I have delayed writing about the removal of the negative gearing, so I could spend more time thinking about what it will mean for property investors.
The Government’s issues paper addressing
negative gearing came out earlier this year and asked for submissions. Both the NZPIF and APIA made submissions on behalf of members.
The proposal outlined in the issues paper is that negative gearing will cease from the 2019/2020 year onwards. In brief, this means a residential property
investor will not be able to offset losses from rental property against other income, such as their salary. The issues paper suggests this will either
come in in one year or could be brought in over two to three years. The five-year time frame promised by Labour in the lead up to the election has
been removed.
There have been some strong opinions on this; with some people saying it is ridiculous to remove negative gearing, while others say the proposal does not
go far enough and that we should stop allowing deductibility of interest as an expense (don’t get me started on that!).
To illustrate the impact of removing negative gearing I thought I would give an example from my own experience. My first property investment initially
made a loss. The interest rates were a lot higher, there were some maintenance issues and being a new investor I made some wrong decisions around tenant
selection. The property made a loss but I offset it against my other income and received a refund. Let’s just use round numbers; I made a $1000 loss
and received $330 back as a tax refund, so I was down only $670. Over the years, the mortgage has been repaid, the rent has more than doubled and it
now makes a profit, roughly equivalent to the National Superannuation – which weirdly had been my original goal. I now pay tax on the income from this
property.
Should we be concerned about the removal of negative gearing? The effect of the change is that if a property (or property portfolio) makes a loss, it cannot
be offset against income from other sources in that year. Ultimately though the losses are carried forward and can be offset against profits when the
property does start making money. Over time the IRD should collect no more tax from removing negative gearing if the property ends up making a profit
– it is more a matter of money now or money later.
If I set up a small business at home and this made a loss I would be able to offset this against my other income and receive a refund as a result. I am
not sure why this should be any different for a property investment.
The effect on cash flow, of course, will affect new investors more than established investors whose properties are already profitable. It also may restrict
what investors are able to spend on maintenance. I recently have completed the accounts for my own properties for the last financial year. I spent
a bit of time analysing the numbers. One of my largest costs over the portfolio is repairs and maintenance. A lot of things went wrong this year, but
from a financial point of view, we were able to do a lot of the work. It averaged around $3000 per property; from plumbing and electrical to repairing
storm damage. (Regarding the storm damage, although I believed I had full cover the insurance company paid out only about a third of our costs. My
husband said it was “after the trickery of the insurance company”!)
Much of the maintenance work we did was preventative while some of it was in response to tenant requests. Currently, if I made a loss on the property investments
by doing such maintenance and repairs I would be able to claim this against my other income for the year. But, in the same circumstances after the
2020 year, I would have to carry the loss forward. My concern is that for some landlords this may mean the difference between doing or not doing maintenance
if there is no immediate tax relief. They might have to postpone the repairs until another year, increasing the risk that the property will deteriorate
and that vacancies might result.
I have never been a fan of buying rental property such that it makes a loss and you need the tax refund just to survive. I believe this is fraught with
danger, especially if you face unexpected expenses or vacancies. Losing the ability to negatively gear will mean many landlords will not have a tax
refund to assist them to upgrade or maintain the property or simply repay debt.
Ultimately investors are going to need to have a reserve fund, so in the years that they make losses, this fund will carry them through. We have now one
year to ensure our properties provide sufficient cash flow for the 2019/2020 year onwards, so any unexpected maintenance does not end up costing us
even more.
This is a guest blog contribution from APIA board member Amanda Watt with minimal edits by John Priest. Guest blogs are a way for APIA members to share their views and experiences with each other and do not necessarily reflect the views and position of the APIA. Matters covered in this article are intended as general information only. We recommend you to seek professional advice to navigate these tax changes when appropriate.
ABOUT THE AUTHOR
Amanda Watt
Amanda has been an active property investor for over 15 years. She is also a Chartered Accountant and Director of Shortland Chartered Accountants Ltd.
Amanda sits on the boards of the APIA as well as the NZPIF and is an active presenter in the property industry. You can reach Amanda at Shortland CA
on 09 890 9840.
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