Tax Alert - December 2018
By Robyn Walker
There is nothing like the release of a new Taxation Bill in the lead up to Christmas. This time around, it’s likely to be everyday New Zealanders who will feel the effects of the Bill in their back pockets when they’re doing Christmas shopping about this time next year.
The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill (“the Bill”) contains two fundamental tax changes, and some other remedial matters. The two substantive changes are:
• Introducing an offshore supplier GST registration system for non-residents selling goods to end-consumers in New Zealand. This change will see GST being charged on low value online shopping purchases which may currently escape the GST net. This change was covered in detail in our November 2018 Tax Alert.
• Introducing ring-fencing rules for residential rental properties (discussed below).
Amongst the remedial changes in the Bill are an amendment to the employee share scheme rules to deal with a financial reporting issue; amendments to the trust rules to ensure beneficiaries do not become settlors of a trust when allocated beneficiary income is retained in the trust; a clarification of how the distribution rules work for co-operative companies; clarification on the application of the common reporting standard; a change to how loss of earnings insurance proceeds should be taxed when there is an assignment of rights; a correction to the GST remote services rules; and a clarification to how GST input tax can be claimed for capital raising costs.
Residential rental ring-fencing of losses
Following on from consultation early this year and announcements in Budget 2018, the Bill contains the legislative details of new rules which will apply to residential rental property from the 2019/20 income year (from 1 April 2019 for most taxpayers).
The Bill may seem innocuous for landlords based on its title, but included within its ‘remedial’ matters are significant amendments to how taxable income will be calculated for rental properties. This change is expected to generate a further $190 million of tax for the Government each year from the 40 percent of property owners regularly claiming residential rental losses.
What is proposed?
The intended outcome of the Bill is that residential property investors will no longer be able to offset losses generated from rental properties against other income (for example salary and wages) to reduce their overall tax liability. To achieve this, property investors will no longer be able to claim deductions in excess of income arising from property. Instead those deductions will be carried forward until there is sufficient income from property (that is, the losses are “ring-fenced” and can only be accessed by earning property-related income in most circumstances).
For investors with more than one property, there will be an option to apply the rules on a portfolio basis (the default approach) or to elect to apply the rules on a property-by-property basis.
What is residential land for the purposes of these rules?
The existing definition of residential land used for the bright-line rules will apply. This definition encompasses land with a dwelling on it, land where there is an arrangement to build a dwelling on it, or bare land that may have a dwelling built on it under the operative district plan rules. Residential land is not limited to land in New Zealand and includes all land (as is the case with the existing 5 year ‘bright-line’ test). Excluded from this definition is farmland and land used predominantly as business premises.
Property held by widely-held companies is excluded from the rules. So too is property which is a taxpayer’s main home, property subject to the mixed-use asset rules, property which will be taxed on sale and certain employee accommodation.
Most notably from the above list, if a taxpayer notifies the Inland Revenue that a property will be taxable on sale (i.e. it is land held in dealing, development, subdivision, and building businesses or was bought with the intention of resale) the ring-fencing rules may not apply. This exclusion exists because there is less concern about allowing rental losses when it is known that any capital gains will be taxed on disposal. The application of this exclusion depends on whether the taxpayer is applying the rules on a property-by-property basis or if all properties in the portfolio will be taxable (the same treatment must apply to the whole portfolio).
The Bill has been introduced into Parliament and still needs to go through full Parliamentary processes. This includes submissions being made by the public (a due date for submissions had not been set at the time of writing this, but this is likely to be late January or early February 2019).
We would expect a number of submissions to be made on the Bill, given the direct impact to the bottom line of many landlords and the imminent application of the rules, with no gentle transition into the rules. We will also watch with bated breath to see what recommendations come out of the Tax Working Group, who are considering the extension of taxation of capital income; the results of which may render these ring-fencing rules largely redundant.
For more information please contact your usual Deloitte advisor.