RING FENCING LOSSES
The Labour party's pre-election promise was to look into a fairer tax system and attempt to improve the quality of housing & affordability.
To 'level the playing field' and make the 'tax system fairer' , the Inland Revenue on 29 March 2018 released an officials issue paper "Ring-fencing rental losses" outlining proposals to introduce loss ring-fencing on residential properties held by "speculators and investors"; however, this will affect everyone that owns residential rental property.
The Taxation (Annual rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill introduced to Parliament in December 2018 sets out the initial statutory framework designed to implement this policy.
This bill is still before parliament expected to be signed & passed shortly. If the bill passes through Parliament unchanged it will then become legislation which will come into effect from 1 April 2019 and hence will apply for the 2019 -2020 and later income years
What are the Changes?
This new legislation will mean that investors will no longer be able to offset tax losses from their residential investment properties against their other income to reduce their tax liability. Residential rental properties are often "negatively" geared mainly as a result of high interest payments (debt). In the future, if expenditure exceeds income, losses will be "Ringfenced".
What are the Main Features?
The Ringfencing bill's default position is to ring fence on a portfolio basis but there will be an "opt out" option if you wish to have your loss ring fenced on a property by property basis.
A taxpayer can choose to make an election for each individual property meaning they may choose to have some properties treated under property by property approach, and others on a portfolio basis.
However, once the choice / election has been made there is no ability to move any individual property between the two methods while that taxpayer retains ownership of it.
The point to note is that Ring fencing on a portfolio basis means that if the overall property portfolio is profitable, there will be no ring fencing just because some of the properties in that portfolio may make losses which will be offset against those making a profit.
This is a huge issue with the effectiveness of this legislation since an investor with a profitable portfolio can add a loss-making property to it and still gain a tax advantage provided the portfolio overall is still profitable. But an investor buying the same property who does not have other rental income to offset the loss against is ring fenced and can't gain the same tax benefits.
Ring fenced losses carried forward will be able to be used to offset against future income from residential land or taxable gains from the sale of residential land.
What is the Exemption?
The Ringfencing rules will NOT apply to
-a taxpayer's main home
- business premises (which is not residential rental property), commercial property or farmland,
-residential property that is used for employee accommodation where the remoteness of location of the business forces it to provide accommodation to employees.
-holiday homes that are subject to the mixed-use asset rules where they are used both as short-term rentals and for private use by owners.
-ring fencing will not apply to revenue account property where the proceeds of sale are definitely taxable i.e. developers.
Losses from overseas residential properties will also be ring fenced and will be subject to the double taxation rules, if applicable.
Serviced apartments are specifically included as residential rental property.
Who does it affect?
The rules will apply to individuals as well as trusts, partnerships and companies (including LTCs). LTC Losses will be allocated to the shareholders to be used only against future profits from residential properties.
The above information is based entirely on the current proposed bill / legislation and is subject to change. We will advise you of any major amendments once the bill is signed and passed by parliament.
If you have any queries please contact Advisory Accountants Ltd Ph: (04)2376825 of Ph: (04)499 6824, email: firstname.lastname@example.org