Articles by Matthew Gilligan


Ring-fencing Update

Friday, June 07, 2019
After several months considering over 250 submissions, the Finance and Expenditure Committee has reported back to Parliament on the loss ring-fencing rules. Reflecting the fact that the original draft was somewhat of a shambles, they have thrown that out and started again from scratch. 

Readers may think that this would mean there are a raft of changes as a result. In fact, that is not the case and the substance of the proposals remains almost entirely intact – only this time the legislation is less of a shambles. 

What remains the same?
To recap, the key aspects of the ring-fencing rules (that remain the same) are:

  • Date of application is still from the start of the 2020 income year, which for most means from 1 April 2019. 
  • The rules apply to residential land excluding the main home, business premises, commercial property, farmland, mixed used assets (e.g. baches), employee accommodation, property bought as part of a land dealing business or bought with the intention of resale. 
  • A ring-fenced loss can be offset against future residential rental profit or a taxable gain realised on the sale of a residential property (e.g. due to the sale occurring within the bright-line period). 
  • Taxpayers can either account for rental profits or losses on a property-by-property basis or a portfolio basis. 

What has changed?
While these core aspects of the rules remain in place, there are a few technical clarifications or points of difference that are worth noting. They are as follows:

  • There was some doubt as to whether carried forward ring-fenced losses could offset depreciation recovery income realised on sale. The new rules confirm that it can. 
  • There has been an extension to the types of income that can be offset against ring-fenced losses to include rental income derived in relation to property held on revenue account (i.e. property acquired as part of a business of dealing, development or erection of buildings). For example, if you are a property dealer or developer and are renting out a property residentially, then rental profit produced from such activity can be offset against residential rental losses.
  • If you own multiple properties, you can elect for one or more of the properties within that portfolio to be accounted for on a property-by-property basis, leaving the remainder to be accounted for on a portfolio basis. This ability to pick and choose within your portfolio as to whether you account for losses on a property-by-property or portfolio basis could be a useful flexibility in certain circumstances, but not widely helpful. 
  • Property bought with the intention of resale falls outside of the rules on the basis that the sale of such property will be taxable irrespective of when sale occurs. However, if you buy such a property outside of carrying on a business of dealing in or developing property, you need to give notice to the IRD if you want to take advantage of the exemption from the ring-fencing rules for any losses. 
  • The rules apply to all taxpaying entities including individuals, partnerships, trusts, LTCs and companies. In the context of ordinary companies, the application of rules has been narrowed so it only applies to “close companies”. A “close company” is one where there are five or fewer natural person or trust shareholders holding more than 50% of the shares. As such, companies that are held more widely than this will not be caught. 

Readers might be interested to know that of the 283 submissions made to the FEC on these rules, 268 were opposed, mostly on philosophical grounds, arguing the proposed rules will not address “unfairness” in the property market, will negatively impact rents and are at odds with fundamental tenants of simplicity and consistency that should underpin the tax system. Unsurprisingly, these arguments have fallen on deaf ears, so we await to see if ring-fencing will prove a panacea for first home buyers. Somehow I doubt it. 







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