Ring Fencing of Rental Losses

July 2019

The Government have confirmed proposed changes to the way that you are able to claim losses from a rental. Previously you have been able to use rental losses to reduce your "other" taxable income (e.g. wages, salaries or business income), which in turn decreases your taxable income and decreases your tax payable.
 
The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019, now says that rental losses will not be forfeited, but they will only be able to be offset against future rental profits. In theory this is only a timing difference, but for some, cashflow will be significantly impacted.  The aim of these changes was to make the tax system fairer and improve housing affordability for owner-occupiers by reducing demand from speculators and investors. The IRD admits that they cannot say for certain what effect these changes will have on the market, which is an interesting note.

IRD has been saying for years that where an investor suffers some sort of real economic cost, i.e. it hit their back pocket then, to that extent, as long as an amount was ordinarily tax-deductible, they should be entitled to deduct that for tax purposes. The thing about rental property losses these days is that with the removal of the depreciation deduction, anyone incurring a loss on their rental property has probably had to pay for that loss themselves by either borrowing more or using their own funds. In other words, the rental loss is a cash loss, and so the investor has suffered a real economic cost. This means that there will be now be no relief until your rental property makes a profit.
 

Unfortunately there are no clever structures that we can set up to circumvent these rules. As is the case with the Bright-Line test, these changes do not apply to a main home, properties owned as part of a land related business (they are taxable on sale anyway) or properties which are subject to mixed use asset rules (e.g. a bach which is used both privately and rented occasionally.)
 
The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 received Royal Assent at the end of June 2019 and are in have an application date of the start of the 2019-2020 finanacial year. For most of us with a standard 31 March balance date, the rules apply retrospectively from 1 April 2019.