Changes to tax­a­tion on real es­tate

CHB Mail - - Tuki Talk - By GREG NEILL Part­ner — Tax Ad­vi­sory, Crowe Hor­wath

As part of its con­tin­ued fo­cus on the tax­a­tion of res­i­den­tial real es­tate, the cur­rent Gov­ern­ment has pro­posed that tax losses from res­i­den­tial rental prop­er­ties should be “ring-fenced”.

A loss arises for tax pur­poses in re­la­tion to a rental prop­erty where the an­nual costs to own and main­tain the prop­erty — such as in­ter­est, rates, in­surance, re­pairs and main­te­nance — ex­ceed the an­nual rental in­come. If the re­sult­ing tax loss is “ring-fenced,” it can­not be off­set against in­come de­rived from other sources and must in­stead be car­ried for­ward to fu­ture in­come years. The loss can only be used to off­set fu­ture in­come from res­i­den­tial rental prop­er­ties, ei­ther as rental in­come re­ceived or as a tax­able gain on sale.

The law change is aimed at lev­el­ling the play­ing field be­tween prop­erty spec­u­la­tors and in­vestors. The Min­is­ter of Rev­enue, Stu­art Nash, has stated that the law change “is ex­pected to boost rev­enue by at least $325 mil­lion over four years and fur­ther dampen prop­erty spec­u­la­tion, while en­cour­ag­ing in­vest­ment in the pro­duc­tive econ­omy”.

The Prop­erty In­sti­tute has said that the pro­posed change will drive peo­ple out of prop­erty in­vest­ment and make the cur­rent rental cri­sis even worse. Pub­lic sub­mis­sions on the pro­posal are cur­rently be­ing con­sid­ered.

Other as­pects to note are:

• To de­ter­mine whether there is a tax loss, the rules ap­ply on an over­all port­fo­lio ba­sis rather than on a prop­erty-by-prop­erty ba­sis.

• The rules are not re­stricted to New Zealand prop­erty and would ap­ply to res­i­den­tial rental in­vest­ments off­shore. The rules would be con­sis­tent with the bright line test in this re­spect.

• Anti-avoid­ance mea­sures will ap­ply to en­sure tax­pay­ers can­not struc­ture around the rules by, for ex­am­ple, hav­ing their debt fund­ing and rental prop­er­ties in dif­fer­ent le­gal en­ti­ties.

• The rules will not ap­ply to a per­son’s main home, a prop­erty sub­ject to the mixed-use as­sets rules, such as a hol­i­day home that is used pri­vately and also rented out, or prop­erty held as part of a land-deal­ing busi­ness, such as a build­ing or prop­erty de­vel­op­ment busi­ness.

The new mea­sures to ring-fence losses are ex­pected to ap­ply from 1 April 2019, but may have a phas­ing pe­riod of two to three years.

If you would like to know how these pro­posed law changes may af­fect your ex­ist­ing res­i­den­tial rental prop­er­ties, or you are think­ing about in­vest­ing in a res­i­den­tial rental prop­erty, please con­tact one of the team at Crowe Hor­wath.

■ This in­for­ma­tion is gen­eral in na­ture and read­ers should seek spe­cial­ist ad­vise be­fore mak­ing fi­nan­cial de­ci­sions.

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