Scrapping rental property tax breaks could send vulnerable "mum and dad" investors broke, rather than hurt rich property speculators, says a leading accountant.
The claim comes as investors are warned to be ready for the new ring-fencing rules that would prevent people who run rental properties at a loss from claiming this as a tax break against their other income.
Although they have not yet been officially passed by Parliament, the changes are set to be backdated to April 1.
But Matthew Gilligan, the managing director of accounting firm Gilligan, Rowe and Associates, said about 70 per cent of his typically wealthier investor clients weren't using the existing tax breaks.
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Instead, the breaks were most beneficial to low-income, mum and dad investors — meaning these families would be hit hardest once the tax breaks were scrapped and when interest rates rose, he said.
At present, people who own investment properties which lose money — because the rental income is less than expenses such as mortgage interest payments, rates and property repairs — can offset that loss against their other sources of income, such as wages or from a business.
This lowers an investor's overall taxable income and, consequently, their tax bill.
The Government wants to end the tax breaks because it believes they unfairly help speculators and wealthy investors outbid first-home buyers.
Under the planned law change, any losses on an investment property could no longer be used to offset other income. Instead, losses could only be carried forward to reduce property income in future years, if the property in question begins to produce a profit, or in some cases to offset tax on the sale of a property.
"This is going to serve poor people, low-income people, low net-worth people up as insolvent dishes to rich people," said Gilligan.
His warning of rich buyers pouncing on properties being sold off at discounted prices by the more vulnerable comes as the nation's home ownership rates have plummeted to their lowest levels in 60 years.
Many young Kiwis now feel priced out of housing markets such as Auckland.
The fall in home ownership has led the Government to look at a wide array of changes — including ring-fencing and a now-rejected capital gains tax — to help level the playing field for first-home buyers.
But opponents of ring-fencing question whether it is the right tool to help.
Even Inland Revenue has admitted it is not easy to predict its impact.
The tax department has estimated that about 40 per cent of rental property owners make losses on their properties at any given time, and they claim an average $2000 back in tax.
This added up to about $190 million in losses claimed as tax breaks each year.
First-home buyers, by contrast, don't have access to the same tax breaks.
Despite this apparent inequity, Inland Revenue said it had "low" confidence that scrapping the tax breaks would actually help first-home buyers compete with investors or lead to improved home-ownership rates.
Gilligan argued that far from helping, the loss of the tax breaks was more likely to hurt the economy.
He said the current tax breaks acted like a pressure valve for the banking system.
It let out some of the steam, or reduced the pain an investor felt as interest rates went up, because rather than having to default on their loans, they had more breathing room to claim the higher rates back via tax breaks.
Wealthier investors needed this buffer less because they typically had paid off more of their home loans, meaning they probably had lower interest payments and a positive cash flow from their rentals, Gilligan said.
"So [ring-fencing] is not an issue at the moment, it's when interest rates go up that lower-income people get hurt," he said.
Other critics say ring-fencing wouldn't have been necessary at all if a capital gains tax had been brought in.
This was because with a capital gains tax, rental property tax breaks would have been largely recovered by the capital gains tax when a property was sold.
In a submission to Parliament, PwC New Zealand director Sandy Lau had called for ring-fencing to be delayed until there was clarity around the capital gains tax.
"In our view, to require taxpayers to comply with such complex rules for a potentially short time before they are replaced is inefficient and results in undue compliance costs," she said.
Revenue Minister Stuart Nash earlier told reporters he was mindful of the concerns but couldn't comment on hypotheticals because at that stage the Government hadn't made a decision on the capital gains tax.
However, Gilligan said the confusion was only likely to line the pockets of accountants.
"As I've said before, a vote for Labour is a vote for Gilligan, Rowe and Associates and all other accountants," he said.
- New Zealand Herald
