What changes to tax ring-fencing mean for landlords
A few weeks ago, we touched on whether now is a good time to invest in property with changes around insulation requirements and tax law (the short answer – it depends on your personal circumstances). This week we delve further into the detail of the tax changes that affect all investment property owners as of the 1st of April 2019.
The legislation changes
On the 26th of June this year the “Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019” came into force. This piece of legislation covers many areas relating to taxation including changes to rental property ring-fencing which have broadly flown under the radar of most property investors.
Prior to this act, if a landlord operated a rental property at a loss, they were able to offset that loss against their personal income tax - which generally resulted in an income tax refund. This often occurred when the costs of a mortgage, rates and insurance exceeded the income generated through rent. With the changes made in the act, this loss can no longer be deducted against personal income and must be carried forward to a year when the property makes a profit to gain any tax benefit.
With this change, the rental cashflow of landlords will no doubt take a hit. Historically, the refund has been an important source of funds to cover significant costs such as insurance and rates. Without this refund these costs will need to be paid from existing cashflow upfront and could have potential knock on effects as quarterly and monthly insurance premiums incur higher costs than those paid annually.
3 Strategies landlords can use to respond
We’ve spoken with Andrew Nicol from Opes Partners about the strategies that landlords can use to respond to these changes. He suggested a three-pronged approach:
1) Refinance your mortgage to cut costs – The most significant expense of any investment property is its mortgage. Interest rates have fallen significantly over recent years. You may be able to refinance your mortgage to a better rate or switch from a principal and interest loan to an interest-only loan. Implementing this strategy should decrease your costs.
2) Purchase a positively geared property – A legitimate approach to respond to the ring-fencing changes is searching for higher income. That does not necessarily need to be within the properties you already own. If you were to purchase a property that has a surplus each week, you could then use that surplus to offset the increased costs you are now facing in your existing investments. If you would like more info on the differences between the different types of properties (and what kind of property might fit these criteria), check out Opes’ Epic Guide to Property Investment in NZ.
3) Increase rent – The other potential source of additional income is rent. When Australian lawmakers passed ringfencing legislation over a decade ago, landlords increased rents by 25% in 2 years. Seeing this, MPs repealed the law. This legislation makes it more costly to be a landlord, so, naturally, some of these costs will be passed on to tenants. Talk to your property manager to see whether there is any scope in your local market to increase rent.
Bonus strategy: Talk to your accountant to get personalised advice for your situation.
Moving forward with the changes
Across parliament there have been movements by both sides of politics which mean investment property ownership is increasingly being treated similarly to running a business rather than a source of additional personal income. Higher rental standards, increased scrutiny for Property Managers and these tax changes demonstrate that this trend is unlikely to change.
With this change in regulation it may mean that landlords need to take a more in-depth review of their finances and work with an Accountant to plan cashflow - as well as ensure that they are tax compliant and maximizing potential benefits.
Our team at FoxPlan Accounting & Wealth Management are more than happy to have a chat with you around investment property. Click HERE to email Blake.