Ring Fencing Matters

[Rosco]

Ring Fencing update

Ring Fencing Update

Yesterday (5^th December) The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration and Remedial Matters) Bill was introduced in Parliament. http://taxpolicy.ird.govt.nz/news/20...ill-introduced

The bill contains other measures including Ring-fencing loses on residential rental properties! Obviously this is very important to property investors, and not just “other” measures.

At this stage the legislation is just draft, but it does give a little more information that we can start working with.

Key points are;

• For the 31/3/2020 tax year, or from 1/4/19 for most rental property owners. This is quicker than some initial indications and will not be phased in over a number of years.
• Apply to “residential land”, which includes bare land which could have a residential dwelling built on it – Basically residential rental properties.
• Does not include
  • Farms
  • Commercial property
  • Main home
  • Holiday homes with mixed use
  • Trading properties
  
  
• Losses would carry forward and could be offset against future rental profits (could be from a sale)
• Specific rules to make it harder to structure around (interest ring fenced where borrowed in parent entity)

Important things to consider

• Maintenance coming up. It might be beneficial to complete before 31/3/19. Especially for bigger items like painting, new bathroom vanity, toilet, shower, kitchen cupboards
• Portfolio or property-by-property basis – We will put more information out about this over the next few months and when the election is required.
• Basics – how do you turn your rentals from negative to positive cashflow? Some possibilities
  • Review rent
  • Break mortgages to get lower rates
  • Add value
    • Subdivision?
    • Minor dwelling?
    • Renovations to get more rent?
    • Garage into sleepout?
    • Extra bedroom?
    
    
  • As above do preventative maintenance early, before ringfencing comes in, rather than later once it is in.
  
  
• Review your tax structure

1/4/19 is going to come up very fast!

If you make a profit from rentals – no issue!

We will also be keeping you updated!

Kind regards Ross

[PC]

Rents are going up again.

[Rosco]

Ring Fencing shouldn't directly affect rents. It's supply and demand.

But if more people sell as a result of ring fencing, then less rentals available so less supply = higher rents

Ross

[Don't believe the Hype]

I agree with PC - whilst there is an element of supply and demand when all owners know with a level of certainty that everyone’s costs are going up they can confidently take a price increase with little risk of their competition not following.

this is more of an input cost shock vs. competitive market forces at play.

the government is expecting investors will want to chase a better yield, their theory is that buyers won’t offer as much money for any given property. While this might be true for the small percentage of landlords who sell in any give year, their is a direct cash flow impact on the huge majority of landlords who are not selling. They will reduce the cash flow hit by pricing rents up.

[Rosco]

Some landlords have owned for years, and are debt free. So positive cashflow, paying tax = no effect

Some landlords have been buying or creating positive cashflow portfolios over last few years, paying tax = no effect

Some landlords own in Trusts with no other income, so are already kind of ring fenced = no effect

Many landlords are trying to change from negative to positive. Higher rents over last year or so, lower interest rates, smart additions of value. So if these turn from negative to positive = no effect from ring fencing


Overall I think saying "the huge majority of landlords" is not correct.

Ross

[Don't believe the Hype]

I agree with your premise that SOME landlords are positive due to the reasons you’ve highlighted. Me too. But if the market moves up driven by those that bought on low yields I will certainly follow and turn my already positive flow into more positive flow.

Why would you not take the opportunity to improve profitability?

I still maintain that the majority will be impacted. The sheer size of the Negative gearing tax write off which was $150m from a 2017 article I just found supports my claim that there will be an impact on the huge majority.

if it was just an impact on a small number of landlord it would make no sense to implement the change.

[Rosco]

"sense" - from a government? I presume this was a joke?

As with all things, time will tell. But obviously with shortage already would expect 5% or more growth in rent over next 12 months anyway.

Ross

[artemis]

The Minister's commentary, link below, is easier to understand than the Bill for us ordinary folk.

About homes in trusts - I think this paragraph says only one property in a trust can be exempted from ring-fencing. Since there are hundreds of thousands of trusts in NZ many unsuspecting trustees, settlors and beneficiaries may be affected.

A significant number of family homes in New Zealand are owned by family trusts. The
“main home” exclusion therefore ensures that a home owned by a trust can be regarded as a
main home. Like with the bright-line rules, it is proposed that a dwelling owned by a trust
only be considered a main home (so not subject to the deduction ring-fencing rules) if it is
the main home for a beneficiary of the trust, provided that a principal settlor of the trust does
not have a different main home. This restriction would ensure that trust ownership cannot be
used to claim multiple properties as main homes, and so not subject to the loss ring-fencing
rules.

Also unsuspecting owners of a single rental property need to be aware that if they sell up while carrying rental losses forward they will forfeit them. Again I think so, but it isn't very clear so I might be wrong.

http://taxpolicy.ird.govt.nz/sites/default/files/2018-commentary-argosrrm-bill.pdf

[Keys]

Also unsuspecting owners of a single rental property need to be aware that if they sell up while carrying rental losses forward they will forfeit them.

I too, believe this is part of their plan. I wonder if the ring fenced losses will be transferable to the new investor/owner.

[artemis]

I too, believe this is part of their plan. I wonder if the ring fenced losses will be transferable to the new investor/owner.

LOL! Bet not!

[Rosco]

The Minister's commentary, link below, is easier to understand than the Bill for us ordinary folk.

About homes in trusts - I think this paragraph says only one property in a trust can be exempted from ring-fencing. Since there are hundreds of thousands of trusts in NZ many unsuspecting trustees, settlors and beneficiaries may be affected.

A significant number of family homes in New Zealand are owned by family trusts. The
“main home” exclusion therefore ensures that a home owned by a trust can be regarded as a
main home. Like with the bright-line rules, it is proposed that a dwelling owned by a trust
only be considered a main home (so not subject to the deduction ring-fencing rules) if it is
the main home for a beneficiary of the trust, provided that a principal settlor of the trust does
not have a different main home. This restriction would ensure that trust ownership cannot be
used to claim multiple properties as main homes, and so not subject to the loss ring-fencing
rules.

Also unsuspecting owners of a single rental property need to be aware that if they sell up while carrying rental losses forward they will forfeit them. Again I think so, but it isn't very clear so I might be wrong.

http://taxpolicy.ird.govt.nz/sites/d...osrrm-bill.pdf

1) Trust ownership - generally if you have rentals in a Trust making a loss, that loss is ring fenced anyway. Under current rules if the Trust had other income could offset, but most don't!

2) single rental property owners - if you have losses, and always have losses and never make a profit, then why did you buy it? If to sell for a profit, then aren't you a trader!
In my opinion this part is fair. You should not be able to run a loss for years and years, never make a profit, and then sell to get a tax free capital gain.


Ross

[artemis]

1) ...... 2) single rental property owners - if you have losses, and always have losses and never make a profit, then why did you buy it? If to sell for a profit, then aren't you a trader!
In my opinion this part is fair. You should not be able to run a loss for years and years, never make a profit, and then sell to get a tax free capital gain.

Ross

In my experience it takes quite a few years for a rental to become profitable under normal circs. Not a major if there is a long term plan. However, under the current government the goalposts are shifting. Already some changes and a lot more proposed. That long term plan is no longer the girl we married. So to ask, why buy in the first place? There is an answer.

That is good for the landlords that don't sell, ECON101. But some landlords will decide to take their ball and go home.

Trademe reports their Auckland for sale listings up 23% in October compared to 2017. 14% nationwide. That is a huge leap, esp Auckland - politicians proposing rule changes should ponder that number and find out who is selling and why. And who is buying. Some sellers will be landlords, but more worrying will be new builds if developers can't sell in a reasonable time frame.

[sidinz]

2) single rental property owners - if you have losses, and always have losses and never make a profit, then why did you buy it? If to sell for a profit, then aren't you a trader!
In my opinion this part is fair. You should not be able to run a loss for years and years, never make a profit, and then sell to get a tax free capital gain.


Ross

What about the Mum and Dad investors who are propping up their rental, planning for it to be neutral after a few years and then cashflow positive by the time they retire, to provide a nice, wee supplement to their super? Only while it is still negative, the main earner suffers a catastrophe and now can't work anymore. They can't afford to keep propping it up, so have to sell. Capital gains are minimal and now they can't use their accumulated tax credit. They are well and truly screwed over by a change in circumstances.

The thing is, shit happens to people and plans have to change. Anything implemented to punish the 'guilty' also punishes the innocent.

[Nick G]

Sell the entity not the asset.

I too, believe this is part of their plan. I wonder if the ring fenced losses will be transferable to the new investor/owner.

[BlueSky]

That's right , some have purchased with hard earned savings which was taxed as well.

What other forms of investments have ring fencing tax?