More 'tax cuts for landlords'? Act reveals significant policy

Act is pledging to reinstate a tax rule that could benefit residential property investors to the tune of $300 million a year. 

The party wants to allow investors to once again deduct losses from their rental properties from all their income, including their wages/salaries. 

Investors could do this until a loss ring-fencing rule was introduced by the Labour-led Government in 2019 in a bid to make the tax system “fairer”. 

Under this rule, which the coalition Government kept in place, an investor who suffered a $10,000 loss on their rental property over a year and received a $100,000 salary from their unrelated day job would have to pay tax on $100,000. 

They could then carry their $10,000 rental loss forward to the following year. 

Under Act’s proposal, the investor would be able to deduct the $10,000 loss from their salary and would only have to pay tax on $90,000. 

Act leader David Seymour pitched the change, which would make property investment more attractive, as being good for renters. 

He warned his policy would provoke “the usual cries of ‘tax cuts for landlords’”. 

However, he said there was “no such thing as a tax on landlords that renters can safely ignore”. 

“When Labour made rental housing more expensive to provide, tenants faced the consequences,” Seymour argued. 

“Labour’s policy meant legitimate losses could not be offset when cashflow is tightest, forcing landlords to wait until a property became profitable – when cashflow relief is needed least. If cashflow is tight, it’s much harder to carry out essential repairs if the tax deduction is delayed for years. 

“The only way to secure more affordable housing for renters is to build more homes and reduce the costs that get passed through to renters.” 

Seymour said rents, which soared under Labour, flatlined under the coalition Government. 

He also argued changing the rules back to how they were before 2019 would make the tax system more consistent. 

“If you’re a sole trader or make other investments, such as commercial property, your losses can be offset against your personal income,” he said, arguing that allowing residential property investors to make these deductions would “level the playing field”. 

When the Labour-led Government changed the rules in 2019, it argued it too was levelling the playing field. 

However, the playing field it referred to was between property investors and owner-occupiers, who couldn’t deduct the expenses they incurred from owning their homes from their wages/salaries. 

Inland Revenue and Treasury recognised this in the regulatory impact assessment they prepared for ministers in 2018. 

They noted that without a change, investors could have part of the cost of servicing their mortgages subsidised by the reduced tax on their other income sources, helping them to outbid owner-occupiers for properties. 

The agencies recognised the process of negative gearing – investors reducing their taxable income with rental losses – had become relatively widespread in the New Zealand rental market, with 40% of taxpayers with residential investment property reporting rental losses and an average annual tax benefit of $2000. 

“We expect the practice of negative gearing of rental properties to continue if no further action is taken,” Inland Revenue and Treasury said. 

While the agencies said the magnitude of losses claimed depended on the state of the housing market, they noted numerous other countries had some form of loss ring-fencing of residential property. 

Coming back to Seymour, he clarified Act would abolish loss ring-fencing for existing homes and new builds. Losses already ring-fenced would remain subject to the existing rules. 

Act expected the policy to cost the Crown $246m in its first year, rising to $303m in its fourth year. 

It said these figures were based on Budget 2018 numbers, adjusted for the increase in the size of the economy.