It is proposed that Ring fencing of rental losses will apply from 2019-2010 income year or with possible phasing in over period of 2 years.
Residential rental loss will not be able to be offset against other income such as salaries, wages, business or investment income to reduce the overall tax liability of the taxpayer.
It is proposed that “Portfolio Basis Approach” should be adopted where a rental loss from one property will be able to be offset against a profit from another rental property, where more than one property is owned by the taxpayer.
Losses that are ringed fenced can be carried forward to future income years and be able to be offset against future rental profits or taxable income or taxable gains from disposal of other residential land.
Ring fencing will apply to “residential land” which is land with a dwelling on it or land that is capable of having building built on it (land zoned for residential)
“Residential land “ excludes farmland or business premises.
It should be noted that “Residential land – is not limited to NZ land it extends to “Overseas Land” as well.
Ringfencing will not apply to:
- a person’s main home, or
- a property which is subject to mixed use asset regime
- land that is held on revenue account ( builders, dealers, developers)
Home owned by a TRUST may qualify for Main Home exclusions if it is used by a Beneficiary of the Trust, provided that a principal Settlor of a Trust does not have a different main home.
INTERPOSED ENTITIES to watch out for:
Special rules are proposed for residential land held by interposed entities ( Trusts, partnerships, companies) where the investor structures the debt in a way that it circumvents the application of the ringfencing provisions . If land accounts to more than 50% of the assets of the entity, the entity will be classified as “Residential Property Land Rich Entity”. In this case the interest expense of an investor in the interposed entity will be disallowed, to the extent it exceeds dividends, interest or distributions from the entity to that individual.