One of the policy measures the government has committed to is to introduce loss ring-fencing on residential investment properties, with application from the 2019 / 2020 income tax year. This means that, from the 1st April 2019 for most taxpayers, residential property investors will no longer be able to offset tax losses from their residential investment properties against their other income (for example, salary / wages or business income) to reduce their income tax payable. Instead, these losses will only be available to offset residential investment property income.
What can the losses be utilised for?
Any residential investment property losses will need to be carried forward to either, reduce residential investment property income in future years, or to offset any taxable income arising from the sale of residential property (i.e. bright-line income). Any unused residential investment property losses will generally remain ring-fenced and continue to have to be carried forward, however in certain circumstances where residential property is taxed on sale any remaining losses may be freed to be offset against other income.
The new rules will also generally apply on a “portfolio” basis for taxpayers, meaning that they will be able to offset residential investment property losses against residential investment property income across their total portfolio. However, taxpayers will be able to elect out and apply the new rules on a property-by-property basis if they wish.
What property is excluded?
The new rules will apply to residential land, both in New Zealand and overseas, with the definition being the same as it is currently for the bright-line test.
Please note however, that the new rules will not apply to:
- the taxpayer’s main home;
- residential property that will be taxed on sale (i.e. property development);
- residential property that is subject to the mixed-use asset regime (i.e. holiday home or bach);
- defined types of employee accommodation;
- residential property acquired by a widely-held company.
There are also avoidance measures that apply to stop an interposed entity (such as a Trust or Company) from by-passing the ring-fencing rules, where a taxpayer has borrowed to acquire an ownership interest in the interposed entity, and more than 50% of that entities assets for an income tax year comprise residential properties.
Special Tax Codes
Taxpayers who have previously applied for special tax codes in order to have a reduced level of PAYE deducted from their salary / wages (rather than receiving a lump-sum income tax refund at year-end) will need to carefully consider whether they apply for a special tax code for the 2019 / 2020 income tax year, where it is likely that they will be subject to the new ring-fencing rules once they are enacted.
Applying for a special tax code where the new ring-fencing rules may apply once enacted, may mean that taxpayers have a (substantial) tax liability to pay at year-end when their residential investment property losses can no longer be offset against their salary /wage income for the 2019 / 2020 income tax year.
If you would like more information or wish to discuss the above changes please don’t hesitate to contact your McCoy & Co advisor.