Ring fencing of losses rusty barbed wire fence

Is Your Annual Tax Refund No More?

Late at night at the end of June legislation was finally passed limiting a person’s ability to offset losses from residential property investments against a person’s other income – ring fencing of losses (i.e. non-residential rental income). For a large number of mum and dad residential rental property investors this will mean the end of the annual tax refund they received based on the loss generated from their rental property.

For most people the rules are effective from 1 April 2019, so the tax refund for the year ended 31 March 2019 will be the last. Residential rental property losses can now only be used to offset against “residential rental income” earned in the year and any excess losses will be carried forward to the next income year. There is no longer the ability to offset those losses against other employment or business-related income.

The new rules apply to residential rental property, with the term being defined as “residential land”. Accordingly, farmland and land used as a business premises are excluded. There are also a number of other exemptions, including:

  • the person’s “main home”;
  • property held for resale;
  • property that is subject to the mixed-use asset rules, and
  • property provided to an employee for accommodation in connection with their employment.

The rules do permit a person’s losses from one residential rental property to be offset against profits from another residential rental property owned by the person provided the default portfolio basis is adopted.

The legislation also contains a provision to ensure that if a “residential land-rich entity” such as a company or a partnership is used to hold residential rental property, and debt is used to acquire an interest in that entity, the amount of a deduction that a taxpayer can obtain for interest expenditure is limited to the amount of rental income derived by the properties owned by the entity. A “residential land-rich entity” is defined as an entity which more than 50% of its assets by value are residential land. Even though the main home is exempted from the legislation it is caught in the calculation to determine a “residential land-rich entity”.

Please get in touch with DNA if you would like to discuss the potential impact of these rules on your income tax liability for the year ending 31 March 2020.

Eagle Landing in reference to capital gains tax in NZ

The Labour Government appointed Tax Working Group (“TWG”), headed up by former Labour Minister of Finance, Hon Sir Michael Cullen, is currently undertaking the fifth major review of the New Zealand tax system in the last 50 years.

The TWG has a wide brief, but its key purpose is to provide recommendations to the Government that will improve the fairness, balance and structure of the tax system over the next 10 years. The TWG released its interim report inviting further commentary on 20 September.

The hot topic of the review has been the consideration of Capital Gains Tax (“CGT”). The main driver behind the implementation of a CGT had been the perception that the tax benefits swaying investment towards the Residential Investment Property sector need to be balanced out. The interim report goes into some detail discussing the taxation of capital and wealth, firmly ruling out an implementation of wealth taxes, but leaving CGT on the table on the basis of fairness.

The report goes as far as discussing specific design features and identifying two main options, either taxing realised gains that are not already taxed, or taxing certain assets on a deemed basis (akin to a risk-free rate of return method). The family home, and the land under it would be exempt under either method.

The proposed risk-free rate method smells a lot like a wealth tax which would be payable annually on a base asset value. The risk-free rate would be set at a level to reflect perceived average annual increase in asset values. The need to fund the cash tax payments arising from a CGT applied on this basis should be particularly concerning for anyone holding investments in property or business!

Another concern is the proposal that should a CGT be implemented then capital gains from assets which the CGT applies would be caught from the implementation date, and valuations of all assets would be required on that date to assess the base price that capital gains would be calculated on.

The TWG is still forming its views on the implementation of a CGT and will complete a comparison between the best proposed methodology and the status quo to determine its ultimate recommendation. Whilst no conclusive recommendation has been made, it appears that today New Zealand is one step closer to a broad- based CGT.

To make sure you are ready when the Eagle does land, contact the team at Drumm Nevatt & Associates Limited to discuss.