Ring Fencing Matters

[flyernzl]

Looking at the TradeMe Community real estate blog, there appears to be great confusion about what exactly ring fencing means.

Example question: " How does this effect landlords where their sole income is rental income ?"

Remarkable ignorance.

[Don't believe the Hype]

Looking at the TradeMe Community real estate blog, there appears to be great confusion about what exactly ring fencing means.

Example question: " How does this effect landlords where their sole income is rental income ?"

Remarkable ignorance.

maybe we have an intelligence crisis?

[artemis]

Worrying times. My accountant suggested to me yesterday that ring fencing could appear in the forthcoming budget. If so, I will simply increase the rent hurting the very voters Taxcinda depends upon.

There may be something in the Budget this month, but it is too late to take effect for the current tax year. Mr Robertson has said it will be introduced in 2019 which means next tax year. The details are not yet decided but Labour's election policy was for it to be phased in over 5 years. See below, for the policy which has IMO many flaws, misinformation and unintended consequences.

If the increased tax is as stated then the minuscule amounts seem insufficient for the level of market disruption to follow.

Losses from rental property investments will be ring-fenced. Speculators will no longer be able to use tax losses on their rental properties to offset their tax on other income, a practice called negative gearing. This move has been recommended by the IMF and the Reserve Bank.

The biggest users of this loophole are large-scale speculators who own multiple rentals and use losses on new acquisitions to continually reduce their tax. The speculators’ tax loophole helps them outbid home buyers for properties because the taxpayer effectively subsidises part of their cost of servicing mortgages.

Ending this loophole will not affect most people who have bought a single rental as a long-term investment, because most of them are not using it. Those that do use this loophole generally only do so for a few years after purchase.

It is time to end the subsidisation of speculators by taxpayers. Removing the speculators’ tax loophole will put home buyers on a level playing field and give them a fair shot at buying a home.

For a smooth transition, this change will be phased in over five years, with loss deductibility reducing by 20 per cent a year.

Removing the speculators’ tax loophole will save taxpayers around $150 million a year once fully implemented. Total savings in the first ten years will be $1.2 billion. Labour will use this money to help 600,000 families heat and insulate their homes to modern standards.

[Perry]

Well, perhaps - just perhaps - the dimbulbs are getting an inkling of the difference between a PI and a speculator?

[Fuzzywuzzy]

"Labour's election policy was for it to be phased in over 5 years."

Hopefully the Nats will have put an end to such crackpot nonsense at the next election.

[donna]

Here is a good article clearly articulating the increased costs of providing a rental property in NZ.

https://thespinoff.co.nz/business/01-03-2018/pushing-landlords-out-will-only-make-renting-more-expensive/

And finally some data to show that there isn't a net sum game of supporting first home buyers over landlords. from the article, 3.9 ppl in the average rental vs. 2.1ppl in the average owner occupied home.'


great job Flyer & team

Yes agree a very good article and one that won't be talked about in other media as it is not popular among the masses who are looking for someone to blame and LLs are a soft target. It's everywhere I see the UK are still doing it too.

Also wanted to say - what's not been calculated is the impact on the small businesses who provide a service to LLs e.g. the property maintenance sector. For every rental property that comes offline how much $$ is not being passed onto this group and property managers etc. I reckon the hit to the cottage industry economy is substantial.

cheers,

Donna

[Don't believe the Hype]

Spot on Donna - we've spent close on $0.5m on tradies (ex materials) this year. If we weren't LL's some of this work would be done by weekend DIYers - some even illigally (I.e DIY elect/plumbing). Some wouldn't have been done as it's not required (heat pumps/insulation) some wouldn't have been done because ignoring costs too much and OO's often put work off till they have spare cash.

[Perry]

As I observed in another thread, all gummints - this one as much as any - are oblivious to the Law of Unintended Consequences.

Their one and only consequential concern is "what must we do / avoid, in order to get re-elected?"

[Bob Kane]

Removing the speculators’ tax loophole will save taxpayers around $150 million a year once fully implemented. Total savings in the first ten years will be $1.2 billion. Labour will use this money to help 600,000 families heat and insulate their homes to modern standards.

This is wrong, isn't it?
Ring fencing a loss doesn't wipe the loss - I can be used in the future to reduce the tax liability when the property makes a profit.
So instead of getting a tax refund now, you pay less tax in the future.
Over time, no change in the tax revenue.
However, Labour intends spending this money now.
How will they balance the books when there is less tax revenue in the future?

[Perry]

You Don't Have To Be Stupid To Believe It, But It Helps

That will be a future gummint's problem, of course.

And shibboleth sophistries (about heat and insulation) have been exposed, time and time again.

Umpteen families and children have grown up in state houses with no carpets, no insulation, inefficient open fires and water-guzzling bathtubs instead of showers.

And that was before global warming removed the need for that modest warmth from those open fires!

[Bluecoat]

I don't see it ending LTC. LTC's can still be a great structure for other reasons, such as if there is a profit.

Ross

Can be but if LTC is setup for high earning shareholder holding a majority of shares then reversing it will be seen tax avoidance wont it?


Ross, I saw your comment on selling LTC shares to the Trust rather than properties itself - what are the main reasons for this? It can free the current LTC to hold any loss making ones until it turns to profit. Both I think will have the same effect on Bright Line test and Ring fencing.

The new Ring Fencing rules now make LTC equal playing field with Trusts so no added benefit having a Trust except asset protection.

[Rosco]

Removing the speculators’ tax loophole will save taxpayers around $150 million a year once fully implemented. Total savings in the first ten years will be $1.2 billion. Labour will use this money to help 600,000 families heat and insulate their homes to modern standards.

I think it is often missed that the losses carry forward. So in many cases the tax refunds not paid out in the early years, will be offset by less tax paid later. So for a true long term hold investor, it is going to save the taxpayers $0

So will help 0 families.

Ross

[Rosco]

Not quite sure what you mean sorry.

Will try to put an example to show;

Ie 10 rentals in LTC.

If sell the rentals to Trust, looking at $1,000 of legal fees for each buy and $1,000 of legal fees for each sell. So probably $20k of legal.

If sell the shares to Trust
- effectively still owned by the Trust
- need to check deemed sale, and brightline effects. But often is nothing and easy, with little or no tax due.
- Cost under $500!

Won't fix ringfencing (or at least unlikely), but gives asset protection and great structure to distribute income to lower earners, charities etc

Ross

[Perry]

You have it nailed, Ross - we need to define this correctly.

Labour to prevent LLs & PIs from claiming tax deductions in the year they occur. All other businesses will be exempt.

Or . . .

Labour forces LLs & PIs to carry tax losses forward, until they make a profit. All other businesses will be exempt.

How does that look?

And, of course, what is called a tax 'break' is nothing of the sort.

[Wayne]

You have it nailed, Ross - we need to define this correctly.

Labour to prevent LLs & PIs from claiming tax deductions in the year they occur. All other businesses will be exempt.

Or . . .

Labour forces LLs & PIs to carry tax losses forward, until they make a profit. All other businesses will be exempt.

How does that look?

And, of course, what is called a tax 'break' is nothing of the sort.

How many other business are structured as LTC to be able to flow the loss through?