Ring Fencing Matters

[Rosco]

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

Lots of businesses and farming do it in another manner. They pay themselves extremely low wage, so that the business doesn't have a loss!

Ie lots of farmers get a $30k wage a year as the business owners, as otherwise farm would have a huge loss (would then use LTC!). Same with business, lots of business don't pay the owner a fair wage because they don't make a profit.

Ross

[Bluecoat]

Just curious , quite a few polled "

So seriously, I'll be re-structuring"

What will be your typical examples?

[flyernzl]

I have now been able to view the official IRD records of tax paid by rental property investors.

The rental property industry paid tax on a net rental income of $1.444 billion dollars in 2016, the latest year they have data for.
In only one year over a 36 year period - 2009 - was there an overall rental income loss.
Clearly we are net tax payers.


The income from rents has been relatively constant from 2013 to 2016, increasing just 5.8% over this period while rental prices have increased 14.3%. This indicates that rental price increases appear to be mostly caused by cost increases.

[Perry]

Ahhhh, but never let the facts get in the way of a good political spin. [With or without sand-papered balls]

(Well done, obtaining those figures, Peter.)

---

PS. Have you got a link to an IRD web site with that chart on it?

[flyernzl]

Another possible downside of the ringfencing proposals lies in the risk of another widespread natural disaster (think Christchurch earthquakes).

If a landlord has most or all of their properties damaged and unrentable they may well be thrown into a loss situation - the rates etc still keep piling up.
Sure, they may well have some loss of rents insurance cover, but as we all know that only runs for a fairly short time and (as we have seen) the repairs after such an extensive event can take years rather than months.

So -with no fault on their part - landlords could end up running at a considerable loss and be unable to gain tax relief under these proposals.

Not mentioned anywhere in the briefing papers!

[PC]

Wairarapa farmer Matt Wyeth reckons if New Zealanders knew how many people were employed upstream from farms they would be more appreciative of farming.

Wyeth, from Spring Valley Enterprises near Masterton, said 30 people had jobs as a direct result of a farm.

https://www.stuff.co.nz/business/farming/103572213/no-shame-in-30-people-employed-offfarm-for-every-single-farm

How many people does a rental employ?
PMs, Tradesmen, accountants, Bankers, Builders, Meth testers & cleaners - probably a small farm each one!

[Rosco]

Just curious , quite a few polled "

So seriously, I'll be re-structuring"

What will be your typical examples?

It depends on the situation. One example where you could restructure is where there is a business and rentals. Might be possible to sell the shares in the business to a Trust, the Trust borrow and then the interest would be deductible. Use the cash to repay rental lending, so turn negative rentals into positive.

Ross

[Don't believe the Hype]

I've seen a couple of articles suggesting ring fencing will apply by individual property, Not applied to a portfolio.

anyone know for sure?

[artemis]

I've seen a couple of articles suggesting ring fencing will apply by individual property, Not applied to a portfolio.

anyone know for sure?

Details not decided yet (publicly anyway) but the IRD issues paper indicates their opinion = portfolio. Much more complex for IRD to do individually, would need serious system changes and all that goes with those. Portfolio basis gives much more flexibility to owners of multiple properties. Investors with only 1 or 2 will be more impacted as they lose any losses once the last place is sold. Probably - no details but would be logical.

Submissions on the issues paper close tomorrow. IRD is basically asking for opinions on various aspects, eg portfolio or per property.

Labour original policy was to introduce over 5 years rather than sudden death next tax year. I suspect they will stay with that to mitigate loss of rentals to the pool. Good luck with that, may already be too late.

I would expect National to overturn this if they lead the next government. No downside really for them as even if investors and traders have not been National voters before they will be now LOL. So policy could be in place for just one tax year.

[flyernzl]

We have all seen the political statement” 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.”


Removing the emotive connotations implied in the words speculator and loophole, there seems to be an intent that the ring-fencing proposals will result in an increase in the tax-take, and that the Government can then use this additional funding to upgrade properties.


To show how inaccurate this statement is, I have run some figures on a typical investor's journey.
Someone on a salary of $80,000 pa buys a rental property and starts out by making a loss of $5000 pa on his investment.
Over time he can increase the rent by around $20 per week so he breaks even in the 5th year and makes increasing profits after that time.

Currently he can deduct his initial losses off his other income, but under the ring-fence proposals he could not do this - but he can carry those losses forward to offset against future profits.

So over an 11 year time-frame we have the following situation:



As is evident, under either situation he pays no more and no less tax. Ring-fencing would mean that he pays his tax earlier, but the total amount over the life of the investment is exactly the same, not a dollar more.

So the Government will have no more dollars available to "use this money to help 600,000 families heat and insulate their homes to modern standards.”"

[Don't believe the Hype]

We have all seen the political statement” 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.”


Removing the emotive connotations implied in the words speculator and loophole, there seems to be an intent that the ring-fencing proposals will result in an increase in the tax-take, and that the Government can then use this additional funding to upgrade properties.


To show how inaccurate this statement is, I have run some figures on a typical investor's journey.
Someone on a salary of $80,000 pa buys a rental property and starts out by making a loss of $5000 pa on his investment.
Over time he can increase the rent by around $20 per week so he breaks even in the 5th year and makes increasing profits after that time.

Currently he can deduct his initial losses off his other income, but under the ring-fence proposals he could not do this - but he can carry those losses forward to offset against future profits.

So over an 11 year time-frame we have the following situation:



As is evident, under either situation he pays no more and no less tax. Ring-fencing would mean that he pays his tax earlier, but the total amount over the life of the investment is exactly the same, not a dollar more.

So the Government will have no more dollars available to "use this money to help 600,000 families heat and insulate their homes to modern standards.”"

Mathematically you're spot on if you ignore the time value of money.

I guess though in reality and to make this assessment more accurate we need to get some data on how many investors hold a property for less than 11 years in this example as I would image in reality there will be those who hold for far shorter periods of time who in reality with ring fencing will not ever utilise the tax credits they've accrued. How much of the accruals that won't ever be used is a hard thing to identify as there are some many varying assumptions.

[Dunning]

From the Governments point of view they get more in the short term which they can then use for other projects. This has the effect of increasing the revenue that is received and can be spun as growth of the tax take and put Labour in a good light even though there is no change to the long term total amount of revenue generated. Ahh politics.

[Don't believe the Hype]

Smoke and mirrors

[PC]

I think the income side will go up a lot quicker now due to ring fencing.
Just more tax for the tenants to pay.

[Perry]

I don't warm to the expression: 'kicking the can down the road,' but that's what's happening.

If Labour is a one-term wonder (quite possible), the reduced tax-take in later years will be some other gummint's problem / fault.

Preferably the gNats - from Labour's perspective.

Mathematically you're spot on if you ignore the time value of money.

I don't know if the expression "time value of money" includes inflation, but that's another big factor in deferring tax losses.