Any day now, Inland Revenue is expected to finalise their views on a proposal which will limit the ability of a property investor to offset losses from their residential property portfolio against their other income (for example salary and wages) to reduce their income tax liability.

In what is another targeted policy measure, the Government expects the introduction of loss ring-fencing rules to help level the playing field between property speculators/ investors and home buyers. The Government considers that investors (particularly those who are highly-geared) who are able to claim a tax deduction for mortgage interest often leading to a refund of PAYE paid, helps them to outbid owner-occupiers for properties as they are not allowed to claim the same deduction.

The proposal is that loss ringfencing will only apply to “residential land” as currently defined for the bright-line test and would not apply to a person’s main home or land that is already subject to tax on sale. The proposal is for the rules to apply on a portfolio basis so investors would still be able to offset losses from one rental property against profits from another property. Currently (see example in the tablebelow), this investor would be able to claim an overall rental loss of $3,000 in their tax return. Under the ring-fencing proposals, they would instead declare nil income in their tax return and carry forward the loss of $3,000 to offset against future rental or property income.

  Property 1 Property 2
Rent received 20,000 15,000
Expenses paid 12,000 7,000
Interest paid 12,000 7,000
Profit (Loss) (4,000) 1,000

Inland Revenue has also thought ahead to consider the avoidance rules that will be required to prevent structuring around the proposed ring-fence. For example, investors circumventing the rules by borrowing funds to acquire shares in a company, or to fund a trust or other entity, that acquires residential investment properties. The proposed commencement date for the ring-fencing rule is the start date of the 2019-20 income year (1 April 2019 for most taxpayers). The impact of the ring-fencing rule is definitely something to keep in mind if you own or are considering investing in residential rental properties.

For further information or advice, please contact Jono Bredin at jono@ or call +64 3 951 3162.

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