Ring Fencing Losses….. It’s Coming!

Media Release 2 July 2012

Ring Fencing Losses….. It’s Coming!

The Minister of Revenue has recently released a statement concerning tax changes for holiday home owners. Costs in future will need to be apportioned based on the number of days rented relative to the total number of days used but the ministerial announcement has a new twist which goes a whole lot further.

The plan now is to also ring fence any resulting loss from a holiday home if the gross income generated from the asset is less than 2% of the cost of the asset or the rateable value of the land.

The ring fencing will operate to only allow the loss to be offset against future profits from the same bach rental activity generated in the future.

Andrew King, President of the New Zealand Property Investors’ Federation says this will mean that losses will not be available to offset other forms of income generated by the same investor or tax payer.

“Property investors should be very nervous of this proposed change. The rule could easily be extended to the wider property investment community. Imagine the impact to your general property investments, especially as interest rates increase in the future and rental yields weaken relative to land values”, said Mr King.

It would be particularly bad for those that choose to provide high quality rental accommodation that perhaps produce a low yield relative to their cost or Government valuation.

This new proposal to ring fence losses whilst only limited to baches at this point is not good news for the property investment community and investors should be wise to the risks of this change becoming wider in the future.

It begs the question “When will the Government leave the property sector alone and start to apply some pressure to other high risk areas like the cash economy and undeclared foreign incomes”?

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