Implications for residential investment property owners

In the build up to last month’s budget, the government made no secret that it wanted to overhaul the tax treatment of residential property investments.

In his 2010 budget, Bill English summed up the property investment aspects of his budget as an effort to introduce a fairer tax system to ensure that the tax treatment for investment properties is consistent with other types of investment.

This article sets out a summary of the changes that will impact residential property investments.

Changes to depreciation
With effect from the 2011-2012 income tax year, residential (and commercial) landlords will no longer be allowed to claim depreciation allowance for buildings with an estimated useful life of 50 years or more.  Under existing rules, landlords, property investors generally claimed either a 2% or 3% deduction on the purchase value of the building. 

With immediate effect, the 20% loading on some plant and equipment (P&E) has been removed on all new P&E bought since 20 May 2010.

Changes in how Loss Attributing Qualifying Companies (LAQCs) are treated
LAQCs have long been a popular structure for many New Zealander residential property investors.  The main attraction has been that losses could be deducted to reduce LAQC shareholders’ taxable.  

These are going to be changed.  But, currently, there isn’t enough information available on how the new LAQC regime is going to work.  Bill English commented that, after after a brief consultation period, new legislation will be introduced so that, with effect from 1 April 2011, LAQCS will be taxed as limited partnerships.  Submissions will close on July 5 2010.

Tax losses will continue to be attributed to shareholders, but taxable profits will also be attributed to those shareholders and not retained within the company.  Therefore profits may be taxed at the shareholders’ top personal income tax rate of 33%, rather than at the lower company tax rate of 28%.

Changes to GST
With effect from 1 October 2010, GST will rise from 12.5% to 15.0%.  This will have a real impact on residential investment property owners as the cost of insurance, rates, property management fees, and professional services will increase.

As many residential investment property owners are not normally registered for GST, they will not be able to claim back the GST component of these expenses.  So unless rent is increased to offset these additional costs, residential investment property owners will see less cash in the bank.    

The changes to depreciation on buildings may have major cash flow implications.  Added to that, the changes to the LAQC regime are wide reaching.

If you are an investment property owner, you should contact us to review your property investment portfolio.  You’ll need to consider the implications these changes will have for you.  You should also seek advice before buying more investment properties or changing existing ownership structures.

The IRD has recently indicated that it intends to increase its audit activities on investment properties and will investigate these transactions more regularly.