Indian Newslink May 1, 2018 Digital Edition

MAY 1, 2018
14 Businesslink
Ring Fencing Rental Loss can be propitious to many
Saurav Wadhwa
The Auckland residential
market has been a hot
topic for several years.
It has been going in
only one direction: Upwards.
The Government has been trying
to make changes in tax policies
since 2010.
Firstly, it abolished the ‘Loss
Attributing Qualifying Company’
(LAQC) status and depreciation
on building, and then introduced
the Bright Line Test.
Bright Line Test has been extended
to five years from April
2018 and Ring fencing of rental
losses are being introduced from
April 2019.
Ring Fencing Rental Loss
In New Zealand, you pay tax
on your net income from all
sources.
It means net income is calculated
by total of salary and wage,
rental income or loss, business
income or loss, dividend, interest
and overseas income or loss.
If you make loss in any activity,
that loss is offset against income
from other activities, and
income tax is calculated on the
net income.
Going forward, the government
will eliminate the loss produced
by residential investment
to offset against other types of
income.
Reason for implementation
Why is Ring Fencing Rental
Loss being introduced?
In general, people buy residential
investment property to make
capital gain in the long term.
However, if in the short-term
it produces losses (expenses are
more than income), the rental
losses are offset against employment
income.
The net effect of this is tax
refund.
The Government believes that
its tax policies favour buying residential
rental investments.
It also believes that people
make capital gains from investing
in residential investments
and that capital gains are not
taxed.
The Government is trying to
use tax policy as a tool to discourage
people in investing in
residential rental investments.
New Rules and their
application
When do the new rules come
in to effect?
Currently, Internal Revenue
Department (IRD) is seeking submission
on its proposal by May
11, 2018 and is hoping to enforce
it from April 1, 2019.
The rules could either apply in
full, from the outset, or could be
phased in two or three years.
These rules apply only to residential
rental investment and
do not apply to (a) a person’s
main home (b) a property that
is subject to the mixed-use assets
rules (for example, a bach
that is sometimes used privately
and sometimes rented out); or (c)
land that is on revenue account
because it is held in a land-related
business.
The Application Process
This will apply on a portfolio
basis. It means investors would
be able to offset losses from one
rental property against rental income
from other properties –
calculating their overall profit or
loss across their portfolio. Ring
fenced losses from one year can
be offset against residential rental
income for future years.
‘Residential land’ is not limited
to land in New Zealand; it would
extend to overseas land.
It was discussed to create interest
allocation rules, as people
can use debt funding for
some type of assets and equity
funding for residential rental
investments.
IRD also believes that specific
interest allocation rules would
create considerable complexity
and compliance cost.
Small taxpayers disadvantaged
Small taxpayers and business-
es who use their residential investments
for business funding
would suffer most. Thus, specific
interest allocation rules are not
being proposed.
It applies to all entities, including
Trust, Company,
Look Through Company and
individuals.
A specific rule to deal with the
interposing of entities will be
created.
People cannot get around by
structuring differently. For example,
you invest in a company,
which then buys residential rental
investment. Since you have invested
in shares, under current
rules, the cost of borrowing is
2018
CALLING FOR
ENTRIES &NOMINATIONS
Forms can be downloaded from
www.inliba.com
your expense, but this will not be
allowed.
A suggested approach to deal
with interposed entities is to define
‘Residential property land
rich.’ It is proposed that when
an entity owns over 50% investments
into residential properties,
then ring fencing of losses
would be applicable.
Saurav Wadhwa is the
Principal Accountant at IBBZ
Accounting Limited, Chartered
Accountant and Tax Specialist
based in Botany, Auckland.
He can be contacted on (09)
2728050; Mobile: 027-5555458;
Email: saurav@ibbz.co.nz;
Website: www.ibbz.co.nz