No more negative gearing
Thursday 29 March 2018
Property Institute chief executive Ashley Church
The end of negative gearing is nigh as the Government launches its proposal on changing the rules around the ring-fencing of rental losses.
By Miriam Bell
It has been a busy week in the Government’s crusade to crack down on those who benefit from property investment with the bright line test extended and a ban on letting fees announced.
Now, attention has turned to the ring-fencing of rental losses and today Inland Revenue (IRD) released an issues paper on the proposed changes.
The proposal is that property speculators and investors will no longer be able to offset tax losses from their residential properties against their other income – like salary, wages, or business income - to reduce their income tax liability.
The IRD paper says that currently investors have part of the cost of servicing their 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 be used to reduce tax on other income, is intended to help reduce this advantage and perceived unfairness.”
Under the suggested changes, which it is proposed will apply on a portfolio basis, ring-fenced losses could be used in future years, when the properties are making profits, or if the person is taxed on the sale of land.
But where a property disposal is caught by one of the land sale rules, ring-fenced losses could only be used to the extent they reduce the taxable gain to nil, with any further unused losses remaining ring-fenced.
The new rules would not apply to the family home, a property that is subject to the mixed-use assets rules, or land that is on revenue account because it is held in a land-related business.
IRD proposes that the new loss ring-fencing rules will apply from the start of the 2019–20 tax year.
Revenue Minister Stuart Nash says that, currently, the persistent tax losses that many property investors declare on their investments indicate that they rely on capital gains to make a profit.
"In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers.”
Nash says the time is right to test the detail of this proposal with stakeholders, including investors, and is encouraging people to give feedback on the proposal which can be read here.
"This measure would not preclude any solutions the Tax Working Group may come up with in relation to housing,” he adds.
However, investor advocates have been vocal in their opposition to the removal of negative gearing.
Property Institute chief executive Ashley Church says he is concerned about the serious unintended social consequences of the proposal.
“People, particularly Mum and Dad type investors, will be deterred from going into the provision of rental properties – because when investors start out they tend to rely on those losses to get by.
“So the proposed loss ring-fencing rules will have a substantial negative effect because they will deter people from buying rental properties at the very time that, as a country, we need more rental properties to address the housing crisis.”
Church adds that he doesn’t think the tax treatment of property should be different to the tax treatment of other assets such as shares.
Comments from our readers
No comments yet
Sign In / Register to add your comment
An anti-capital gains tax campaign was launched by ACT today – even though the Tax Working Group’s final report is not due to be made public till Thursday.
New Zealand’s housing market might be cooling but it’s in sync with global trends – unlike the Australian market’s dramatic decline, according to a major bank.
Developing co-working and flexible spaces in commercial properties offers big opportunities for landlords, the results of a major new survey suggest.
Shockwaves are running through Australia’s finance industry following the Royal Commission’s damning report so how could the recommendations impact on New Zealand investors?