Interest deductibility for rentals to return
The Government has confirmed landlords will again receive a tax-break on interest paid on rental properties from April.
But, in a sign that difficult economic conditions and competing demands within the coalition Government are hampering its commitments, the taxbreak will not be back-dated as promised by the National-ACT coalition agreement.
Associate Finance Minister David Seymour and Revenue Minister Simon Watts announced yesterday the National-coalition Government had agreed to enact the policy, campaigned on by both National and ACT, which will reverse the prior Labour Government’s phasing out of interest deductibility for rentals.
From April, landlords will be able to claim for 80% of interest costs, and from April 2025 this will rise to 100%.
Originally, the parties had promised to also restore the ability to claim 60% of interest costs for the 2024 financial year, ending this month – amounting to a retrospective tax break. But this is no longer going to occur.
Seymour said Labour’s phasing out of interest deductibility had been a “strange change” that made the tax system inconsistent.
“It shows their naivety about how the economy works. Mega-landlords that have wide portfolios with say commercial property and stocks and shares and different assets, they can actually load up their other assets in their portfolio with debt, get the interest on that deducted and pay no interest on their residential housing because they take money away from those assets.
“If you’re a ma and pa investor, and it's your only investment, then you can’t shift your debt onto other asset classes to avoid paying mortgage interest.”
He said the decision to walk back the promise to restore interest deductibility in the current financial year came after discussion between the two parties.
“ACT wanted to store mortgage interest deductibility, 100% straight away. National wanted to do it, but at a slower fashion. What we’ve done is we’ve reached a compromise.
“We feel that the deal that we’ve made is actually the best policy for New Zealanders. To have gone to 60% retrospectively would have added more complications, probably not worth the amount of benefit it would have given our people.”
The Government would wear the cost of the change by collecting almost $3 billion less in tax in the coming four years.
“While many people will see this as a tax benefiting landlords, there’s a difference between who pays the tax and who pays the costs,” Seymour said.
“When you put an extra tax on rental housing, it is the renter who pays much of the cost.
“In the past two years since Labour started phasing out mortgage interest deductibility for rental housing, rental rates have gone up 21%, from $495 to $600 median nationwide, versus only 10%, from $450 to $495, in the two years before they introduced this change.”
However, he acknowledged it was not possible to say rents would fall as a result of the change.
“What happens with rates will depend on how much building happens, how much immigration, how the economy is performing. So it’s very hard to say that one thing or another is driving rent. But what we do know is if the Government takes another $800 million of tax each year out of renters and landlords, it’s those people who are renting and who are going to be hit hard.”
The changes to this tax setting will be added to legislation already partway through the law-making process.