This article was published on 15 March 2008. Some information may be out of date.

Q&As

  • Two readers sound off about ring fencing rental property tax losses, and a third puts it all in historical perspective.
  • Another reader worries about the difficulties of making tax payments online.

QCorrespondents like your first one of last week really hack me off.

The way some landlords threaten to raise rents if the government introduces tax-loss ring-fencing, you would think they currently charge sub-market rents out of the goodness of their hearts.

What a load of rubbish; some landlords charge sub-market rents because they fear losing a good tenant (because they know how horrible bad ones are), and the rest charge as much rent as the market will bear, as determined by competition from other landlords.

In all cases, it may be assumed landlords already charge as much as they feel it is in their best interests to charge.

Rent levels will settle to an equilibrium in each particular neighbourhood, determined by supply and demand at any particular time. Every house sold by a disgruntled landlord is one more bought by an owner-occupier (or the next generation of public-spirited landlord), and does not affect the total number of houses currently available to be lived in (supply), or the total number of houses required by the populace (demand).

AOh no! Another angry reader — and not the only one this week. This nice quiet page is turning into a veritable battle ground.

But it’s interesting to think through some possible outcomes if rental property losses were ring-fenced — so that the losses couldn’t be deducted against other income, but only against the property in future years.

There probably would be some room for a rent increase, as the supply of rental property fell because it was less attractive. After all, the Reserve Bank says it would expect rents to rise — after more than the back of the envelope analysis that I, and probably you, do.

On the other hand, with some unhappy landlords selling, houses would become cheaper — or at least cheaper than they would otherwise have been. That would make it easier for tenants to buy their own homes. And if rents were rising, they would be particularly likely to do that.

In turn, that would reduce the supply of tenants, which would help to hold rents down.

We might end up with more of the population owning their own homes. That would be no bad thing.

QRe the ring-fencing letter, a typical homemaker needs to earn $1.33 plus GST for every $1 of outgoing. This excludes interest, which has no GST.

An investor pays less than 70c on every dollar of outgoings including interest, plus the investor is rebated the non-cash depreciation. If that break comes from deductions against “other income” it is a distortion and a rort.

The goal is to convert normally taxable income into tax-free capital gain, but still make use of the local and national infrastructure a large group of householders contribute to.

I think the tax position has been sold to investors by lenders, REINZ members and Blue Chip style vehicles to the point the price paid for a property became inconsequential to the tax position.

It makes my blood boil to read comments such as you published last week from the investor who has relied entirely on a tax position to fund his outgoings, while at the same time smugly expecting a tax-free capital gain.

Perhaps we should all put in place such structures to equalise the taxation issue. The IRD has of course warned against that, but they seem powerless.

AFar from being a distortion, I’m afraid I think it’s fair that investors — in property or any other investments — can deduct their out-of-pocket expenses against other income.

Without that ability, many businesses, including the business of being a landlord, would not get off the ground. And we need new businesses to provide goods and services and to grow the economy.

However, I agree that property depreciation deductions have become silly, and need to be curbed.

Beyond that, though, the problem lies not in loss deductions but in the non-taxation of capital gains on property. And this is where it all gets puzzling.

Under the law, if the main reason you buy an investment is to sell it at a gain, that gain is taxable. And how can a landlord whose properties suffer losses year after year claim she or he bought for any other reason?

I’ve asked Inland Revenue several times why they don’t ask this of landlords, and their responses don’t convince me. It makes me wonder if the rumours are true — that the government has told the tax department to soft-pedal this — which leads us to the next letter.

QThe debate regarding deductibility of residential rental losses continues.

Having been a landlord of several properties for nearly 30 years I can remember mortgage interest rates of 24 per cent and marginal tax rates of 67 per cent!

At that time there was a modified ring-fence policy, which restricted annual loss deductions to $10,000, with any balance rolling forward into future years.

The IRD would contact the taxpayer asking them to justify the claim “since it seemed that the investment was unlikely to become profitable in the future”, and this was one way of separating genuine investors from the speculators.

There were several years when I sent projections showing that the investment would be making a profit in less than five years, and consequently the claims were always allowed.

This projection depended, of course, on paying down mortgage principal over several years to enable the property to become profitable. The landlord became mortgage-free and paid taxes on the profits.

ASo ring fencing has been done before — or at least half-pie.

It’s interesting to note that Inland Revenue at that stage didn’t mind asking people to explain their investments. Why not now?

QRegarding one of the recent letters to your Herald column about making payments to IRD and the comment that IRD is notorious for mucking up where the funds you have paid get allocated to.

It is true, and this is because you need to ensure that you have used exactly the right code for the payment. For example if you are making a payment for staff deductions, PAYE, student loans, KiwiSaver etc you need to use the correct code and the date for the period you are paying. I have had many staff use PAYE as the code and had all the staff payments be incorrectly credited to wrong accounts because of it.

Recently we paid some provisional tax payments using PROV but we should have used ARR for arrears because we were slightly late, so IRD put the payment to our GST account!

More fun and games from IRD designed to waste everyone’s time.

AIt’s easy to point the finger at the big bad government. But in this case I don’t have a lot of sympathy for you.

An Inland Revenue spokeswoman says, “All major banks, as listed on our website, use a verified Inland Revenue online tax payment service, which we strongly advise customers to use.” I just tried it with my bank, and it all looks pretty straight forward.

You get a list of the tax codes and choose one. Given that there are more than 30 items on the list, it would help if they were in alphabetical order. But that is the only obvious flaw.

Of course you have to be careful about entering the right code, amount, period covered and so on. But that’s the deal when we do anything via a computer.

There’s more info, if you need it, at www.ird.govt.nz or you can request or download a copy of the IR584 Making Payments pamphlet.

The spokeswoman points out that there is no PROV tax type code. “Customers are advised to use INC (income tax or provisional tax). They should not use ARR if they are slightly late. The ARR tax type code is only intended for customers who have entered into an instalment arrangement with Inland Revenue.”

She also says the department can “provide assurance to the customer that the payment has gone to the right place”

“We send a statement when an assessment is actioned — so if a customer sends a payment in at the same time as a return they will get a statement once the return is assessed.

“We also send statements when we are doing our monthly monitoring of overdue accounts — so any payments that came in during the month will show on the statement issued at that time.”

Beyond that, you can ring, write or email for reassurance. “If using email, we prefer them to use our online services accessible through our website,” she says.

OK, so that’s the word from the department. It’s not the only side of the story. Perhaps some banks haven’t set it up as well as mine does. And no doubt there’s room for human error at Inland Revenue. But I haven’t had other letters complaining about this.

If you’re worried about it, you’ve always got the option of paying the old-fashioned way, by mail or at a Westpac branch.

MORE ON KIWISAVER

Next Tuesday, March 18, the Herald is running a special section containing excerpts from my new book, “KiwiSaver Max: How to get the best out of it”, to be published in June. The section includes basic information about KiwiSaver, which should answer many readers’ questions about the scheme.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.