GRA Blogs

Articles by Matthew Gilligan

Matthew Gilligan

Ring-fencing Update


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. 

If you'd like help with how the ring-fencing rules impact you, contact us at GRA - phone +64 9 522 7955, [email protected] or via our website.

Matthew Gilligan
Matthew Gilligan
© Gilligan Rowe & Associates LP

Did you like this article? Subscribe to our newsletter to receive tips, updates and useful information to help you protect your assets and grow your net worth. We're expert accountants providing expert advice to clients in NZ and around the world.

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

Add a Comment

Log in or sign up to post a comment

Morning Matthew, Quick note about Salesh Chand. I have been extremely impressed with his actions with regard to the mutual client of ours in Auckland Abrasive Blasting and Coatings 2005 Ltd. He has been a pleasure to deal with, provided accurate information in a timely manner and most importantly is giving the client the right advice as far as I am concerned.  He is very personable and I would certainly recommend his services to any ANZ client. Kind regards - Grant Clune - ANZ Relationship Manager - Auckland South

Would you like to receive . .

. . tips, updates and useful information to help
protect your assets and grow your net worth?

Property 101by

Investing in residential property?

Put this at the top of your reading list.

If you're investing in residential property, seeking to maximise your ability to succeed and minimise risk, then this is a 'must read'.

Matthew Gilligan provides a fresh look at residential property investment from an experienced investor’s viewpoint. Written in easy to understand language and including many case studies, Matthew explains the ins and outs of successful property investment.

  • How to find the right property
  • How to negotiate successfully
  • Renovation do's & don'ts
  •  Property management 
  • Case studies and examples
  • and much, much more...