Rental Properties and Taxes.

In New Zealand one of the most common forms of investment is property to the point where some economists feel that the nation’s economy is adversely affected. The thought was that the government might introduce taxes that would reduce the investment potential of property and so cause New Zealanders to think of other areas of investment.

As it turned out John Key announced that the Government would not instigate these taxes (not now anyway). Changes that are expected in 2010 are;
► An increase in GST from 12.5% to 15% (A 2.5% lift in GST would generate a further $2.3 billion each year for the government).
► Cuts to personal taxes.
► Up-front increases in benefits, superannuation and Working For Families payments.

It is hoped these changes will add another $4Billion a year to the government’s income, and encourage people to save and invest (because of the increased income due to tax cuts) rather than just spend (because of the increase in GST).

The decision not to instigate a land tax is good news for home owners but there are other changes possible for property investors and owners of rental properties. John Key said that Government will look to fix up loopholes in taxation on investment properties, though no details would be released until the Budget in May.

So, what are we expecting?

The Government has ruled out a land tax and a capital gains tax. That means, the area the Government is likely to target is depreciation and how much in the way of losses can be claimed.

There are two types of depreciation, one on buildings or improvements and the other on the chattels within a property. The change, we understand, will only apply to buildings or improvements – it is expected the Government will remove, or greatly lower, the ability to claim depreciation on rental properties. The rationale for this is that the ability to claim depreciation means rental owners are, in effect, 'double-dipping; They win by getting a tax advantage through the depreciation of their property and then win again when they sell their property at a higher price than they purchased it.

The second change John Key hinted at it that of ring fencing losses on rental property to a certain level or restricting their offset to property income. At present owners of rental properties can use a profit made on a rental to offset losses made in other areas of their finances.

What the Government will finally decide is uncertain but Property Investors’ Groups are warning them to be cautious suggesting; firstly, that many people have their only form of superannuation tied up in this sector and secondly, that the Government should be encouraging the landlords to continue improving their properties and so improving our housing stock. The danger of these changes is that if it becomes unattractive to invest in property, there will be fewer investors which may well lead to a rental accommodation shortage and hence higher rents.

All we can do is wait and see what the Government decides.

*Definitions:

Land tax = tax on the value of land. The tax is based on the land's value (the higher the value, the higher the tax). This ignores buildings, improvements, and personal property.
Capital gains tax = tax charged on the profit made from the sale of some asset. So, in the case of land, if you made a profit on the sale of a property, you would be required to pay tax on the profit gained.
Depreciation = the reduction in the value of an asset due to usage, passage of time, or wear and tear.