Ring-fencing 'may be just the beginning'

Friday 29 June 2012

Government moves to ring-fence holiday home rental losses should send a chill down the spine of residential property investors, says property tax specialist Mark Withers.

By Susan Edmunds

Revenue Minister Peter Dunne has announced Government plans to ring-fence losses on holiday homes offered for rent if the gross income from the property is less than 2% of its land value.

This comes on top of the changes announced in the Budget, reducing the amount of tax deduction that can be claimed on baches, bringing it in line with the number of nights they are available for rent.

Mark Withers, of Withers Tsang and Co, consulted with the Inland Revenue Department on the proposed changes. 

He said this could be the thin end of the wedge and lead to ring-fencing losses on all property investments.

While property investors had not been very concerned by the changes relating to holiday homes, the ring-fencing proposition could be the start of a whole host of major changes across the industry, he said.

“Property investors have thought, ‘I haven’t got a bach, it doesn’t apply to me’. But if they ring-fence losses on baches, it could so easily be extended to property investment losses in general.”

He said this was the first time the Government had suggested limiting deductions in relation to the value of a property.

He said it would be a major concern for investors who had properties with, for example, a 4% yield funded by borrowing at 6%.

“It could so easily be applied to the wider investment market and if you’re sitting on a high-debt, low-yielding property relative to value, you’ll be absolutely stuck.”

Withers said once the precedent had been set, it would be easy for the Government to widen its sights.

“Once this law is on the books all they have to say is let’s widen it, the principle is already there. These are genuine losses, they shouldn’t be ring-fenced.”

Martin Evans, of the Independent Property Managers Association, agreed. “Everything the Government does is open to expansion.”

He said once the proposal was law, it would be much harder for anyone to make their objections heard. “They’ll negotiate on the first thing then they’ll just add to it. There’s not much you can do about it.”

The legislation is expected to be before the house in August or September. 

Withers said: “If people start to think about it they might think that this is not such a welcome change.”

Comments from our readers

On 29 June 2012 at 1:08 pm Lee Kammerer said:
I don't care about holiday homes but if we ever have the misfortune to have Labour/Green government then ring fencing loses on all investment properties will be one of the very first items on the agenda.
On 29 June 2012 at 1:12 pm Tim said:
In theory, yes, they could extend this to residential properties, but seriously, they won't. To destabilise the rental sector beyond stealing a few nickels and dimes would only be viable if the government was proposing to step into the sector. The current government, and the next few governments for that matter, have no spare cash available to instigate a takeover of the rental sector.
On 29 June 2012 at 5:20 pm Christopher Landigen said:
You don't have to be very bright to glean that the Government, instead of imposing a capital gains tax (which wouldn't work) is hellbent on imposing other ways of emptying our wallets. The writing is on the wall. You make your own arrangements. Living in Christchurch we have learned to make the hard decisions, and one of them is to realise that sometimes it's prudent to sell and reduce your exposure.
On 30 June 2012 at 6:03 am Ian said:
Because NZers are becoming less able to purchase their own home the ratio of rentals is bound to increase. However someone has to own the rental. The Government has proved their incompetence in this. So government will need investor support to hose NZers. If the Govt shoots holes in their feet by stuffing up the playing field then they will have to fix it. Rental housing is a real business!

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