Is there any particular reason why Jacinda Ardern announced her Cabinet reshuffle of the housing portfolios on the 27th of June? Probably not. But a cynic might draw the conclusion that she did so to distract attention away from the devastating effects of a piece of legislation, passed in Parliament the previous day, which ushers in one of the biggest changes in housing policy in years.
Bigger than KiwBuild, bigger than the decision to dump capital gains tax, bigger than the ban on foreign buyers.
If you missed it, you’re not alone. So did almost everyone else.
Indeed, nothing in the name of the bill gave any indication of what was hidden away in its small print. But introduced under the innocuous name of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill were provisions that have ended the ability of property investors to offset rental losses against other income. In doing so, this bill will unquestionably have a greater impact on the supply of rental accommodation in New Zealand than any other housing legislation passed, in this country, in the past half century.
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Let me explain why.
Up until this bill was passed, property investors who made a loss on a rental property could offset that loss against other income which, for most investors, was from a small business or a 9 to 5 job. This means that someone who owned a rental property on which interest, insurance, rates, maintenance and other costs exceeded the income from rent on the property could either deduct the difference (the loss) from their other taxable income, or be eligible for a refund if they had already paid tax elsewhere. It isn’t a subsidy or a loophole, it’s a standard tax practice that is applied broadly against hundreds of thousands of businesses across New Zealand and is based on the principle that the costs associated with establishing and running a business should be deductible from overall income.
But not anymore. With the passage of this new bill rental property tax losses will now be ring fenced, which means that they can be used only to offset taxable income from rent. That might sound reasonable – until you realise that investment property in the major metropolitan centres (including Auckland and Wellington) generally makes a loss for up to ten years before it starts making a profit. In a sense, such property investors are actually subsidising their tenants – a claim which will draw howls of outrage from the usual quarters, but is nevertheless, true.
Even with the previous ability to claim losses against other income, many landlords are still out of pocket for years. According to Inland Revenue, 116,000 property owners declared an average property investment loss of $7,138 on earnings in the 2016/17 year. The introduction of this draconian legislation means that these people will now not only make a loss but will also pay over $2,000 more in tax, per year, than they should. At the same time, the Government will pocket a windfall of over $230 million, per year, by not refunding investors for overpaid tax.
The consequences of this law change are entirely predictable. Some landlords will look to recover this additional cost through the most obvious source – rent. This means that rents will rise even more at a time when we’ve already seen higher rent increases, over the past two years, than we saw in the previous ten. Others will see this as the final straw in a hostile rental environment which has already seen their costs increased through new legislative and compliance requirements. Those investors will sell up and leave the market, meaning that the supply of rental accommodation will drop at precisely the time when the country needs more rental housing than ever before.
Most alarmingly, this will provide yet another reason not to invest in rental property in the first place - a turn of events which will certainly compound an already serious market shortage.
Taken in context with the Government’s other rental housing policies and initiatives, it would be difficult to deliberately design a set of policies which would more effectively destroy the rental sector and remove the incentives which have made private citizens the dominant providers of rental accommodation, in this country, for over half a century.
You’ve been warned.
- Ashley Church is the former CEO of the Property Institute of New Zealand and is a property commentator for OneRoof.co.nz. You can email him at [email protected]
