Residential landlords will be able to claim back tax that they paid under the previous Government, the National-Act coalition deal indicates.
Such a retrospective law changes would be “highly unusual and unorthodox,” says one tax expert. Retrospective law-making is generally frowned upon.
And it’s one more oddity in all the toing-and-froing by lawmakers over the residential landlords’ tax break.
Today, CTU economist Craig Renney releases a report concluding the lost revenue cost of accelerating the restoration of interest deductibility will be about $900 million for the new Government – that’s on top of National’s original $2.1b costings, and a new hole in its tax package.
Interest deductibility is the ability for residential property investors to offset their interest payments on the mortgage against the rents they earn from the property, thereby reducing their assessed income, and their tax liability.
In 2021, the Labour Government introduced a law change to phase out this tax advantage amid concerns that it was fuelling property speculation. The interest deductibility had been reduced to 50 percent this year, on its way to zero. Under the new Government, it begins tracking back up again.
During the election campaign, National had promised to maintain interest deductibility at 50 percent for the 2024/25 year, then gradually step it back up to 100 percent in the 2026/27 year.
But in the coalition talks, Act has extracted an agreement that the Government will move faster. The parties have committed to restore mortgage interest deductibility for rental properties with a 60 percent deduction in 2023/24, 80 percent in 2024/25, and 100 percent in 2025/26.
“The details of how these commitments will be implemented, including their costs, will be considered by Cabinet, and are likely to be Budget sensitive until details are finalised and made public.“
Nicola Willis, Minister of Finance
“Crucially, this change would be retrospective,” Renney says. “They will be receiving a rebate on payments already made. Landlords will be cut a cheque from government, but tenants will not benefit from the rental payments they have already made. That’s hugely unfair and simply rewards landlords for nothing.”
Most investors are already nearly two-thirds of the way through their 2023/24 tax year, have paid one tranche of provisional tax on August 28, and have their next payment due on January 15.
If Parliament doesn’t introduce and pass a law change through all its stages before Christmas, then investors will be left in the awkward position of assessing whether to pay provisional tax as the law is – or as the government says the law will be. If they get it wrong and under pay their liability, they are liable to pay 10.93 percent penalties on the money they owed Inland Revenue.
Asked by Newsroom about the retrospective tax changes, Finance Minister Nicola Willis is sticking to her guns.
“The Government stands by the commitments made in its coalition agreements,” Willis says. “The details of how these commitments will be implemented, including their costs, will be considered by Cabinet, and are likely to be Budget-sensitive until details are finalised and made public.”
Tax expert Terry Baucher has been reviewing Renney’s costings of the removal of interest deductibility. He says the retrospective tax change would be “really very unusual” and “highly unorthodox”.
“I can’t recall a tax measure like this being brought in after an election with retrospective effect.”
The acceleration is not just unusual in its retrospective effect, Baucher says, but is also “a $900m bigger hole in their budget over four years”.
Impact on monthly tax revenues of restoring interest deductibility
At the same time as agreeing with Act to faster tax cuts for property investors, National also agreed with New Zealand First to abandon its foreign buyer tax, with the dubious $2b revenues that had been forecast it would haul in over four years.
So as clients prepare their provisional tax payments for January, would Baucher recommend they pay the reduced amount promised by the Government?
“Until I see the legislation, I couldn’t do that. And there are other complications, because if you get it wrong, you have to pay use-of-money interest, which is 10.93 percent.
“Don’t get me wrong, landlords will be happy with the tax cut. But the detail of how it works through is a bit of a process.”
Shouldn’t subsidies or tax incentives be available to those that build new homes? After being in property businesses myself for 15 years, I just don’t get it. Afterall, isn’t that what we have to do…build more homes. This government is going to place their bets on the future success of trickle down property wealth.
Two questions to ask our PM and our Minister of Finance: What is the expected average reduction in tax paid per rental property with this tax package? How many rental properties do you have?
The measure to allow tax-deductibility of interest costs applies to everyone in business except property investors. Restoration of tax deductibility for property investors simply eliminates this unfair discrimination. Making it retrospective though is another matter and with a government seeking to reduce taxes I would have thought that this would not be prudent.