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There is much misunderstanding around the deductibility of mortgage interest for tax purposes relating to residential investment property.
If the Government-controlled Air New Zealand raises a loan to buy a new airliner they can – and they do – deduct the interest cost of that loan off their income before calculating their taxable profit. If that deductibility is a ‘tax advantage’, a ‘tax break’, or a loophole then surely the Government should disallow that for Air New Zealand. But they don’t. The reality is that every single business in New Zealand, from a brothel to a Bank, is permitted to deduct their interest costs in such a manner – apart from those who provide rental housing.
And yes, both MBIE and OSH define residential renting as a business.
There are those who claim that as home owner-occupiers cannot deduct their mortgage interest costs, then why should landlords?
Consider the situation if you or I borrow money to buy a new car.
Having got that car, we then derive a benefit from owning it – we can move ourselves around, go to work, carry stuff or go sightseeing. That benefit obviously has value, but we are not required to pay any tax on the value of that benefit.
Because we have a non-taxable benefit then we cannot deduct our car loan interest off that non-existent tax.
Should we, instead of using that car for our own needs, operate it as a taxi we derive a very different benefit from that car ownership – we get a cash income from the fares people pay us. But, unlike before, we are now required to pay income tax on that benefit.
Because we have a taxable benefit then we can deduct our car loan interest off that taxable income.
Housing used to be, and should be, treated in a similar fashion.
The owner-occupier of a house derives a valuable benefit – shelter - from living in their house but pays no tax on that benefit whereas the landlord pays tax on the benefit – cash income – they receive.
That is the logical reason for the difference in treatment of the cost of mortgage interest.
Imposing this regime on residential landlords seem to have been done not to raise tax money but to pursue an agenda that seeks to eliminate private sector landlords.
Jane is a school teacher. She is now in her late-40s and has been thinking about how she will live in retirement. Seeing the need for an additional income above the universal pension she invested her savings into an apartment that she now rents out to a tenant.
Up until recently, the rent she received covered the rates, insurance, and mortgage interest payments on that apartment, with a little bit left over for maintenance.
She is now suffering the impact of the tax burden imposed by the recently legislated inability to deduct her mortgage interest costs from her taxable income. Jane is now being taxed on fictitious earnings, earnings that don’t really exist.
Already, with that tax now being imposed at the 50% level, she is having to subsidise that apartment by $200 each week, and if the non-deductibility reached 100% that will cost her $400 each and every week.
On her fixed salary, she just cannot afford that.
Jane’s only option is to sell the apartment.
Almost certainly her tenant will not be able to buy it, so the buyer may well be someone coming out of a relationship breakup or a younger person moving out of a parental home. In those cases that’s one less rental house available in the market.
So what of the tenant?
It is highly likely that, given the current shortage, her ex-tenant will end up on the Government housing waiting list and moving into a motel that costs the taxpayer $1000 per week or into Kāinga Ora house where, on average, the taxpayer subsidises each and every house by over $16,000 every year.*
Bought in against the advice not only of landlord groups but also against the advice of tenant groups and the Government's own advisors who could see that this would rapidly become a costly 'tenant tax', this is making life so difficult for people like Jane. As people like her sell up, tenants are moved out of cost-effective private sector rental housing into high-cost state accommodation that require substantial never-ending taxpayer subsidies far exceeding any possible cost recovery from such a Landlord tax.
The Government – any Government – is actually losing money by retaining this targeted and punitive tax imposition. It should be removed, not by a staged removal over three years as some political parties now propose, but immediately, which will lessen the costs both to taxpayers and tenants.
* Figures from Kāinga Ora’s 2021 annual report show public housing rental income was $1.43b, of which $1.04b was subsidies from the Government.
With 64,206 Kāinga Ora properties, and if the taxpayer-funded subsidy received is divided by that number it equates to taxpayer funds of $16,260 per property in that year.
Their 2022 report reveals a net deficit after tax was $344 million (2021: deficit $152 million).
If the Government-controlled Air New Zealand raises a loan to buy a new airliner they can – and they do – deduct the interest cost of that loan off their income before calculating their taxable profit. If that deductibility is a ‘tax advantage’, a ‘tax break’, or a loophole then surely the Government should disallow that for Air New Zealand. But they don’t. The reality is that every single business in New Zealand, from a brothel to a Bank, is permitted to deduct their interest costs in such a manner – apart from those who provide rental housing.
And yes, both MBIE and OSH define residential renting as a business.
There are those who claim that as home owner-occupiers cannot deduct their mortgage interest costs, then why should landlords?
Consider the situation if you or I borrow money to buy a new car.
Having got that car, we then derive a benefit from owning it – we can move ourselves around, go to work, carry stuff or go sightseeing. That benefit obviously has value, but we are not required to pay any tax on the value of that benefit.
Because we have a non-taxable benefit then we cannot deduct our car loan interest off that non-existent tax.
Should we, instead of using that car for our own needs, operate it as a taxi we derive a very different benefit from that car ownership – we get a cash income from the fares people pay us. But, unlike before, we are now required to pay income tax on that benefit.
Because we have a taxable benefit then we can deduct our car loan interest off that taxable income.
Housing used to be, and should be, treated in a similar fashion.
The owner-occupier of a house derives a valuable benefit – shelter - from living in their house but pays no tax on that benefit whereas the landlord pays tax on the benefit – cash income – they receive.
That is the logical reason for the difference in treatment of the cost of mortgage interest.
Imposing this regime on residential landlords seem to have been done not to raise tax money but to pursue an agenda that seeks to eliminate private sector landlords.
Jane is a school teacher. She is now in her late-40s and has been thinking about how she will live in retirement. Seeing the need for an additional income above the universal pension she invested her savings into an apartment that she now rents out to a tenant.
Up until recently, the rent she received covered the rates, insurance, and mortgage interest payments on that apartment, with a little bit left over for maintenance.
She is now suffering the impact of the tax burden imposed by the recently legislated inability to deduct her mortgage interest costs from her taxable income. Jane is now being taxed on fictitious earnings, earnings that don’t really exist.
Already, with that tax now being imposed at the 50% level, she is having to subsidise that apartment by $200 each week, and if the non-deductibility reached 100% that will cost her $400 each and every week.
On her fixed salary, she just cannot afford that.
Jane’s only option is to sell the apartment.
Almost certainly her tenant will not be able to buy it, so the buyer may well be someone coming out of a relationship breakup or a younger person moving out of a parental home. In those cases that’s one less rental house available in the market.
So what of the tenant?
It is highly likely that, given the current shortage, her ex-tenant will end up on the Government housing waiting list and moving into a motel that costs the taxpayer $1000 per week or into Kāinga Ora house where, on average, the taxpayer subsidises each and every house by over $16,000 every year.*
Bought in against the advice not only of landlord groups but also against the advice of tenant groups and the Government's own advisors who could see that this would rapidly become a costly 'tenant tax', this is making life so difficult for people like Jane. As people like her sell up, tenants are moved out of cost-effective private sector rental housing into high-cost state accommodation that require substantial never-ending taxpayer subsidies far exceeding any possible cost recovery from such a Landlord tax.
The Government – any Government – is actually losing money by retaining this targeted and punitive tax imposition. It should be removed, not by a staged removal over three years as some political parties now propose, but immediately, which will lessen the costs both to taxpayers and tenants.
* Figures from Kāinga Ora’s 2021 annual report show public housing rental income was $1.43b, of which $1.04b was subsidies from the Government.
With 64,206 Kāinga Ora properties, and if the taxpayer-funded subsidy received is divided by that number it equates to taxpayer funds of $16,260 per property in that year.
Their 2022 report reveals a net deficit after tax was $344 million (2021: deficit $152 million).
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