apply on a person’s main home, a property that is subject to mixed assets rule for example a bach that is sometimes used privately and sometimes rented out and land that is on revenue account because it is held in a land related business.
It is suggested that the loss ring fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental against rental income from other properties calculating their overall profit or loss across their potfolio.
Using ring fenced losses
Under the suggested changes, a person’s ring fenced residential rental or other losses from one year could be offset against their:
It is proposed that the loss ring fencing rules will apply from April 1, 2019 next year.
Cristina Canard is the principal accountant at Apex Accountancy Ltd. Cristina keeps up to date with all the relevant tax changes in New Zealand.