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Week in Tax Special: Changes to the bright-line test and interest deductibility rules as reviewed by tax specialist Terry Baucher

Week in Tax Special: Changes to the bright-line test and interest deductibility rules as reviewed by tax specialist Terry Baucher

By Terry Baucher*

The Government on Tuesday released details of its housing package and related tax proposals. The key changes here are that the bright-line test will be extended to 10 years for properties acquired on or after this coming Saturday March 27.

The bright-line test will remain at five years however for new builds. In addition, there will be changes to the main home exemption for the bright-line test and also restrictions on interest deductions for rental investment properties.

Speculation beforehand had focused on the extension of the bright-line test to 10 years. And that has been confirmed. So properties acquired on or after March 27 sold within 10 years will now be taxable.  

Other tax advisors and myself were briefed beforehand by Inland Revenue and I asked a question about what additional revenue would be expected to come from the bright-line test. The estimate is it will be about an extra $650 million per annum. Incidentally that's more than the increase in the top income tax rate to 39% is expected to raise.

Separately the bright-line test period will remain at five years for new builds acquired on or after 27 March. The idea here is to encourage some investment in new property.

There is another change in the bright-line test rules which is potentially quite significant and that’s around the treatment of the main home exemption. Currently if 50% or more of the time a property is held, it is occupied as a main home, then it is completely exempt from taxation.  If it’s 49% tough! It’s going to be fully taxable. So, it was a little bit harsh, that arbitrary treatment.

The proposal is to change that for property acquired on or after 27 March – you’ll be taxed on the period it was not occupied as your main residence. So, for example, if it was your main home for 80% of the time then only 20% of the gain will be taxed, whereas currently for properties acquired prior to 27 March the rule will be that in that case it will be fully exempt.

So on one hand it means that some gains which would have been exempt would now become taxable, on the other hand some gains, say that 49% example, which were fully taxable, now become partly taxable. So, the Lord giveth and the Lord taketh on that one.

However, the big change which has been announced that's generating quite a bit of commentary on social media is the proposal to restrict, in fact remove entirely over time, interest deductions on residential property income. And this kicks in from October 1.

For residential investment property acquired on or after 27 March no exemption will be allowed from 1 October. However, for properties acquired before 27 March interest deductions are still claimable but will be reduced over the next four income years until it’s completely phased out by 1 April.

Starting 1 October this year, only 75% of the interest will be deductible. For the full year ending 31 March 2023, 75 % will be deductible. For the year ended 31 March 2024 it will fall to 50%, and for the year ended 31 March 2025 it falls to 25%. And then from 1 April 2025 onwards no interest deduction will be allowed.

Inland Revenue will be consulting on what happens to interest deductions in the event that the bright-line test applies. In other words, if a property is sold during a period and the bright-line test applies then some interest deduction could be allowed. We’ll wait to see what the proposals are around that.

Now this is obviously a significant change. I made a suggestion last year that maybe it was time to apply the thin capitalisation rules, but this has gone further than I expected. But it also reflects a measure that happens in the UK.

It will be interesting to see how this plays out. The obvious concern would be that landlords will increase rents. But on the other hand, if you are going to do a measure like this although there is never a perfect time for investors, interest rates having fallen so much means that the impact this time is probably significantly less for investors than it would have been say two/three years ago when interest rates were not 3% but 6% or even higher.

So there’s swings and roundabouts there, no doubt though the Government will be watching with some concern to see what happens about residential rental increases. And there is a measure, actually separate, which proposes to limit the number of increases in rent and it now does it per property rather than per tenant. The proposal is a landlord can only increase the rent once every 12 months per property rather than the current once per 12-month tenancy.

So, there’s a fair bit of detail and commentary going to happen around these proposals. The extension of the bright-line test to 10 years was expected. It’s now getting to the point that because our land rules, as I’ve said, beforehand are very complicated, maybe it’s time for a comprehensive review.  Maybe even saying that all land sales within 10 years are taxable apart from main homes, and also farms and businesses.

Possibly also in that time it might be worth thinking about whether it is appropriate that the gain gets fully taxed. But for now, those are the rules in place.

The fiscal impact of the interest rate deductions will be quite interesting because that may mean the Government has a little bit of a tax windfall, obviously because it’s now getting more income tax because there’s fewer deductions. We’ll have to wait and see.

Anyway, that’s it for now, I’ll probably have more commentary on the fallout from these proposals in our next podcast.  Until then, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until Friday Ka kite ano!


*Terry Baucher is director of tax advisory firm Baucher Consulting.  

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188 Comments

Broken promises capital gains tax, people renting will end up in tents, cant afford rent

17
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The rental houses are not going to suddenly disappear. Owners will live in the ones that are sold. If they are currently untenanted as some are then there will be a net increase in housing availability.

Generally less people live in an owned home vs a rental though so unlikely to be an increase in housing availability

If you're talking aggregate numbers then sure. This can be put down to a combination of pensioners/widows living in half empty owner occupied 4 bedroom houses and rented student accommodation (particularly around universities) typically being larger houses/extra rooms crammed in.

However, owned homes don't share the same constraints as rental properties do in the form of a tenancy agreement with occupancy limits.

Who knows? Maybe some of these rentals will become homes to young couples, who then might be in a position to have child(ren) to fill up said homes? Instead of us having to import more tax payers.
Just a thought.

Not to forget the numbers of people who are changing from rental to Air b&b these are in effect taken out of the housing stock.

Regarding the vilification of mum and dad landlords... We evicted the multi-generation Polynesian family that had rented a large comfortable sunny house in a nice neighbourhood with convenient good schools for a very fair rent from us (has always cost us money to top up the mortgage, insurance, rates and maintenance of large section and swimming pool) for the past 5 years and sold it to a young professional couple with wealthy parents and no children.
We had wanted to keep the house in the family but could see the writing on the wall regarding the squeeze on landlords, as further evidenced by today's announcements.
Everybody happy now?

16
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You were doing the lord's work with your people farming. Putting yourself out of pocket Iike that. Bless you.

11
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The 70% gain in "value" over the past 5 years and the evasion of ht 5 year BLT could be a consolation.

Wow. Up in the middle of night raging about the great favours you were doing and no longer sustain. Seriously.

You do realise there is no point sharing your lovely anecdote when you made your decision before this was announced. In other words the announcement had no impact on your decision...

Hmmmm, this comment appears elsewhere, in the exact same wording.

Can understand entirely. You can only subsidise people’s lifestyle for so long.

Or maybe people that can actually afford to buy the houses will buy them now, instead of people that can't afford it, but expect what was in effect a government subsidy to help them do it.

It is only the over leveraged, interest only brigade who will face this. The ones who are on such a tightrope they relied on that tax deduction to make it work.
When you look at the actual numbers, the toy chucking is OTT.

Yes the feelings of entitlement are over the top, entitlement to a government subsidy in effect, to get wealthy, while crowding out and overpricing other people that simply just want to own their own house, I have no sympathy whatsoever.

Investors will end up selling cheap to cut losses, the market controls rent prices not landlors.

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I think its great. Why should an investor get to deduct interest where as a home owner I can't.

23
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Thinker...they have been able to (unfairly) deduct interest payments mainly due to constant pressure and griping by the reptilian property investor lobby groups.

15
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That's not he case Karl, the original reason is simply that any business can deduct it's business expenses from the income generated, thus interest was deductible against rent received.
BTW, you have claimed in the past being a landlord, from your multiple comments I find this absolutely not believable, stay honest

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Buying up rental properties is not a true business !!

Of course it's a business.
Why do you think it is not?

10
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Because he doesn't own one

rubbish comment. Slander for the sack of belittlement. Buying properties in NZ for the majority of owners is not business but investment. Business is productive, employs people, growing, adding value, services. Rental domestic investment is just clipping the ticket, even if you are yield focused. Unless you run it as your job full time (there are not really that many that do) its an investment and for those highly geared, speculation.

Not that I'm saying there is anything wrong with taking advantage of current state tax laws. But simply owning a 2nd or 3rd home as a rental investment is not a business.

I know people who have businesses that don't work on it fulltime. A successful business is one that runs itself.

You’ve clearly never owned even one rental property. It’s a fair bit of work, depending on your property and your tenants.

Whether is was a business or not, all it really did over the years was push up house prices, and line the pockets of investors.

Because lenders do not treat investors in property the same as other genuine business owners, who even get charged higher interest rates.

So you're saying that the legitimacy of a business is based on what interest rates private banks decide to charge?

Yes, I am

Interest rates are based on perceived risk. Not all businesses can borrow at the same interest rate.

Of course it is not, it is the perfect example of usury.

You can deduct expenses incurred in (1) deriving income, and/or (2) carrying on a business. Even if a person's rental activity did not satisfy the business test (e.g. 1 rental property unlikely to be a business whereas owning 20 rental properties is definitively a business) a deduction for interest incurred in deriving rental income would satisfy the legal requirement to claim a deduction. See s DA 1 of the Income Tax Act 2007:

https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1513555.html

The law change to prevent a deduction for expenditure incurred (i.e. interest) in deriving taxable income (i.e. rent) is at odds with normal tax policy. It appears to be designed to effect a societal change to home ownership away from home investment.

Quite right, but housing is not a typical product or service sold by a typical business, it has a unique quality of those not owning being forced into servitude of those that do. You can't say that about burger bars and panelbeaters. Speculation in housing to the point of exclusiom has a real social cost. Ask the hardworking homeless how often their prospects are limited because they dont own. This happens both materially and socially. 'You're renting? I'm going to avoid you' love, your acquaintances, neighbours, and business loan bankers.

Yvil, exactly! Straightforward clarification always welcome.

But business pay business intrest rates not home mortgage rates.

And lenders fall all over themselves to make loans to them

Interest expense is not a business expense, it is a cost of financing. Servicing debt obligations does not contribute to generating underlying profitability (EBIT - Earnings Before Interest and Tax) in the same way as servicing equity obligations (paying dividends) doesn't. Yet a fully equity financed purchase doesn't get subsidised by the dividend payments being tax deductible, so why should interest (the cost of debt finance) be? Tax deductions should in principle only be available for costs that are required to generate EBIT (i.e. capital structure indifference). Anyway, it's a little bit of a can of worms given historical treatment but worth questioning the whole concept. In many countries interest is not deductible to corporates or subject to much sterner thin capitalisation rules.

So if Westfield can no longer deduct interest, increase rents lose tenants and your partner loses her job when Briscoes closes and your Starbucks coffee and Big Mac increase in price you can sit back and thank Labour for producing yet another failure like Kiwibuild.

Be interested to know where interest is not deductible on business activity. I know plenty of countries where it is.

Yvil...property investment should not be classed as a business. It is a bit like classing scalping concert and sports match tickets as a business. I should never have been allowed to claim interest payments as a tax deduction or claim depreciation on my appreciating assets. I wish it had never been allowed and am glad they are finally making it right now.

Yvil, the strategy is to have no mortgage on your house and rack up all the investment properties with debt. In effect you are claiming a tax deduction against the family home, albeit this relates to those leveraged up the wazoo.

PS my business OD runs at 9%. Until investment properties are running the same interest rates as real businesses, there is no comparison.

Because they pay tax on any profit they make and homeowners do not.

I can’t think of an example where someone is charged tax on revenue only and not on profit.

I would say without doubt these costs will end up being capitalised into the debt and deducted at sale time and there will be plenty of drawn out court cases over this with the IRD.

I didn't have to think much, the income tax is an example of that.

A better policy response, then, would be to allow owner occupiers to deduct the interest on their owner-occupied homes.

I see you like your bubbles explosive?

No, I’m just addressing the original posters concerns. I just know that, based on my study and practice in tax, implementing this is a lot more difficult with a lot more fishhooks than many realise. I just don’t think it’s worthwhile and many of the seasoned property investors will keep calm and carry on. It’s like when Labour announced they were banning foreign buyers to much fanfare and it had negligible effect on the property market even though Twyford led many to believe that Chinese-sounding names were behind the rises at the time.

A better policy response, then, would be to allow owner occupiers to deduct the interest on their owner-occupied homes.

Because that’s considered as a business.You just saw investors make money from it but you never see the risk they are carrying.

Which is near enough to zero compared to genuine business owners

I have never heard of a business customer, painting the shop walls, brewing meth or smashing the place up like i read regularly with tenants so potentially renting your $500k asset is more risky than running a coffee shop and with this load of legislation on top of tenancy rules increases the risk considerably so be unsurprised when the expected result of increased rents and reduced availability comes to a place near you. On the bright side I understand housing NZ have a new dept to solve the homeless crisis - Rent a Tent - hopefully the first site will be in Sandringham were there is a kind caring female that will hug those will problems.

Normally when risk increases the bank will want higher interest rates. Do you know why so many pour money into investment properties and not businesses ? Because property is seen by the sheeple as a low risk, sure bet.

I think you will find there has been more than one huge marijuana growing operation uncovered in large commercial premises.

Is that a serious question? Because an investor derives taxable income from rent against which deductions can be made in the same way as one can deduct expenses associated with any other business activity. The ring-fencing of losses already fixed the problem of negative gearing. If a home owner derives an income through the use of their home, they can deduct interest in the appropriate proportion (or approximate this through tax exempt boarding allowances). If they don’t derive an income from the use of their home, clearly they have no basis to deduct their financing expenses.

Perhaps the lack of financial/taxation literacy demonstrated by your question is the bigger problem here. If apples were compared with apples and people didn’t cheat the system, we may see more rational capital allocation/investment decision-making in this country.

Why should any business be able to claim any expense when an individual can’t. Maybe the answer was to create an option for homeowners to be able to claim interest off their income tax. There are many renters which would like to buy a house to live in and there are many others where it doesn’t make sense to buy given their current situation. The new rules make it very difficult if you need to rent out your house for a period if you need to relocate for work etc.

Well that's how generally all business work. Why can a business claim an car park, petrol as an expense, when a private individual that needs it to go to work cannot. Doing so would lead to a overly convoluted tax system.

In general deducting interest is totally reasonable idea, it is a valid expense of renting out a property, however the entire system has been corrupted with property investors actually just using this to make interest cheaper with no intent to every make a taxable profit. The problem lies in the fact that what they are doing is setting up a business with absolutely no intent on ever making a taxable profit, and then claiming tax deductions.

I think its great. Why should an investor get to deduct interest where as a home owner I can't.

That is simply not true. It's literally the opposite! Home owners are paying zero tax on their imputed rents! ie they get a 100% tax deduction. The government has created an awful market distortion here.

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The more i think about it, it's a ripper change and the govt should be commended. The amount of bleating generated by investors is an indicator that this policy has real bite and will be successful.

Now, about that climate emergency...

Successful on what level ? If you are renting , ask your landlord today to reduce your rent. Let’s see what your landlord is going to say.Preparing for a significant rent increase every year. You can try to find another place to rent. Hopefully you can get a cheaper one.

Could have asked them yesterday, last month, 16 March 2020 (OCR to 0.25) and I'm sure the answer would still be the same.

Is that like when all the mortgage rates dropped and the landlords dropped rents? Yeah I thought so.

Do you think the majority of people renting asked for it to be dropped, (or were even aware mortgage rates dropped).

I know you are angry and want to lash out at someone, but this is just straight up wrong.

In a competitive market, with thin margins, costs are passed onto consumers. Our rental market is NOT a competitive market - we have an underlying shortage of houses that has allowed landlords to charge based on what the consumer can afford - not what their costs are.

In a competitive market where there are enough (or more than enough properties) providers keep prices low to ensure they keep their property tenanted. This means they all compete on price, but obviously can't drop below the level required to make sufficient returns (i.e. the floor is their costs). So if their costs rise, they are forced to pass on that cost.

In our current market that competition doesn't exists, allowing landlords to charge the maximum amount people are willing/able to pay. What people are willing/able to pay hasn't changed - we are already at that maximum, thus the costs will be eaten by landlords. If those landlords sell to first home buyers they will reduce the demand for rentals at the same time the supply is reduced.

You've missed that there will be more competition for renters now. Some people are at the limit of how much rent they can pay, but others on higher incomes or different household makeups are not. Market rates will continue to increase and that will mean that some people will miss out on rental accommodation altogether.

I agree rental yields will need to increase as landlords try and pass this on (they will not be able to pass all of it on), however rental yields are a function of price and rent. Price can and probably will decrease. Investors costs CAN decrease, by paying less for houses. Fairly basic stuff, the expected cash generation over the life time of the asset should dictate the value of the asset. The expected cash generation has decreased for some (this is where it is a bit murky as owner occupiers whose ‘cash returns’ are rental savings are not impacted), therefore the value of the asset should decrease until a new equilibrium is reached.

‘Thus the costs will be eaten by the landlord’ tells me the extent of your property investing experience.

It will hurt them but I see a lot of crocodile tears too, the lobby is making it look as if this would be the end of the days, when it is merely a slap on the face.

by Yvil | 23rd Mar 21, 10:35am 33 up
The end of interest tax deductibility is a BIG thing because unlike the bright line test, it affects the investor immediately, well at the end of the tax year, every year. As an investor, I can tell you, it will be a deterrent!

Yvil...definitely a nice start but still lots more changes required to solve our housing crisis. Hopefully this is a first step of many.

Yes it affects the investor who will simply increase rent

Eventually you'll strip the renter dry, hit your ceiling and find no more money forth coming from governments. You'll then have to foot the cost of an unrented property. Post Covid with an abundance of convertible commercial properties, governments can find plenty of scope for accommodation if the they look close enough. Then we'll see rentiers start crying afoul of their tactics to pressure and exploit people failing...such a shame.

But converting those empty commercial units turns them into residential rentals so interest on capital to convert is not deductible. losses ring fenced and tenancy rules applied so unlikely to be viable.

Easy to change that... put it in same category as new-build

17
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Hopefully we see 5 more major changes and they really will have made a big effort to fix the housing crisis.

1.Fix immigration so that we have less than a quarter of our pre covid settings going forward.
2. Stop all interest only loans asap.
3. Freeze all rents for 5 years
4.Extend the bright line to 20 years.
5. Levy a huge sin tax on Air B n Bs and unoccupied homes in urban areas.

If the Govt can implement these changes there is little doubt that given some time to take effect the housing crisis will be in the rear view mirror.

You can add the Empty Homes Tax to your list too! Potentially an Empty Homes Tax in Auckland city could generate revenue of around $421,505,100 a year if we were to use the Vancouver EHT model, that could go towards new affordable homes.

cj099.. I did. refer to number 4 above.

Now that you consider Govt has a duty to determine that under utilised assets need to be taxed it follows that your vehicles will require to be similarly treated so use less than average of say 15,000 k pa will incur a tax use of say 5cents a k, next your clothes so any not used for say 50% of the year will either be taxed or donated to the poor or homeless. I could list enough new tax sources to eliminate income tax completely. Apply this to public servants failing to occupy their office desks for say 50% of the time will have that portion of the pay taxed at the under utilised tax rate so be added to the notional gross pay which may push them into a higher tax bracket which is good for IRD and should they stay at their desks for more time another benefit for the taxpayer but to ensure the time was not spent sleeping a credit for increased real prductivity set against their under utilized asset liabilities. My thanks to Uncle Joe (Stalin or Biden) for these ideas.

And the underutilized rooms and beds in many houses, and don't forget the pull-out sofa bed or the garage that could be converted into another room.

A lot of property owner will terminate tendency agreement by using reason of selling the property. Will you provide house for those renters ? House market may be crash but a lot of renters will live on street before the govt can provide enough house for them.

Post Covid there is an abundance of convertible commercial properties. Plenty of scope for accommodation if the government looked close enough. Then we'll see the rentiers start crying afoul of their tactics to pressure and exploit people failing...poor babies.

That's not really a viable near term solution though is it? The building industry is pretty stretched at the moment so converting those would take time, especially considering resource consents etc. plus it has to make financial sense for commercial property owners which i'm not sure it would

In four years time the building industry will be a different animal. Landlords will put off all building projects, new roves and repairs until a National government reintroduces tax deductions for interest and repairs.

Where will the houses go?

Karl we will need to delay the Air B&B sin tax as we are about to open ourselves to tourists and our tourist accommodation is currently fully booked.

Tbh, these smell like Communist China pre-1979. I mean, it will be easier to nationalise the entire housing than putting up all these. LOL

AFAIK there was no private property at the time, how does this compare? Or is everything that does not comply with a 100% neoliberal textbook become communism by definition these days?

What about ban any new people from coming to live in Auckland.

I am happy with the tax non deduct-ability change. It went further than I was suggesting i.e. only the inflation portion. Still quite a bit more to do however. I.e. making houses a lot cheaper and easier to build.

Chris...I just do not believe we can build our way out of this without at least some of my suggestions above being brought in as well.

Yes those are all great suggestions, but it is a good start.

Will be interesting to see what the comerce commission investigation into the building (and food) sectors comes up with. Whether anything is actioned is a difderent story.

Hi Everyone. Easy fix. Increase rent by 40-50 P/W for next 4 years . You will have 160-200 dollars p/w to cover the tax. Sorry for renters.

jack...a rent freeze MUST accompany these changes otherwise greedy investors will do exactly what we think they will do. Laws are made to prevent unscrupulous people acting in ways that harm others and destroy the fabric of our society.

Well. A lot of property owner will stop renting house out or sell it. Can the Govt provide house for that big amount of renters?

Who are you going to sell it to?

There are a lot of buyers on the market.As long as price is right, the house will be sold.However more and more house will be withdrawn from rental market. Can the govt provide enough rental property?

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Owner occupiers replacing renters? That sounds like a societal positive.

Except it’s not because the vast majority of renters will never be OO’s regardless of market dynamics or policy that is an idealist theory and is in no way realistic.

Circular incorrect argument

FHB's

I suppose houses will disappear if landlords got out.

Regarding the vilification of mum and dad landlords... We evicted the multi-generation Polynesian family that had rented a large comfortable sunny house in a nice neighbourhood with convenient good schools for a very fair rent from us (has always cost us money to top up the mortgage, insurance, rates and maintenance of large section and swimming pool) for the past 5 years and sold it to a young professional couple with wealthy parents and no children.
We had wanted to keep the house in the family but could see the writing on the wall regarding the squeeze on landlords, as further evidenced by today's announcements.
Everybody happy now?

That young couple will be moving out of a rented house somewhere, freeing it up for another family.
I understand landlords are sad, and venting, but these hyperbolic arguments make you look foolish.

Yes, yes they could. As I said previously "Post Covid there is an abundance of convertible commercial properties. Plenty of scope for accommodation if the government looked close enough. Then we'll see the rentiers start crying afoul of their tactics to pressure and exploit people failing...poor babies."

Just because you repeat it doesn’t make it true. Sure, the office and retail segments of the commercial market are softer than they were. That does not mean they’re dead. It also does not mean that their owners want to or can quickly convert from one use to another. In addition to planning and consents, these projects will require heavy retrofits to meet residential standards which will be expensive and struggle with ongoing material and labour shortages.

And as residential rentals will not be able to deduct interest and losses ring fenced.

Regarding the vilification of mum and dad landlords... We evicted the multi-generation Polynesian family that had rented a large comfortable sunny house in a nice neighbourhood with convenient good schools for a very fair rent from us (has always cost us money to top up the mortgage, insurance, rates and maintenance of large section and swimming pool) for the past 5 years and sold it to a young professional couple with wealthy parents and no children.
We had wanted to keep the house in the family but could see the writing on the wall regarding the squeeze on landlords, as further evidenced by today's announcements.
Everybody happy now?

How do you know so much about the people you sold to? You know for a fact they both have wealthy parents? Really? They may need a home for the children they are planning to have. (I think you over-egged the pudding in your attempt to come up with the ideal scenario for the angry point you are aiming to make).

Rent increase of $40-50 p/w will cover taxes by $160-200? I hope you've got a good accountant because you will need one

Increase 40-50 p/w every year for next four years. After four years , the rent will become 160-200 PW higher than now, it may not cover everything but it transfer big part of tax expenses to renter.. People don’t need an accountant to finger that out

What have you fingered out? These angry posts about how landlords will punish their renters for government actions are really distateful. It sounds a lot like sadism!

Tom,Sorry to say that it is going to happen for next four years.All tax expenses will be slowly transferred to renter.I know someone who never increase their rent since they bought their investment property 6 years ago. They immediately put their rent up and plan to do it every year after today’s announcement.From 1/04, minimum wage will go up to 20 dollarsP/h.Business have to put up price to cover it.Do you really think the government’s action does have any consequences?

God bless you selfless landlords charging so much less than you could put of the kindness of your hearts. Salt of the earth.

I don't see why they are angry posts, landlords may try to recover extra expenses by putting them on the tenant, to how much of a degree it will work I don't know but it is certainly a possibility. This happens with every other business I know when their costs go up those cost are eventually passed on to their customers. Just because you and I don't want to see that happen doesn't make it impossible that it will.

You'd have to pay tax on that increase though :)

The deductibility is pro rata over 4 years Amigo so rents only need to creep up over this period of implementation to until you are unable to deduct in full and by that time they will probably be voted out anyway. Entirely doable.

Better take away interest only as well then for good measure.

Lord Dowding - I'm 100% with you on raising my rents pro rata over the 4 years. I'm a soft touch on rents raised them once in 7 years.
For me it's war against the Tooth Fairy and the Fat Controller twats !

Still wont change house price inflation but lets kick the property investor in the guts again as if they havent had enough with all the latest tenancy bullshit the government has been throwing around. Lets not forget this is not a new issue , house price inflation is created by these Muppets but presently they can not control because the fire is already out of control due to the fact they inject 100 Billion of made up money into the economy and call it stimulus. Like the rest of the world gotta keep the Ponzi scheme going because if they dont keep it going the currency is doomed. Good Luck Mr Robertson but Im sorry nothing you can do will fix this problem.

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The poor property investor...they might have to take risks and start investing in 'productive' businesses...shock horror...work, precarity, risk...just like the common man again.

Common man is investing in food and beverage not in any productive business. Secondly, having more taxes and hoping for cheaper staff ( rent ) is not logical.

Good idea. Or even a Sharesies portfolio, seeing as they have such a huge appetite for RISKY BUSINESS

I think this was a better overall thing for the country long term than the ending of 90 days notices, and other tenancy changes, I agree they are absolute rubbish and should be overturned as soon as possible.

So sell it. Realise a healthy profit. Stop whinging and be grateful for your massive unearned gains.

Exactly the world will go on, and that will be one extra house an owner occupier has the opportunity to buy, that's a win win.

Yes, property investors have been scared off in their tens of thousands by this government. Really? Are you choosing to ignore the fact that the proportion of monthly loans going to investors over FHB's in recent months is the highest it has ever been?

I find it really hard to buy into this woh-is-me, landlord beat up rhetoric. I own two rental properties and the incentives to hold these and consider buying more have been incredibly attractive. Read: massive leverage, interest deductions, recycling equity, ability to increase income (rents) more often than many other businesses, very cheap debt relative to other investment classes, easy access to credit, fiscal and monetary policy protection of nearly all downside risk to protecting price decreases year after year...

I find it really hard to take anyone seriously who claims the incentives for property investment are not atleast a little bit out of kilter compared to other investments. If it were even somewhat balanced, would we not see a similar level of investment in other asset classes and a robust system supporting this?

Robbo is borrowing $128+ million a day - just $45 billion a year - like buying groceries on the credit card - https://www.debtclock.nz, so suck it up you young socialists and be happy its your generation that will be paying it back, plus interest and no deductions except to your lifestyle, tell your children how good it was when you could afford a Starbucks coffee.

19
up

Anyone here recall landlords crying a river at the RBNZ reducing their interest costs by 50% over the past 2 years?

I approve of this comment.

This is interesting ?? A sneaky new tax !!! - There is another change in the bright-line test rules which is potentially quite significant and that’s around the treatment of the main home exemption. Currently if 50% or more of the time a property is held, it is occupied as a main home, then it is completely exempt from taxation. If it’s 49% tough! It’s going to be fully taxable. So, it was a little bit harsh, that arbitrary treatment.

The proposal is to change that for property acquired on or after 27 March – you’ll be taxed on the period it was not occupied as your main residence. So, for example, if it was your main home for 80% of the time then only 20% of the gain will be taxed, whereas currently for properties acquired prior to 27 March the rule will be that in that case it will be fully exempt.

Lol

Property investors will always find a way to make cash. I know of one who is streets ahead of the game and is building a motels to house the homeless and make qwids. All government guaranteed. When and if tourism picks up he will do a quick reno and revert to a tourist motel. If tourism doesn't pick up the economy will be stuffed and more motels will be needed. Can't lose.

Good on him, that's someone that's not just sitting on piles of debt and effectively expecting the tax payer to subsidize it for them, which is how so many property investors have got rich over the last few decades.

If you are working for someone, tell your boss to stop deduct any expenses from his business as taxpayers can not subsidise him. You don’t want to see him is getting rich. Let’s see what’s your boss is going to say,

I told my boss that my living and commuting expenses should be tax deductible since I live to work for their business.

He laughed. A bit like everyone is laughing at you Jackjack.

No one is forcing you to buy houses, if it now doesn't work for you, then you probably shouldn't have been doing it anyway, the more owner occupiers that own houses the better for NZ, rather than a nation on landlords and tenants like we have been becoming.

Some investors like this do have brains and will work to fit the market rather than whinging when things are no longer rigged to suit them perfectly then lashing out and threatening to make tenants homeless and living in cars (how dare people want to have their OWN home!!!) like what I'm seeing since yesterday morning's announcement!

What a difference a day makes

Regarding the vilification of mum and dad landlords... We evicted the multi-generation Polynesian family that had rented a large comfortable sunny house in a nice neighbourhood with convenient good schools for a very fair rent from us (has always cost us money to top up the mortgage, insurance, rates and maintenance of large section and swimming pool) for the past 5 years and sold it to a young professional couple with wealthy parents and no children.
We had wanted to keep the house in the family but could see the writing on the wall regarding the squeeze on landlords, as further evidenced by today's announcements.
Everybody happy now?

Your comment brings to mind "Cut off your nose to spite your face". You've done what you believe is good for you, yet it's also part of the problem. You could have kept topping it up with a modest rent rise, yet this hysteria we're seeing in these columns seems to have caused you to throw the towel in.

"Our investment ran at a loss but we still banked massive capital gains, yet we were the ones being squeezed".

It's really something, isn't it?

Incredible how ungrateful people who have made stacks of unearned wealth at society's expense can be. Complete lack of self-awareness.

Incredible how ungrateful people who have made stacks of unearned wealth at society's expense can be. Complete lack of self-awareness.

I like the bit where you said the family were Polynesian for added victim status effect, meanwhile overstating the financial status of young couple's parents.

Glad to see a young professional couple attain a chance at home ownership though, if the story is indeed true.

If the story is indeed true! It might be true but I would put the odds of it being true at less than 50%

Yes I think you did the right thing. Did you sell at a loss or a gain?

More houses going to owner occupiers is a good result as far as I'm concerned.
Nothing worse than a street that is only renters, the houses always looks rubbish, if you compare it to a street of owner occupiers the difference is staggering, bring on anything that tips the balance in favour of owner occupiers rather than investors.

Yes, I live in a so-called leafy suburb and so does my sister. Both of us have Chinese overseas absentee owners next door in same block with management by Barefeet and TomToms. Good tenants but no proactive attending to common-area maintenance. You have to go cap in hand and beg. If property managers ever seek self-management I will be making submissions that property managers must pro-actively cooperate with the other owners on maintenance and have a binding discussion with them at the outset of any new tenancy. Two units next door to me have let go the verge gardens bordering their drive and weeds now growing out into the footpath. The worst one is owned by Chinese landlord. An absolutely disgraceful mess! The Auckland Management property manager is not doing a proper job. I will be keeping photographic evidence to support any submissions I make if property managers try to say they deserve a professional body to self-regulate. Right now they are not fit to be considered a professional organization.

Maybe they need to think up a way to get existing overseas non Kiwi landlords out of the market? they certainly aren't helping us in any way.

The main issue with tinkering around the edges and other band-aid solutions is whether the effect is cumulative or not.

An action that is pretty minor in itself could be the 'straw the breaks the camels' back and causes a far larger correction that was was planned for (I use the word 'planned' very loosely here).

The unplanned correction last year were priced increasing too much, this year........?

Tax should be on things that are not producing anything and on wealth.
Not on income generated by employment.
Not flat rate either because it is regressive.
In NZ we have virtually nil tax on wealth, a flat rate tax in form of GST and no tax free allowance.
And we WERE (and still are I see, until October, then it's still 75% for a year) subsidising loans for investors.
And we socialise risks for banks too.
If landlords buy 40% of property listed for sale, logically there is less for FHB.
If landlords leverage, they logically can out bid FHB who cannot.
All patently iniquitous

Clearly you do not understand corporate tax laws and how most wealth is accumlated

Good luck with your 'robin hood' capitalism philosophies

Here's a deal for you. If you are paying only domestic interest rates then either no interest rate deduction for taxation, or it's for everyone including owner/occupiers or if your loan is a business loan with commercial rates then perhaps it could continue, however you would be subject to consumer guarantees act.

If Landlords run a business, then maybe we should start treating the rental properties as a workplace and the Landlord is liable as a PCBU? Then we would have a case for argument of tax deductions.

It doesn't affect me and I agree with the removal of interest deductions but I was wondering how the extension of the Bright Line Test would affect family trusts that own multiple properties. I assume that if these trust properties were rented out and things like depreciation and interest deductions had been claimed then these would be captured by the changes in the Bright Line rules just like any other rentals or is it simply multiple properties owned by one entity (the trust) that the test would apply to?

Well about time we had a government with some mettle, good job in some ways.

We're at a slippery slope. The new policy just opened the doors to Hades for the economy.

What's stopping them from taxing every other businesses based on turnover if when they deem that the business is running against their agenda?

Who's next? Car dealers? Pump stations? Airlines? KFC?

Adorable housing if it isn't, should be a human right, for it to be a never lose r roulette table for landleechery and what is pretty much "people farming" is a blight on this country.

People-farming is right, and half these shameless people are now fantasizing about their tenants begging on the streets or living in tents and cars. They really get off on these ideas of retribution on people who have affectively covered their mortgage while their rental property has grown and grown and grown in value. Were these people born with a silver spoon in their mouths, and brought up by elite parents to look down on every day people and treat them as cattle? Or are they average people who are simply talentless or lazy, I have no idea but their appetite for risk will be met with the downsides of risks soon if they continue with these attitudes

I agree as I’ve said I can’t find any example anywhere of an entity being taxed on turnover only.

You know where I think they will stop? Once they have addressed the parasites using leverage and un-earned capital gains to monopolise a market and extract as much wealth as they can from hard working New Zealanders, contributing to a massive financial bubble that risks the entire economy and is contributing to a problem 60% of New Zealanders believe is the biggest issue facing the country.

Fortunately I don't think Car dealers, pump stations and airlines meet the criteria.

I think you will also find that you can't go cap in hand to the public purse for a top up of the price of said items, because they don't want to meet the market, are quite happy to have their hands, via their tenants, in the pockets of the public

Well said.

Very well put.

Unfortunately every decision this government makes on housing pushes rents up. Later this year they will probably put rent controls on the table. Rent controls lock in existing tenants and lower renter mobility, creating flow on issues like inefficiencies in employment markets, requiring further government intervention. These are all incremental steps in the realisation of Labour’s dream of a government-directed economy. Back to the days of Muldoon, and as history shows, government-directed economies are unsustainable in the long term and very painful to unwind (with the pain falling mainly on poorer people).

Government directed, as in directing things to get more houses built? is that a bad thing?
Do you yearn for the good old days of a government that does nothing and sit on it's hands watching while a problem gets worse? like National did.
I thought we paid them to solve problems when there are problems? isn't that exactly what they are doing?

Hi Terry
On top of interest deductions, what happens with the other tax deductible expenses for residential landlords - including rates, maintenance, insurance, etc, which a worker/occupier under PAYE cannot claim. Is there more to be done to level the playing-field between landlords and owner/occupiers ?

https://www.ird.govt.nz/property/renting-out-residential-property/reside...

If you have rental property that is not used privately at all you can deduct expenses from the rental income you include in your tax return. Not all rental expenses can be deducted.

Expenses you can deduct
The expenses you can deduct from your rental income are:

the cost of insuring your rental property
the rates for the property
payments to agents who collect rent, maintain your rental, or find tenants for you
fees paid to an accountant for managing accounts, preparing tax returns and advice
repair and maintenance costs
fees for arranging a mortgage to finance the rental property
fees for drawing up a tenancy agreement
the cost of getting a valuation required to get a mortgage, but not insurance valuations
the costs of taking legal action to recover unpaid rent
the costs for evicting a tenant
mortgage repayment insurance
depreciation on capital expenses
travel expenses for travelling to inspect your property or to do repairs
legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
You can also deduct interest on money you have borrowed to buy your rental property. You cannot deduct this if you have used some of the money:

for something else
to top up the mortgage for another purpose.

When are investors going to realize no one is holding a gun to their head making them buy houses, in fact the country would be much better off without them crowding out the market and pushing up prices.

Should there be a level-playing field (in tax terms) between buyers of existing houses, and a level-playing field (in tax terms) between builders of new houses. The former could be treated as income without tax deductible expenses, and the later as businesses with tax deductible expenses. with after a period of time the property moves to an existing house tax status.

So first they blamed the Overseas (aka Asian buyers) for the housing crisis..... They banned them from buying.... Prices still went up.

Then they blamed the RBNZ & the Banks for the housing crisis..... Banks proactively reacted and lifted the LVR for investors even before the Govt said anything..... Prices still went up....

Now they are blaming LOCAL investors for the housing crisis..... So they add all these deterrents....... I wonder what will happen now? (*Sarcasm*)

Maybe shock horror more people will be able to afford to buy a house themselves, rather than rent, why is it acceptable for close to half the population need to rent houses?
We don't rent clothes, shoes, cars, boats, why should people need to rent houses? only when something is broken should almost half the population need to rent houses.
When something is broken, things need to be done to fix it.

RBNZ? they dropped interest rates to close to zero, and printed money, they still are to blame.

Removing the ability to deduct interest will do nothing to lower houses prices. The policy is in place in England and "London’s average house prices increased by 4.7% over the year to March 2020; this is the largest 12-month growth London has seen since December 2016" The speed of money printing around the world is phenomenal. This Labour Government knows that it has no option other than to print more money and lower interest rates. They are locked in synch with whatever the United States does. To stop the frenzy you need to stop printing money. Simple maths - It is better to pay interest at 2% and pay 39% tax on your rental cash flow than have rates climb to 6% or higher and claim the deduction. Printed money has to go somewhere! By the way I voted for Labour, but I dislike liars with a passion.

Even if it doesn't lower house prices, if it stops them going up again by 20% this year, and then 15% the year after that etc, then it's a massive win isn't it. Also if it helps to to tip the ratio back in favour of owner occupiers over investors then that is also a massive win.

Depends on what you consider a massive win. Grant Robertson talked today about how all their experts predicted Covid 19 would sink the housing market. I found it hard at the time to understand why the experts did not understand the effect of money printing and low interest rates. Of course all the experts were wrong then, so why trust their opinion now. These policies are experimental and the outcome cannot be fully known. If they were to cause a downward trend in prices (mortgagee sales), then the most likely banking response would be to make lending more restrictive. That would not be the best outcome for first home buyers. I still maintain that while the RBNZ is carrying out it's Large-scale asset purchases (LSAP) programme, thus keeping a lid on interest rates then assets can do nothing but inflate. There could be a case where the investor moves from housing to the stock market. Taking that NZX bubble to super bubble status! To understand the real economy, look at bank deposit rates. Even if they stopped printing money, the economy does not make enough money to pay any real interest or dividends. Returns are based on holding for capital gain supported by money printing.

Make no mistake a 10 year bright-line test imposes a capital gains tax

Ardern ruled out a capital gains tax (CGT) under her leadership in April 2019 after Labour and the Greens were unable to reach a consensus with New Zealand First, saying at the time she felt too many New Zealanders did not support the policy. Ardern on Monday said she didn't regret ruling the CGT out.

I consider it a win if our property market wasn't used like a casino, and the ratio of owner occupiers starts going back up again instead of being in freefall like it has been in the last few decades.

Doggog there is no 'money printing' going on, you are just showing your ignorance with that comment

https://www.interest.co.nz/bonds/105275/robertson-has-no-intention-getti...

The RBNZ is currently printing money for monetary policy reasons. It has committed to buying up to $60 billion of New Zealand Government Bonds on the secondary market over the next year. Importantly, the purpose of this is to lower interest rates and encourage growth to help the RBNZ meet its inflation and employment targets.

Seriously who cares about investors making capital gains or deducting interest....its the lack of new housing stock thats killing the market. More supply to meet demand works much better than tax and punishing the residential investor.
Kiwibuild was an absolute disaster so looks like this govt has run out of ideas on housing - now trying to tax its way out of the problem!
NZ managed to partially rebuild (and repair) an entire city once- its called Christchurch - maybe we do it again?

Punish investor = Investor can't take the punishment and sells/stops hoarding stock = housing stock magically increases for genuine buyers. Pretty simple, I would have thought

Funny to some of these RE as commodity fans, I knew for facts some in AKL came from India or China.. just to exploit the NZ weak systems, when I put the question. IF so successful buying multiple properties here... then why not back doing it on different countries? (including home land),.. rule & regulation are lot tougher there.

Because those countries realized years ago there were enough people lining up to be property investors anyway, without having to incentivize it even more, NZ is a bit behind the eight ball on that, but we are finally getting there.

Big mistake, should just let run up.. because everyone benefited from it claim it's a good thing.
And remember they're all voters, now imagine if you're the authorities in the university, all students striking from study because all demand an increase/subsidy hours/subsidy alcohol drinks for their fun time, would you try to regulate them? or let it go.....(like the song? do the latter, regulate won't work).

It’s not if rents rise but when. Landlords are not in the business of running a charitable enterprise and subsidising other people’s lifestyles.
Also if Labour bring in capital gains tax on farms, then good bye to all the farmers that voted for them in the last election to keep the greens out.

Or maybe it will help house prices to get closer to what their actual value is, not what their value is with thousands of highly leveraged investors, that can only do it off the back of what they claim back in tax at the end of each year, if house prices stop going up so much then rents will not need to rise as much either. It will help the market to become much more sensibly priced.

agree the govt had to do something to rationalise both house prices and rents - but intervening into a perfectly legitimate activity of investors is ideology not economics.
Supply and Demand govern prices - government should be pulling out all stops to increase the new supply not restrict investment activity. The carrot offered to new home investments coupled with the infrastructure fund is well overdue but why not really turbo charge by signalling this to investors earlier and adding another tranche of incentives for developers! the real question is what will incentivize the building industry to lift productivity and lower the cost of building - which by the way is just as overheated as the rental a property market.
FYI im not a residential property investor.

One responsibility of a government is to make laws that incentivize desirable behavior, that is good for the country overall.

agree the govt had to do something to rationalise both house prices and rents - but intervening into a perfectly legitimate activity of investors is ideology not economics.
Supply and Demand govern prices - government should be pulling out all stops to increase the new supply not restrict investment activity. The carrot offered to new home investments coupled with the infrastructure fund is well overdue but why not really turbo charge by signalling this to investors earlier and adding another tranche of incentives for developers! the real question is what will incentivize the building industry to lift productivity and lower the cost of building - which by the way is just as overheated as the rental a property market.
FYI im not a residential property investor.

It’s not if rents rise but when. Landlords are not in the business of running a charitable enterprise and subsidising other people’s lifestyles.
Also if Labour bring in capital gains tax on farms, then good bye to all the farmers that voted for them in the last election to keep the greens out.

this is the perfect opportunity to see just how many kiwi businesses are financed through private home mortgages as the banks will not lend against most start up self employed businesses

this is the perfect opportunity, given the timing in the tax year, to let everyone know it was great they put in their home office tax deductions, on a property held in a trust, that evidentially has nothing to do with them

this is the perfect opportunity, to point out, if it's in a trust, it's not the family home, and all BLT &tax applies

tax deductible financing cost are an expense, it probably ought to stay that way

better changes are available, like when they ruled out depreciation, that made sense, everyone had to pay depreciation recovered cause everything went up anyway, was more of a gift/loophole of an government backed interest free loan for that proportion(s) during ownership.

maybe concentrate on the laws politicians have put in place to feather their own nests at our detriment rather than to focus on what they think is best for "us" moving forward...

although this is the perfect time to buy tents, going into winter they will be cheaper and you can avoid the summer rush, it is also a good time to buy accountants and MIXED USE properties