With the property market hitting record highs over the last few years, the Government inherited a political “hot potato”. Many issues have been heightened recently. One of the key issues being the perceived tax advantage people were gaining through residential rental property investment.
What is the proposal and how does it affect me?
Currently, losses from rental properties can be offset against other sources of income (wages, salary, business income), thereby reducing an individual’s tax liability. This effectively gives property investors/speculators a tax advantage vs. other types of investors, and an incentive to invest in residential rental property. The argument has been made that this limits opportunities for first home buyers by distorting the investment market towards real estate, rather than investing in the stock market for example.
It is proposed (see Inland Revenue officials issues paper Ring-fencing Rental Losses – March 2018) that any loss made from a rental property will be ring-fenced. It will be contained within the rental itself and used on a ‘portfolio basis’. The two types of property income losses can be offset against are:
- Future residential rental income from across your portfolio; or
- Any taxable income on the sale of residential land.
Any losses left over will stay ring-fenced to be used in the future against this type of income.
What constitutes residential property/land?
The Government intends to use the same definition of residential property as that used in the bright-line test. This definition covers:
Land with a dwelling on it
- Land for which there are plans to build a dwelling on it; and
- Land that may have a dwelling built on it under the relevant local rules.
It should be noted that this proposal also includes overseas land.
Are there any exemptions?
The rules will not apply to:
A person’s main home (the home in which you are predominantly living in and with which you have the greatest connection);
- A property subject to the mixed-use asset rules (a property used for both a bach/holiday rental and personal use); or
- Land held on revenue account by a land-related business.
It is noted heavily by the Inland Revenue that these rules will not just apply to individuals and that any other structures such as trusts, companies, look-throughs and partnerships will not be able to be used to intentionally navigate around these provisions.
When do the new rules apply?
It is proposed that the new rules will apply from 1 April 2019.
Greater compliance costs may be felt by many, as you will now be responsible for the recording of profits and losses made by your rental portfolio and for ensuring that these are utilised correctly and when they are allowed.
A key issue that has been mentioned is regarding “mum and dad investors” (typically with one property) who then end up selling on capital account. Any losses from this property would end up being trapped, with the only option to absorb the losses being through the purchase of another property that generates income. There is no concession for this in the current proposal.
For more information:
Tel: +61 9 366 5089
Fax: +64 9 366 5001