“If you liked it, then you should’ve put a ring on it”. Well, it seems, here in New Zealand, the government doesn’t like it and are about to stop it by putting a ring on it. What am I alluding to? I’m talking about the proposed tax changes which, if they go ahead, will mean you’ll no longer be able to use losses from your rental property against your other income such as salaries and wages.
Ring-fencing is simply the technical term, used by chartered accountants and tax-boffins to describe this approach. In practical terms, for many people, it may be the end of receiving tax refunds from some of the tax paid on their wages. Anyone who’s been using these tax refunds to help fund rental property cash-deficits may get a little ‘Antsy’ about all of this but it’s unlikely to be anywhere near the doomsday the media is making it out to be and here’s why:
- Some would say the main hit has already been taken because the proposal isn’t entirely dissimilar to the changes which were made to depreciation not so long ago. Prior to that, the depreciation claimed on buildings boosted many a tax refund and when the claim was no longer available, there was a significant downsizing of tax refunds for rental property owners.
- Ring-fencing doesn’t mean your losses suddenly go ‘poof’ and disappear, never to be seen again. Generally, the losses will simply accumulate until you’re ready to use them when the rental property becomes cash-positive and profitable. Often, standard tests are required to maintain losses but thankfully losses don’t come with an expiry date. It’s simply a matter of timing.
Finally, don’t forget the big picture. From a commercial perspective, the tax position of capital gains remains unchanged. Ring-fencing is unlikely to have any negative bearing on the capital gains made from selling the rental property. Typically capital gains have been the primary factor in property investment and in many cases, these will still significantly outway any changes brought about by the proposed ring-fencing reforms.
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Boutique Financial Chartered Accountants & Business Commentators
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