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Rental Losses to be Ring-Fenced Rental Losses to be Ring-Fenced

Another so-called tax ‘loop-hole’ about to be closed

On the Labour party's pre-election tax policy wish-list was the ring-fencing of residential rental losses.

Over the weekend the Revenue Minister, 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.

This will mean that investors will no longer be able to offset tax losses from their residential investment properties against their other income to reduce their tax liability.

The Government sees this as a key measure in making the tax system fairer while improving housing affordability for 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 effected parties.

It will be interesting to see what parameters are placed around the ring-fencing, such as how will 'investor' and 'residential investment property' 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?

Time will tell…

Contact Shelley-ann Brinkley, Phil Barlow or any of the team at Hayes Knight if you would like to discuss.

Shelley-ann Brinkley
Associate - Tax Consulting
T +64 9 414 5444

Linked in Shelley-ann


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