Last month Government passed legislation removing the right to offset rental losses against the tax paid on other income. It comes into effect immediately.
This new law is extremely misguided and will cause many negative consequences. These consequences cannot be termed “unintended” because Government has been clearly warned of their likely occurrence.
Ring fencing rental property losses was supposed to allow “fairness” between property investors and first home buyers. The theory is that property investors claiming expenses and tax losses meant they had an unfair advantage over first home buyers who couldn’t. Government believes that investors could outbid first home buyers when purchasing a property so ring fencing their tax losses would “level the playing field”.
Unfortunately, the entire premise for ring fencing rental providers tax losses is wrong. Rental providers receive the benefit of rental income, which is taxable, while home buyers receive the benefit of accommodation, which isn’t taxable.
Rental providers can claim expenses (just as any other business can), against their gross income to establish how much tax to pay. Home owners do not receive any income from their property and therefore have no income to claim expenses against.
We engaged Economic Consultants, Morgan Wallace, to research the situation. They stated that “our analysis does not establish any bias in after tax returns between an investor, home buyer or tenant. The housing market can be considered a level playing field”. In other words, the entire premise for the law was false.
In our submission on the Bill, we provided evidence that buying the average NZ property as a home for a tenant, would cost around $10,000 above the rental income received in the first year to cover expenses. Previous to the Bill passing, this loss could be used to offset tax paid on other income earned by the rental property owner, meaning a lower $6,000 top-up was required. Still difficult to finance, but considerably easier than $10,000.
The effect of the new law was to take away the largest tax deduction when rental providers are making large losses, then allow them to claim the losses once they were profitable and no longer needed them.
We included this cartoon in our submission to clarify the point that allowing tax losses in the year you make them and paying tax when you make profits, evens out cashflows and makes it easier to actually supply rental property. Ring fencing tax losses increases the cash flow hurdles of the first few years then reduces future years hurdles by allowing tax deductions when eventually making profits.