Ring-fencing: What Is It and How It Effects Property Investors?
I talked to Tony Thorne from Thorne Accounting, an expert property accountant; to enlighten us about the latest change in the NZ tax system effecting property investors.
According to Tony, Ring Fencing is where any rental loss you made on a residential rental property can no longer be offset against other forms of income; typically your salary and wages. Historically you would have a rental property and if it made a tax loss that loss will be offset against your salary and income and you would get a refund that year.
This change in the tax law can be a massive change, but potentially not as big as it could have been as interest rates are historically very, very low now. So we certainly don't have the large rental losses like we had done in the past when rates were a lot higher; so I guess that's offset some of the pain, but certainly there’s plenty of uncertainty out there as investors who are making rental losses can no longer get a refund based on that.
So those changes came into effect on the 1st of April, 2019 so in the 2020 tax year we are having a lot of all accountants around the country explaining why their clients aren’t getting a refund this year when historically they have been because they had a loss from rental property offsetting their income. Now you're going to get a letter saying you've got a rental loss of $XYZ and that is going to be carried forward. So that's a big cashflow change for clients.
So that loss, if you make at least hypothetically, you make a $10,000 rental loss, that will be carried forward to the following year. If you make a further loss and the next year say another $5,000 loss that will accumulate, you'll then have a $15,000 loss in year three. Hypothetically, let's say you make a $5,000 profit, then that profit will be offset against that loss. You'll also go down to $10,000 if you have used up that loss, then you'll be into a tax paying position. But effectively then that loss will carry on and definitely it's going to ask you that.
Listen to the full episode on my podcast Ring-fencing: What is it and How does it Affect Property Investors?