Adviser, tax expert discuss impacts
Inland Revenue is making sure that investors understand and comply with the new tax deductibility rules, using campaigns and integrity checks to ensure they are “getting it right”.
Twine Financial Advisers director and mortgage adviser Eugene Bartsaikin (pictured above left) said that removing the ability to claim mortgage interest costs as an expense – and declining property prices – had left many investors stuck.
New Zealand tax leader at Chartered Accountants Australia and New Zealand John Cuthbertson (pictured above right) reiterated the need for care on the phasing out of interest deductions over time, which applied to loans in place before March 27, 2021.
The rules, which removed the ability for investors to offset interest paid on their mortgage against rental income for existing properties, were introduced in 2021 but are being phased in over several years.
For the tax year ended March 31, 2023, investors were able to claim 75% of their mortgage interest as an expense, reducing to 50% from April 1, 2023, and 25% from April 1, 2024. From the tax year starting April 1, 2025, the percentage falls to zero, with mortgage interest no longer deductible.
Inland Revenue recently reminded landlords of the interest limitation rules via various marketing campaigns, including a campaign on its LinkedIn page.
In response to questions from NZ Adviser, an Inland Revenue spokesperson said its compliance approach had been focused on helping customers “to get things right from the start”.
“The focus of our marketing campaign for interest limitation this year is on reminding customers about the rules, including how the phasing works for properties acquired before 27 March 2021,” the spokesperson said.
Inland Revenue confirmed that it had conducted integrity checks to make sure customers were “getting it right”.
“Our integrity review to date indicates many customers and tax agents are applying the rules correctly,” the spokesperson said.
Advertising and direct communication has been used to increase awareness of the rental tax changes, along with education to customers through the Inland Revenue website, using webinars and seminars.
“We’ve also been educating customers about the new fields in the income tax return and reminding them they need to complete both their income tax return and IR3R,” the Inland Revenue spokesperson said. “These reminders ensure we’re doing what we can to help customers get their income tax returns right.”
Bartsaikin recently spoke to NZ Adviser about mortgage prisoners.
Commenting on tax deductibility rules on rental properties, Bartsaikin said that interest denial could be thought of as a “tax on the interest rate”.
“If mortgage rates are 6%, that’s like an investor paying 9% with deductibility,” he said.
He noted that many investors had purchased properties under a traditional set of tax laws. The tax deductibility changes on rental properties, along with declining property prices effectively rendered them “stuck” subsidising those properties, he said.
“Very few are actually profitable at the moment – especially with interest rates having gone up and their deductibility has gone out the door as well,” Bartsaikin said.
With affordability and cashflow now a key concern for property investors, Bartsaikin said it was difficult for landlords to pass on the full increase to their tenants, leaving many little option but to bear the extra cost and hope for future capital gain.
“Fundamentally, rent is based on what people are willing to pay … rent is not as directly linked to expenses as was previously expected,” Bartsaikin said.
Cuthbertson confirmed that the interest limitation rules didn’t apply to a taxpayer’s main home, which was subject to the “private limitation”.
“A homeowner is therefore still able to obtain a prorated interest deduction where they receive income from flatmates. The normal interest deductibility provisions apply,” Cuthbertson said.
Advisers should not underestimate the complexity involved with interest calculations, particularly where revolving credit or multi-use arrangements are in place, he said.
“There is a significant practical disconnect between the tax rule requirements and commercial banking arrangements,” Cuthbertson said. “The information required, and time and cost to comply should all be taken into account.”
If it is elected into government in the October general election, the National Party has confirmed it will reinstate tax deductibility rules as they apply to rental properties.
