The new ring-fencing rules of rental loss apply retrospectively from 1 April 2019 for the 2019/2020 and later income years. Inland Revenue issued an official paper entitled “Ring-fencing rental losses” in March 2018 outlining the proposal to ring-fence tax deductions on residential rental properties so that they could not be used to reduce tax on other income. Following the consultation process, the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill was introduced in Parliament on 5 December 2018 and it received the Royal Assent on 26 June 2019.
Main Features Of The New Ring-Fencing Rental Losses Rules
- The loss ring-fencing rules will only apply to “residential land”, which means investors with residential properties will no longer be able to offset tax losses from these properties against other income. The definition of residential land includes:
– land that has a dwelling on it; or
– land for which there is an arrangement to build a dwelling on it;
– but does not include land that is used predominantly as business premises or as farmland.
- The excess loss amounts will be carried forward to later income years and will be available to be off-set against any future residential rental income the person derives.
- The excess loss amounts are released from the ring-fencing restrictions when either there is sufficient net taxable rental income or when a fully taxed disposal of residential rental property occurs. For example, the property is sold within five years of the purchase, and as a result gain on the sale is subject to tax under the bright-line test for residential land. The excess loss amounts will be released from the ring-fencing restrictions and the person will be able to offset the losses against the taxable gain.
- If the property is held in a company, it cannot carry unused deductions forward to a later year unless the shareholder continuity requirements are satisfied.
- The rules are applied to residential properties on a portfolio basis. The investors are able to offset losses from one rental property against rental income from other properties. The person can make an election in their tax return to apply the ring-fencing rules on a property-by-property basis to some or all properties. However, if no election is made the default position is to apply the rules on a portfolio basis.
- There are special rules to ensure that a trust, company, partnership or Look-Through Company cannot be used to get around the ring-fencing rules. If an entity is regarded as a residential land-rich entity, which means over 50% of its assets are residential properties, the entity will be within the scope of the ring-fencing rental losses rules.
- It is important to note that a residential rental property does not include certain types of property, including a person’s main home, a property that is subject to the mixed-use asset rules (for example, a bach that is sometimes used privately and sometimes rented out), or land that is on revenue account (i.e. a property that was bought with the intention of resale and the residential exclusion does not apply).
This information is intended as a general guide only. Please contact us on (09) 839 0087 to discuss your circumstances.