Property Chit Chat by Louise Roke

Ring-fencing: What is it and How Does it Effect Property Investors?

May 05, 2020 Louise Roke/Tony Thorne Season 2 Episode 6
Property Chit Chat by Louise Roke
Ring-fencing: What is it and How Does it Effect Property Investors?
Show Notes Transcript

In 2019 there were significant tax changes in New Zealand for property investors.  These changes could greatly effect your tax returns.  It may mean if you usually get a tax refund from a rental loss on your investment;  don't necessarily expect it this year.  Avoid the shock; listen to Tony Thorne an expert property accountant as he explains ring fencing... and I'll give you a tip it's got nothing to do with sheep....tune in and find out from him what it is and how it works.  
This is one experts opinion so make sure you do  your own due diligence and get your own advice about your own circumstances..

Speaker 1:

Welcome to the property chit-chat podcast. I'm your host Louise rogue where I talk about everything and anything property. Okay. So today I am talking to Tony and Tony is um , from Thorne accounting and that is an expert property accounting agency that he's set up. And today we're going to talk about a subject that I'm sure a lot of you will want to know about because it is quite a recent change and it is ring fencing. So Tony, please enlighten us and firstly, welcome. Hi Ron . So what is ring fencing and no , we're not talking about farming or anything. We're talking about some tax changes for property. And when did it come in and give us a rundown?

Speaker 2:

Well, ring fencing is where any rental loss you made on a residential rental property can no longer be offset in other forms of income. Typically your salary and wages, historically you would have a rental property if it made a tax loss. That loss will be offset , is your salary income and you get a refund every year.

Speaker 1:

Yeah. So that's a huge change for people.

Speaker 2:

Oh , it's , it can be massive, potentially not as big as it is . That could have been interest rates as a historically very, very low now. So we certainly don't have the large rental losses like we had done in the past when it was rates were a lot higher. So I guess that's offset some of the pain. Uh , but certainly there's still plenty of McCombs out there. They're making rental losses and they can no longer get a refund based on that . So those, those changes came into effect from on the 1st of April, 2019 right? So in the 2020 tax year is that 220 tax year is about to finish in a week or just over a week. We then going to have a lot of all accountants around the country. You're going to have a lot of work coming in and there'll be preparing accounts for clients. But when those accounts are completed and sent out to the clients and advise of what the impact is, you're not going to get letters saying you'll do for a $3,000 refund, $4,000 refund. Now you're going to get a letter saying you've got a rental loss of $10,000 that is going to be carried forward. So that's a big cashflow change for clients. Right . So when you say carried forward, can you just explain to people what that actually means? Yeah , so so that loss , so if you make at least hypothetically, you make a $10,000 rental loss that that will be carried forward to the following year. If you make a further loss and the next year say another $5,000 loss that will accumulate, you'll then have a $15,000 loss in year three. Hypothetically, let's say you make a $5,000 profit, then that profit will be offset against that loss. You'll also go down to $10,000 if you have use up that loss, then you'll be into a tax paying position. But effectively then that loss will carry on and definitely it's going to ask you that. So it does carry on. It does carry on. Definitely. Alexa , as long as it's the particular structure that you have is around.

Speaker 1:

So basically, let me just clarify this. If you're on a wage and you're working away and say you have a rental property and it has a loss of $10,000, does that $10,000 loss go against your income? Okay .

Speaker 2:

No, I , I don't know how the IRD textures are actually going to be structured, I guess in their point of view. But typically most people will own a rental property either in their personal name or look through a company, one of those two . Um , and look through company B . The real loss flows through to you personally as well. So in your personal tax return, I'm imagining there will be , uh, when , when we, when we get these, when they are released by the ID and they're not due to some future, I'm imagining there'll be a box in there that'll have the rental loss that you will still put that figure in, but instead of it being offset against your other Sarah and wages income, that'll also in their tax return, there'll be a function there where it would just fit to be carried forward. So, so will still flow through into your personal section and be declared as a number because you still need to declare to the ID so that you can declare it , the amount that's being carried forward.

Speaker 1:

Okay. So it's a big change for people. And I guess when the, you know , when people put their tax return and sometime during 2020 that you're probably going to get a lot of phone calls, do you think?

Speaker 2:

I think [inaudible] numerous emails, newest newsletters, there's been all of the news there , but there will still be clients absolutely. Um , that will , will get their text tunes and they'll, they'll be surprised and get a refund and there'll be a shock to them. No doubt.

Speaker 1:

Because it's one of those things, isn't it? I mean, it came in and everybody spoke about it, but of course that was, you know, several months.

Speaker 2:

Oh, I was, I was at a seminar, only a few. If I gave a talk at a seminar, a few, a few months back, and then got into about the ring fencing, that changes. And I talked about that. And a guy came up to me afterwards and he specifically said, so, so there are actually these ring things, rules that

Speaker 1:

they're actually hitting me . Are they? Yes. You bet. Not just hit me. They have happened. They have happened any sooner . Oh , I thought it was still just a proposal. Yeah, this was exactly. Yeah. And that's the thing, because you're in the industry and you know what's happening. I mean, I'm just saying that for me, I'm thinking to myself, well yeah, everyone's heard about it, but did did some people think that it wasn't actually in and that it was just, you know, rallied around like capital gains tax, which didn't, do you know what I mean?

Speaker 2:

Absolutely. A capital gains since it didn't go anywhere eventually. Yeah . And there's the be exactly the same thing. Well it could have been but , but there's actually did go ahead.

Speaker 1:

So, okay, so let's say what is, is getting a tax refund of people have got several properties , um, and re , well, should I say writing off money, you know, writing, writing off losses, genuinely writing off losses against property. I mean, is this going to change for some people? I mean is it, is some people sitting there thinking, okay, well I'm just sitting here waiting for a capital gain and that's my longterm plan. Or some people thinking, Oh look with me, you know, doing all this property stuff is , is it worth it with all these changes that have come in lately, like the bright line, the ring fencing, you know ,

Speaker 2:

do absolutely be people in both camps. I think the ones that would sell a property or get out of the property because they don't get their loss, any of their , their refund anymore. I think that's very shortsighted. I mean, unless they've got really, really tight cash flow issues, which they possibly shouldn't have gone in the first place or maybe the situation's changed there . There'll be some, some situations where maybe they have to have to get out, but you know , if you don't have to, the property was always getting into proper . It was always about capital gain. That refunds you got was was I guess the icing on top of the cake really. But, but it was the cake you always after. Yeah . And is it before with the low low interest rates, the losses should be fairly minimal and therefore hopefully we're not missing out on too much. So we'll be talking about the bright line and another episode as well. But okay. So if I'm a new investor, I've never bought anything before and I come to you and I said, Tony meaning money, obviously I want to do something with it. I want to buy a property. What would be the long, what would be the plan so to speak? That would be probably the most beneficial. Well the plan is buying apartment. It's not too negatively geared and it's , it's not particularly difficult at the moment with low interest rates. But I guess you've , you do have to factor in a high interest rate. They , they, I say they will increase at some point. Will they, will they are , I don't actually know, but we factored in just in case they do. Obviously at the moment things are , um , Andres are coming down, down further. So we just have to factor in a high interest rate. And say that, you know, can you afford this cashflow hat ? Um, when interest rates, when interest rates rise, because you're not going to be held up only to mean , are you saying to people that it's probably a good idea to lock in five years and all that sort of stuff, or as in delay, your property purchased five years, five years, interest rates. Oh yeah . Well, what do you think his will be in five years? What do we think they'll be in 10 years? I mean, property should be a very longterm plan. I mean, having said that in probably five years time, I think in 10 years time with most properties, rents would have gone up and the price would have increased a lot so that you'd be very cushioned for any sort of timeframe should people be looking at to buy and keep a property. Oh, I think 10 years pass. Yep . Okay. So longterm at all the properties I've bought, I've, I've installed any , um , and , and they just continue to perform. So I think that's , um, the bricks and mortar. Kenya , absolutely . I'm very biased of course, but I dabble in the sheer market. But yeah , I've got to say properties a lot better. Yeah . Yeah. Well, I mean we'll always have that debate, but I'm sorry, I'm on your side. It's bricks and mortar, so, okay. So what about any stories you can think of about ring fencing? Not yet. I haven't had any issues. I haven't actually started preparing. Let's just get to say, give me a ring sometime when you start giving these people ringing you and going, what the hell? I think you've made a mistake. We'll all be, I'll be pruned to see them a little bit . The rationale, because a lot of people, I mean even even, even prior to ring fencing, we, you know , as accountants we , we do our jobs. You know , I guess our job is to prepare financial statements and try and get the client the maximum that the techs that they get back. And ultimately we bill for that . The time and effort that goes into that preparing and doing that work. Even in the past, I've had clients that have been, have come to me and perhaps their probably be properties made a profit or not much of a loss and I'll build them still the same man as I always would because I've still done that. It's still taking the same amount of time was still doing the same job and then science might hesitate and seeing the value in the fee because the refunds dropped. Nothing to do with with Al . And um , I guess I'm just wondering to see what will happen with clients going forward as to whether they will be more inclined to see less value in and in a job that we do, given that they won't get any physical refund for that. Having said that , a job will still take States , they'll still be legally required to do a job. And I think, and also I think I saw , I guess I'm also wondering the situation where you've got a client that buys a new property, perhaps under their personal name, the ID doesn't know they've got a rental property. So theoretically their art is not chasing them for a texturing to be actually be filed. Um , what will their kind of siloed our client decide not to.

Speaker 1:

That's going to catch up on them as absolutely will because he works down the track, start making a good break ,

Speaker 2:

but all of a sudden decided, well I need my losses to be able to offset their profit against or I haven't filed taxes for the last five years. My would be, well they'd have to go back that go five years, final information, five years back, which I still get. We get clients all the time that will come to us and say, you can follow textures of five years now chasing and it's always a nightmare because you're looking for all this sort of information five years back and the clients can't remember what it is. [inaudible] I mean I thought that it was a requirement to anyway to put in a tax return , but it is. Yeah , but I guess what I'm saying is if you've got a rental property , it makes a tax loss, even though he's a requirement to put it in, the ID probably aren't going to be concerned themselves, particularly with chasing up Pines that have just got lost anyway. They're more concerned five years down the track when you're making a profit, of course. And that's when that's where they , yeah , they want their money .

Speaker 1:

[inaudible] but you know, they want their money pretty quick, but when they are you money, it might take a little, she says, I think that it's about time that we cut this one now. So Tony thorn from thorn accounting. Thank you so much. That's all about ring fencing and hope you learned something from that. I hope you enjoyed this episode of property. Chit-chat, subscribe to hear all our episodes. If you want further information, visit good tonic.co. Dot. INSEAD and at the property chip tip tip till next time, over and hour .