This year’s budget announced a number of changes for both businesses and individuals.  As a property investor, what does this mean for me?

As expected, depreciation on buildings will no longer be able to be deducted from rental income effective from 1 April 2011.  For most, this will reduce cash flow on average by $1,000 - $2,000 per annum depending on tax rates and assuming 100% negative gearing of the rental property.  However, there is a silver lining to this cloud:  on the eventual sale of the property, tax will only be payable on depreciation recovered up to 31 March 2011 and not the date of sale as is currently the case.  It should be noted that depreciation on chattels is still available, so getting a valuation of chattels at date of purchase is now more important than ever.

A second expected change signalled in the budget is the loss of the ability to use rental losses to reduce taxable income for the purpose of calculating entitlement to Working for Families Tax Credits. This entitlement applied when a property was owned by one or two individuals but did not apply if property was owned by a Loss Attributing Qualifying Company (LAQC).  This change is also effective from 1 April 2011.

The third major change relates to rules around losses incurred via a LAQC.  At present these changes are only at discussion document stage and therefore subject to amendment.  However, one of the most significant proposed changes may result in the amount of losses available to a shareholder in any one year being limited to the value of that shareholders’ investment in the company. At this stage, the definition of ‘shareholders’ investment’ has yet to be agreed.

So what effect will this have on the rental property market?  The change in depreciation may result in an increase in rents and the reduction in tax saving may mean that some potential purchasers may not proceed.  We still await clarification on the changes to LAQCs from the Inland Revenue. Your accountant will be able to assist you in assessing the effect of these changes.


Our Source: Brian Reddington, Bennett Reddington Ltd. (T) 03-379 8630, brian@brlaccountants.co.nz