Who still wants to be a landlord? :
It seems every day you read the newspaper, there are numerous articles focusing on the New Zealand property market. There have been a number of tax changes aimed at softening the property market. In addition, there are various other rules and regulations being placed on landlords. For the average New Zealand mum and dad investor who may have only one rental property, some of these changes may now have them thinking twice about continuing to hold that investment.
So what recent changes have been made and what is on the horizon?
LOSS RING FENCING
The proposed residential rental 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 their other 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.
The Government sees this as a key measure in making the tax system fairer while improving housing affordability for owner-occupiers. There is an expectation that many mum and dad investors will exit the rental market given they will no longer be able to cover mortgage payments from PAYE refunds that they may have historically received from the loss offset.
These proposals will likely make their way into a Tax Bill in 2018 and apply from the 2019-20 income year.
The Brightline test effectively taxes gains from the sale of property that have traditionally been treated as non-taxable capital gains. A 2 year “Brightline rule” was introduced from 1 October 2015. Gains on property bought on or after that date and sold within 2 years became taxable. The exceptions to this rule being the “main home”, relationship property and also inherited property. The 2 year ownership requirement has subsequently been extended to 5 years for any property acquired on or after 29 March 2018.
From 1 July 2016, new tenancy agreements were required to contain a signed Insulation Statement from the landlord disclosing whether there is insulation in the rental premises and its location, type and condition. It is intended to help tenants know what to expect come winter and make informed decisions. Landlords must also have smoke alarms installed that are in good working order and well maintained.
From 1 July 2019 insulation will be compulsory in all rental homes. Any new, replacement or top-up insulation installed in a rental home after 1 July 2016 must meet requirements that will apply from 1 July 2019. Further information can be found at https://www.tenancy.govt.nz/assets/ Uploads/Tenancy/renting-and-you-english- edition.pdf
HEALTH AND SAFETY LEGISLATION
The Health and Safety at Work Act 2015 (the Act) came into force on 4 April 2016. Under these rules, landlords (and their property managers) of both commercial and residential premises, owe a duty of care to ensure the health and safety of everyone involved with or affected by work undertaken on their property.
These rules place numerous obligations on commercial property landlords to ensure the health and safety of those using the leased property for work purposes.
Although the Act applies to residential rentals, it only applies whilst it is a place of work (e.g. where tradesmen are engaged and enter the premises to carry out repair work). The rest of the time, rentals are simply homes and landlords need only comply with existing Residential Tenancy laws.
Over recent years the media has been awash with stories of properties found to be leaky. Many of these have been in large apartment blocks and the costs for remediation have been significant (sometimes over $100,000 for each apartment). For landlords, the issue is then whether any of these costs are deductible for tax purposes. Unfortunately, this is not a clear-cut issue as it is necessary to determine to what extent the costs are “repairs and maintenance” and to what extent they are capital in nature. Most property owners would rightly argue their property is just being returned to the condition it was when it was purchased and therefore the costs should be deductible. The Inland Revenue however do not necessarily hold that view, although they are considering this issue in more detail – it will be interesting to see if they relax their position once the loss ring-fencing rules are introduced. Advice should always be sought before deducting any remedial expenses.
AIRBNB – BED TAX
The Auckland Council (and other councils) are looking at introducing an Airbnb tax. If the proposed tax proceeds, homeowners would have to pay a visitor accommodation rate to the council, which is based on how much of the year they rent their place out.
Another issue that is sometimes overlooked for Airbnb homeowners is if you derive more than $60,000 in a 12 month period from renting your home, you will need to be GST registered. In addition, you need to watch if the owner of the home is registered for GST in a different capacity (e.g. self employed) as that may mean there is already a GST obligation. If you are operating an Airbnb or intend to, you should seek advice on this point.
EARTHQUAKE STRENGTHENING RULES
The Building Act provides a framework for managing earthquake-prone buildings.
Major changes to this framework took effect from 1 July 2017.
The earthquake-prone building provisions apply to non-residential buildings and some larger residential buildings – those that are at least two storeys and either:
- contain three or more household units, or
- are used as a hostel, boarding house, or other specialised accommodation
Some structures are specifically excluded, including farm buildings, retaining walls, fences, certain monuments, wharves, bridges, tunnels and storage tanks.
For landlords, any earthquake strengthening requirements will fall under the Health and Safety legislation. In practice, landlords are only expected to take reasonable steps to address a hazard or minimise its impact. As strengthening work involves significant costs and disruption, it is most probably not a reasonably practicable step to immediately begin such work. Landlords should thus plan and budget for strengthening work in the future or as soon as is reasonably possible.
As you can see, there is a raft of new legislation and regulations that have recently affected property owners and there are further changes just around the corner.
If you are contemplating buying or selling property, please contact your Hayes Knight advisor to discuss this in more detail.