Articles by Salesh Chand
The tax changes recently announced by the Labour Government have left many property investors feeling unsettled. So I thought it would be helpful to discuss the current property market, the impact of the rules, and what you should be doing to manage this new environment.
The current property market
• The property market has been hot for the best part of a year, and it seems the boom is continuing, with properties selling within weeks of coming on the market.
• The LVR restrictions are currently set by the Reserve Bank at 70% for investors, but they move to 60% from 1 May 2021. Many of the banks seem to have already adopted the 60% LVR for investor lending.
• Interest rates are low (both for term deposits and borrowing). Consequently, the returns from cash in the bank are next to nil, but on the flipside, it is easier to get good cashflow returns on rental property investments. This has resulted in cashed up investors with enough funds for deposits (to meet the LVR rules) buying properties to get better cashflow and capital growth returns, compared to having cash sitting in the bank.
• Parents are buying properties for their children, or refinancing their personal homes and providing deposits for their kids to buy their first home.
• Listings are low throughout the country, and agents are hungry for more properties to sell.
New proposed tax rules and the impact on the market
Firstly, I am bitterly disappointed at the way the Labour Government have lied to us about tax. They promised no more tax changes, and then surprised us on 23 March with new tax rules, including extension of the bright-line test to 10 years and removal of interest deductibility for property investors.
The 10-year bright-line test, which is essentially a capital gains tax in disguise, does not hurt investors as much as not being able to deduct interest costs – which every other business is allowed to do. This has been a shock, and will end up hurting investors and tenants alike. And when I say investors, I don’t mean the very few super-wealthy investors with massive portfolios – these rules will hardly make an impact on them. I mean ordinary New Zealanders with 1-4 rental properties, who make up the vast bulk (about 96%) of residential landlords in this country.
As a result of the interest non-deduction rule, landlords are looking at passing the additional costs they incur on to tenants. The truth is, the majority of landlords are caring people, and they are saddened that such cost has been added to the running costs of their property, and that it now needs to be on-charged to their tenants.
Investors with less cashflow or passive income are now being forced to exit the market because they simply can’t afford to keep their properties if they are unable to treat interest costs as an expense. These are generally ‘mum and dad’ investors who have purchased one to two rental properties as a way to provide for their own retirement. They are genuinely worried about where their tenants will go, as there will be fewer rental properties available, and many of these tenants don’t have the ability, or the desire, to become homeowners.
My recommendation to investors
• If you are tight for cashflow, refinance all your properties and extract your equity. This will help ensure you have sufficient working capital.
• Get overdraft facilities in place so you have access to working capital. It appears it will be harder to get overdrafts in future.
• Get your pre-approvals in place to ensure you are ready to buy the right property.
• If you are in a position to reduce your debt level, you should. Start paying off your investment debt aggressively.
• If you are on a high fixed interest rate, consider breaking it prior to 1 October 2021 (when the new interest deduction rule kicks in). By doing this, you will be able to claim the break fee as an expense, which you won’t be able to do after 1 October. Additionally, with a lower interest rate, your interest costs will be much lower, which will improve your cashflow. I suggest you discuss this with your accountant and financial adviser/mortgage broker.
• Most importantly, don’t panic. Whatever move or decision you make needs to be calculated strategically. Help from a property accountant and financial adviser is crucial here.
• Always remember, property investing is long term – if you can hang on to ride out the storm, the capital growth over time should compensate for the reduced cashflow now (all things being equal and property continuing to increase in value as it has done for decades).
• Keep an eye on GRA's Tax Changes Resources webpage, which we update regularly with the latest articles, videos and information on the new tax rules.
Property School provided an excellent environment to learn from the experts. The senior partners and experts presented and shared current and relevant experiences which was invaluable. The one-on-one sessions offered with experts in each area meant I could discuss my situation with confidence referencing key learnings from the school. Thank-you for giving me practical knowledge that I am applying now - Anon
Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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