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The Impact Of Tax Changes On Investors

The Impact Of Tax Changes On Investors

Amid rising living costs the interest non-deduction rules are starting to hurt.

By: Sally Lindsay

1 September 2023

Q. Are the changes to the tax deductibility rules having a real effect on investors yet and how can investors prepare for the next round of tax bills?

A. The short answer is “yes” – the interest non-deduction rules are affecting investors. At present only 50 per cent of residential rental property interest can be deducted as an expense, and this is hurting investors who are already paying higher interest costs and suffering negative cash flow from the increase in finance cost.

When you add inflation on food and living costs to this equation, it’s a terrible burden and completely unfair. It will be even worse as the non-deduction rules are fully phased in over the next 18 months or so (no interest will be deductible from April 1, 2025 unless a property qualifies for exemption). To mitigate the adverse effects, some investors have already changed their strategy to investing in properties that are exempt from the interest limitation rules (eg social housing or new builds) and I expect more will follow.

However, in my view, the best solution is to vote National or ACT in the upcoming election, and these bad tax rules will be reversed.

- Matthew Gilligan

Q. A neighbour has removed the existing adequate fence between the two properties and erected a new 1.8m wooden one. They have not spoken to me before or since the demolition/construction. My tenant says the reason for the fence is breeding puppies. There has never been a problem with either the neighbour’s two dogs or my tenants’ rottweiler, in fact they socialised through the fence. My tenant supplied my email address to the neighbour and would/could have already supplied my phone number. The email address was supplied mid-2022. The neighbours also sent an invoice for $1,850. Do I need to pay this as I was not consulted?

A. Fencing issues between neighbours are a common area of tension which usually come within the ambit of the Fencing Act 1978. Your neighbour is only entitled to compel you to contribute to the cost of removal and construction of a new fence if they served you a notice in the form provided in the Fencing Act. This notice must: specify the boundary on which the fence will be erected; specify the proposed work, to allow you to understand the nature and cost, and the materials to be used; and estimate the cost. Having failed to serve you with such a notice, they are probably not entitled to compel you to pay the $1,850 or contribute any amount to the cost of removal or construction. We suggest writing to your neighbour saying you will not be paying the invoice given their failure to follow the provisions of the Fencing Act.

- Shane Campbell

Q. In 2019 we bought a 7,000m2 piece of land that used to be a farm paddock and has had a sleepout added and trees planted. It is not a main home and is only used at weekends. We were thinking of building a new house on the property in the future, but circumstances changed and we now want to sell. Will the property attract the bright-line test?

A. Step one is to determine if the property is residential land. Residential land includes land that has a dwelling on it or where there is a plan to build a dwelling. This includes bare land able to have a dwelling built. There are exemptions for business premises and farmland. To qualify for the farmland exemption the land must be capable of being worked as an economic farming unit or agricultural business. The fact that your land used to be a farm paddock would not be sufficient to trigger the exemption as the land is too small to be an economic farming unit.

To qualify for the main home exemption the land would have had to have a building developed on it and you would have had to have lived there as your main home, so I agree there is no main home exemption available. The bright-line moved from two years to five years on March 29, 2018, so it would seem your property is subject to the five-year bright-line. It would be subject to bright-line tax if sold within its five-year bright-line period. This period runs from the date you were registered on the title as owner through to the date you enter an agreement to sell the property. The best bet to avoid bright-line tax would be to sell the property only after the bright-line period has expired.

- Mark Withers

Q. I want to borrow about $30,000 on top of a $300,000 mortgage on an investment property I bought last year. It’s for a minor dwelling to add value to the property. Should I get the house revalued and borrow against it from the same or another lender, or do you have other suggestions?

A. You will have to use the same lender unless you have other property to borrow against as two banks won’t lend on the one property. In regard to valuation, I would recommend getting a conditional approval from the bank prior to gettingit valued as it gives the bank a chance to run a desktop valuation and potentially avoid you incurring the cost of getting it valued. Note also that in most cases banks will want you to order the valuation through a specific portal (Valocity or CoreLogic) rather than you approaching a valuer direct.

- Kris Pedersen

Q. I’ve received a complaint from my tenant about dampness, including condensation on windows and mould appearing on clothing. The property underwent a Healthy Homes compliance inspection last year and was approved. My previous tenants did not raise concerns about dampness. Given these mixed signals, I’m uncertain about the appropriate course of action. Could you provide guidance on how to address this situation effectively?

A. Although your property received Healthy Homes compliance sign-off last year, it’s important to bear in mind that maintaining compliance requires ongoing attention. Sudden issues such as a blocked drain will result in non-compliance with Healthy Homes standards, potentially making your property more susceptible to dampness. To start, ask your tenant if they’ve observed any issues, particularly during rainfall. Then, thoroughly inspect your property for any potential sources of moisture ingress, like blocked drains, downpipes or gutters. Rectify any issues promptly to prevent further dampness issues for your tenant and maintain Healthy Homes compliance.

After that, spend some time with your tenant and educate them over managing dampness effectively. Encourage them to ventilate the property by opening windows and using extractor fans. Condensation on windows occurs when warm, moist air meets cold glass surfaces.

Suggest your tenant uses a Kärcher Window Vac to mop up condensation. Consider providing the window vac as a chattel so future tenants can use it too. In the future, when inducting new tenants, it’s good practice to focus on empowering them with knowledge about maintaining a warm and dry home, as well as recognising and promptly communicating indications of moisture ingress. We can’t take for granted that all tenants know these things by default.

- Ryan Weir

Q. What are the potential upcoming GST changes for the short-term rental industry and what do we need to do as property owners if we aren’t currently registered?

A. While there are discussions around a potential tax change for the short-term rental industry, this change has not yet come into effect and whether it will or not depends entirely on who gets into government in the October election. The tax bill will only pass into law under a Labour government. The National Party opposes this new tax policy and, if elected, it will not proceed.

The proposed tax change applies to Airbnb, Uber, and other gig economy operators and will require them to levy a 15 per cent GST charge on all bookings from April 2024, and also return GST to applicable property owners.

If you are already registered for GST because you earn over $60,000 per annum in taxable income streams (not including your salary if you are an employee), then you do not need to take action in the event it passes. While GST-registered owners who already pay tax won’t see a direct impact to their income, those who are not registered could see a reduction in cash flow. With that said, the market as a whole is likely to increase prices across the board to compensate for losses.

As it stands, if you are not GST registered and you rent your property on the likes of Airbnb for $230 per night including GST, you will receive the full $230. If the new rules come into effect next year, you would earn just under $220. Of the $230, roughly $30 would be taken as GST. A flat-rate scheme would be applied so 8.5 per cent of the 15 per cent GST charge would be returned to unregistered property owners (in this case $17). The remaining $13 would go to the IRD. This means your income could drop by around 6.5 per cent unless, as we anticipate, market prices increase to compensate.

Again, these tax changes will only come into play if Labour wins the upcoming election and the tax changes have not yet come into effect.

- Eric Hammond