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BDO tax specialists say new tax rules around residential property investment 'could result in tax paid on what would ordinarily be an economic loss'

BDO tax specialists say new tax rules around residential property investment 'could result in tax paid on what would ordinarily be an economic loss'

Tax specialists at accounting firm BDO say the Government's proposed changes to the residential investment tax rules are a "significant departure from the core fundamentals of our tax system".

In an overview of the changes announced in March, and a consultation document released last month, BDO partners Mark Lodder and Iain Craig said that in our tax system we deduct (subject to certain limitations) expenses incurred in "driving" taxable income.

"Why [in the proposed changes]  is there no deduction for this income earning process?"

Lodder and Craig say that "clearly" for some taxpayers the proposed limitation on interest deductibility for residential investment properties "could result in in tax paid on what would ordinarily be an economic loss"

Another issue they have about the proposals, on which public submissions are open till July 12, is on whether there should be a deduction of previously foregone interest available for investors in the event they sell a property for a taxable gain.

"Absolutely," they say.

"Otherwise - the Government are double dipping and taxing more than the economic increase. This really wouldn’t be fair."

Another question they have is around ring-fenced loss rules:

"We already have ring-fenced loss rules. Will we have any losses to ring-fence if (when) the restrictions are enacted as proposed?"

Lodder and Craig also think there is an opportunity to simplify the new rules.

"Regardless of objectives, the proposed new rules appear overly complicated. There are 143 pages of Discussion Document trying to work out what would be fair, what wouldn’t, how to define 'new builds', what should be excluded, dual purpose buildings, tracing of borrowings (what was the borrowing actually used for to work out restrictions?)…it doesn’t feel uncomplicated."

They say the inclusion of roll-over relief provisions in the new rules is welcomed ("although they too come with some complications"), and it is helpful that the restrictions will be phased in over a four/five year period for existing investments.

"The immediate application of these rules to the Kiwi who invested in residential property and worked out their retirement plan based on the legislation of the day could be disastrous.

"The four year transition period at least allows time for those who made acquisitions based on the status quo. Particularly if interest rates rise in the medium to longer term, as is indicated by financial commentators (RBNZ signalling a view that that OCR may rise to 1.75%, as compared to 0.25% currently, by mid-2024)." 

As their parting comment the two tax specialists question whether there would have been a better way for the Government...

"Stepping back, one might ask: 'If we had to do something to deal with demand, could there have been a better way to help solve the housing problem through the tax system?' Something that increased the cost of acquisition, was uncomplicated, uncluttered and is used across the world?

"A stamp duty on residential property was previously discounted…but is this now worth a further look?"

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31 Comments

We already have these all through our tax systems. Contractors claim things employees cannot. Hell, we have thin-cap rules already on debt and borrowing costs. If we're arguing for comprehensive consistency in the tax system then there's a lot of bridges to cross before we lose sleep over housing investors getting an interest deduction to finance tax-free gains, and all the distortionary social effects that come with it.

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Since the higher tax threshold was introduced, I've noticed a few high earners (>180k) go from permanent to contracting in the same BAU role.

Claim a portion of your housing and travel costs, pay your spouse or kid a bit to do admin/bookkeeping and reduce your net taxable income. Easy as!

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Indeed, we should be moving towards a more consistent system, not away from it, so i don't exactly follow your point; its not ideal now, so we may as well make it worse?

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If we're going to start worrying about fairness in the tax system then there's a lot of much higher priority issues to address before we get to investors being allowed interest deductions. In fact I'd wager investors would be even more unhappy once we shake out a truly 'fair' tax system, because logic says it should either deny them all deductions or give them to the same owner-occupiers they are displacing in the market, you know, for the sake of consistency, which is suddenly really important now that they're not getting something they want.

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"The immediate application of these rules to the Kiwi who invested in residential property and worked out their retirement plan based on the legislation of the day could be disastrous."

Cry me a river!! How many Kiwis retirement plans have been scuttled due to an inability to buy a home or through their savings returns being decimated via the theft perpetuated by the RB.

$100k generating $820 in interest as of today verse $6-8k not so many years back.

Complaining about fairness while the biggest unfairness of all time unfolded as wealth was transferred from savers to landlords is a joke.

Tax the hell out of em so they know how it feels.

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Property speculators must be taxed until we reach a point where the property market and the economy re balance themselves and reach a new equilibrium in sync with economic fundamentals. The sooner this happens, the better.

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So much this.
I read today that not only have they killed the comparative value of wages but the latest stats have wages dropping in absolute terms as well. House prices at 12.5 times averAge wage according to stuff.

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How sad, too bad, who cares, never mind. We have to do something to basically take residential property investment off the table for every man and his dog. The situation we are now in, from decades of pandering to the "people farmers" has got us into very deep do-do. Now we need to do things to turn it all around again.

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Agreed. All expenses should be eligible for a tax deduction. Just as all income should be liable for income tax. If someone makes a gain on sale of an asset. This should be treated as income regardless of the asset class (property or land). Any expenses occurred in obtaining this income should be offset against this income.

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I had to eat in order to not starve while on the job - should I be able to claim that expense for a tax deduction?

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Understand the difference between personal and business expenses

Most times, the line between personal and business expenses is clear. Any expense that is directly linked to your business earning an income is a business expense. If you buy something to be used for your business, it’s a deductible business expense. If you buy something to use privately, that’s a personal expense.

If something is mixed between business and personal, such as a laptop that you use partially for business and partially for personal use, you can only claim a deduction for the amount that you use for business. So if you use the laptop for business 75 percent of the time and for personal use 25 percent of the time, you can only deduct 75 percent of the laptop.

Whether you use something entirely or partially for business, you need to have a record of the purchase.

If you have a home office for running your business you can claim a portion of related expenses.

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Sounds like my breakfast and lunch should be a tax deductible expense as the energy i get from those is to sustain me over the working day and is therefore for business purposes. a portion of dinner too. I'm about to line up my tax return......

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I kind of agree that property should have a capital gains tax. But I don’t agree that we shouldn’t tax “losses” no matter how fake they are. To me a loan to buy a business is not that business making a loss, it was no doubt profitable before that loan.
There are plenty of fake losses in business, I suggest the government ignore these ideological idiots and stat tackling them one by one, such as google etc.

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Do you understand the difference between costs/expenses and losses? It doesn't seem like it.

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" Just as all income should be liable for income tax. If someone makes a gain on sale of an asset. This should be treated as income regardless of the asset class (property or land). Any expenses occurred in obtaining this income should be offset against this income."

Welp, there goes a huge chunk of most FHBs deposit then, as tax on their kiwisaver profits..

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Why, if you introduce a CGT & use this to offset income taxes you will both lower house prices & increase after tax income for income earners. This is good for FHB's

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It would be even better if you sent the bill to people who aren't trying to make ends meet on internationally sub-par wages, while at the same time saving for their first home and their own retirement.

Maybe instead we could focus in on, I don't know, the people who caused this mess by over-subscribing to a tediously predictable path of 'wealth building' without complying with the basics of the existing capital gains regime and who have wreaked untold havoc on New Zealand's social fabric?

Maybe start there instead of casting a net so wide it catches the people you're trying to help.

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Or maybe those who didn't build houses they promised to, or maybe to those who dropped the interest rates to zero and flooded the market with money. What about those in the sahremarket for speculative reasons (investments), why not go fo all of them?
Answer, politics.
Labour have decided who to blame for their failings, and began demonising them firast. If Cindy and Grant were honest, they have plenty of blame to shoulder, but there is no chance they will accept any. They hardly even listen to the advice of their own departments who advise them, and acknowledge when by going advice they get bad outcomes. i.e. low grade Indonesian Coal firing our electricity and electric car power.......

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CGT on owner occupied houses is daft. We're going to tax you on the basis that the house you live in went up in value, so now you have a big chunk more to find to buy the equivalent house where you new job is.

Not to mention the same system is designed to enforce that there is inflation in the first place.

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Farms should really be treated the same way. They are really just farming inflation in the same way landlords do. Admittedly a large part of what farmers do is useful and that should be rewarded, but the tax free capital gain ponzie is no different and must be distorting land prices and economic signals to farm efficiently.

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The price of rural land is skyrocketing. Land bankers have returned to any and all potential land to build on now. Peeves me that I’m struggling to find a decent piece in our range for a family farm now. I’ve been looking for the right piece, in the right place, with the right specs in an affordable range for a couple of years now and it’s only gone for bad to worse in price (some properties in some locations with upwards of 150+% increase in 3 years according to Oneroof market stats!) and availability. The little guy wanting to just live on the land is being squeezed out on all fronts.

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Good on Labour for doing something. Anyone who feels aggrieved, just needs to suck it up.

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Our longstanding very effective income tax collection process relies heavily on voluntary compliance. This works when tax law is fair and consistent. The proposed new rules for taxing residentail investment breach these longstanding principles and will motivate non-compliance and incentivise avoidance. Apparently BDO have the courage to stand up on this.

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So what.

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Thats sort of comment and thinking is why there just needs to be a flat land Tax. Its unavoidable like Rates. The BDOs of the world will hate it because its simplicity will eliminate many fee opportunities for them as a business.

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Those "principles" may be longstanding, but that does'nt make them valid. Grant Robertson is to be congratulated on partially fixing an anomaly in the Income Tax Act.

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I thought there was an unspoken political agreement that the parties wouldn't reverse each others policies, however Labour crossed a red line here in terms of the idiocy of taxing revenue not profit. It's out of step with international norms, and of course will have unintended consequences. National quite rightly stated that they'll reverse this one as soon as they're elected again. To me this is a sign that something deeper is broken, call it social contract if you like. We're no longer heading in the same direction. I'm not sure where that ends, but we've all seen people in life who have no direction. Those types who dont have a future goal and consequently go nowhere in life. Now a country isn’t a person but still.. it doesn’t portend well for the future if we don’t fix this.

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We need to rethink investment deductions in the tax system altogether. Why do we allow tax deductions on investments outside of productive sectors at all? If the investment is not intended to directly and ultimately creating MORE jobs and produce a DEFINABLE improvement in the health and wellbeing of society, at a DEFINABLE scale, why do we allow it? Tax deductions should ONLY be used as an incentive to growth in employment, otherwise we should all cop our costs as a consequence of the production of our profit/wealth?

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True. But, by the same reasoning, if rents are not "productive" they are not really income and should not be taxed as such. The source of rents are the tenants, who pay for the profits from their own tax paid incomes, so if the landlords pay tax the same income is being taxed twice; something which tax authorities seem at pains to avoid.

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Good to get the opinion of tax experts, worth listening to. New non tax deductibility of residential property interest law is a dog and will thankfully be gone with a change in government.

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Agreed. It is proprietors who borrow, not businesses. And they do so in order to acquire ownership, personally, of additional properties. It is to be regretted that other businesses are not also losing interest deductiblity.

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