IRD Against Interest Deductibility Rules - Telling For Tenants

Tim Kearins, Owner of Century 21 New Zealand.

The Government’s interest deductibility rules for landlords have improved slightly since they were first announced in March. Nonetheless, from tomorrow, they will put unwanted pressure on residential rents already at record high levels,” says Tim Kearins, Owner of Century 21 New Zealand.

“Rising rents are not just the property sector’s prediction, but Inland Revenue’s – arguably the one organisation that’s got the most to gain! Its advice to Ministers earlier this month is as clear as daylight: Don’t do it,” says Mr Kearins.

His comments follow the Government confirming its proposal to limit the availability of deductions for interest expenses incurred by residential property investors from 1 October, phasing them out over four years.

“The Government’s forecasting an extra $1 billion revenue over the next four years as a result of these tax changes. Given the pandemic that will no doubt be well spent, but is rental housing really the place they want to gather more revenue from?”

Also announced this week was an exemption for new purpose-built rentals with deductibility for up to 20 years. Cabinet is set to consider an even longer period for large build-to-rent developments. However, for most Kiwi landlords the rules take effect on Friday.

“Landlords have been waiting for clarity, so they now have that. However, this serves up extra costs just when the sector doesn’t need them. Inevitably, these costs will get passed on to New Zealand’s 1.5 million tenants. Unfortunately, it will be a tenants’ tax,” says Mr Kearins.

The Century 21 leader points to the ‘Regulatory Impact Statement: Limiting interest deductibility on residential investment property’. Authored by Inland Revenue, and dated 8 September, it advised the Ministers of Finance, Revenue, and Housing against going down the deductibility route at all.

After considering four options: ‘Inland Revenue has advised against any of these options to deny or limit interest deductions and prefers the status quo to all options. It considers that additional taxes on rental housing are unlikely to be an effective way of boosting overall housing affordability.

‘While they will put downward pressure on house prices, they will put upward pressure on rents and may reduce the supply of new housing developments in the longer-term. The benefit of increased housing affordability for first-home buyers is outweighed by negative impacts on rents and housing supply, high compliance and administration costs for an estimated 250,000 taxpayers, and the erosion of the coherence of the tax system,’ Inland Revenue advised.

“Against the advice of their own tax department and experts, the Government soldiered on regardless. Let’s not also forget this move comes hard on the heels of the Residential Tenancies Amendment Act which was the biggest overhaul of our tenancy laws in 35 years,” he says.

“Just when our property managers are screaming out for more properties to rent given the huge demand, it becomes less attractive for ‘mum and dad’ investors to provide the stock. Many are instead heading to the share market or commercial property syndications.

“Credit to the Government for trying hard to encourage new builds to fill the void. However, the rental availability gap will only widen in the short to medium term. That’s where the real pain will be for tenants,” says Tim Kearins.

www.century21.co.nz

Note: To read Inland Revenue’s full 36-page advice to the Government, please visit: https://taxpolicy.ird.govt.nz/-/media/project/ir/tp/publications/2021/2021-ris-interest-deductibility/2021-ris-interest-deductibility-pdf.pdf?modified=20210927011748&modified=20210927011748

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