Chapter 2 - Summary of the suggested changes
- Property the rules will apply to
- Portfolio basis
- Using ring-fenced losses
- Interposed entities
- Timing of the introduction of the rules
2.1 The proposed loss ring-fencing rules will mean that speculators and investors with residential properties will no longer be able to offset tax losses from those properties against their other income (for example, salary or wages, or business income), to reduce their tax liability. The losses can be used in future years, when the properties are making profits, or if the person is taxed on the sale of land.
2.2 A summary of officials’ suggestions for the design of the loss ring-fencing rules is set out below. These design issues are discussed in more detail in the chapters that follow.
Property the rules will apply to
2.3 It is proposed that the loss ring-fencing rules will apply to “residential land”.[3] We suggest that the rules use the definition of “residential land” that already exists for the bright-line test which taxes sales of residential land bought and sold within either two or five years.[4]
2.4 The rules would not apply to:
- a person’s main home;
- a property that is subject to the mixed-use assets rules (for example, a bach that is sometimes used privately and sometimes rented out); or
- land that is on revenue account because it is held in a land-related business[5] (that is, a business of land dealing, development of land, division of land, or building).
Portfolio basis
2.5 It is suggested that the loss ring-fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.
Using ring-fenced losses
2.6 Under the suggested changes, a person’s ring-fenced residential rental or other losses from one year could be offset against their:
- residential rental income from future years (from any property); and
- taxable income on the sale of any residential land.
Interposed entities
2.7 Under the suggested changes, there would be special rules to ensure that trust, company, partnership, or look-through company cannot be used to get around the ring-fencing rules. It is proposed that such an entity will be regarded as “residential property land-rich” if over 50 percent of its assets are residential properties within the scope of the ring-fencing rules, and/or shares or interests in other residential property land-rich entities. Where that is the case, it is suggested that any interest a person incurs on money they borrow to acquire an interest in the entity (for example, shares, securities, a partnership interest, or an interest in the trust estate) would be treated as rental property loan interest. The rules could then ensure that the interest deduction is only allocated to the income year in question to the extent it did not exceed the distributions from the entity (deemed rental property income), any other residential rental income, and residential land sale income. Any excess of interest over distributions, rental income, and land sale income would be carried forward and treated as “rental property loan interest” for the next income year.
Timing of the introduction of the rules
2.8 It is proposed that the loss ring-fencing rules will apply from the start of the 2019–20 income year. The rules could either apply in full from the outset, or they could be phased in over two or three years. We are interested in feedback on which of those approaches should be taken.
3 In section YA 1 of the Income Tax Act 2007.
4 The bright-line period is two years if you first acquired an estate or interest in the land on or after 1 October 2015, but is five years if you first acquired an estate or interest in the land on or after the date the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2017 is enacted.