National promises to reinstate tax deductibility on rentals

But there are two sides to consider, says brokerage

National promises to reinstate tax deductibility on rentals

The National Party has confirmed it plans to  reinstate tax deductibility on rental properties if it wins  the general election in October.

Reinstating interest deductibility on rental properties is among the changes National said it would make in the aim to contain inflation and support growth.

For residential rental properties purchased before March 27, 2021, tax deductibility on interest expenses is in the process of being phased out – with the benefit no longer applying from April 1, 2025. For properties purchased on or after March 27, 2021, there is no interest deductibility available, however new builds are excluded from these rules.

In a statement to NZ Adviser on Tuesday, National leader Christopher Luxon (pictured above left) confirmed that a National-led government would “unlock housing and growth across New Zealand” by “restoring interest deductibility on rental properties”.

In response to how a National-led government would encourage business investment while controlling inflation, Luxon said it would review immigration policy settings to address labour and skills shortages and support growth to overseas markets.

“National will fix broken immigration settings to ensure businesses can reliably access skilled labour, deliver resilient infrastructure that businesses need, get education back to basics so New Zealand has a long-term skills pipeline, and rebuild our connections to the world so businesses can break into new markets and access investment from overseas,” Luxon said.

 National would fix “broken regulations like the CCCFA” and “eliminate taxes like Labour’s interest deductibility changes,” he said.

“The combined effect of these changes will be to reduce pressure on inflation and enable economic growth,” Luxon said.

Squirrel managing director John Bolton (pictured above right) told NZ Adviser that there was no doubt that reinstating tax deductibility on rentals would be met favourably by property investors.

Bolton said landlords were grappling with a raft of requirements and costs, such as healthy homes standards, removal of interest deductibility, increases in council rates, higher insurance costs, and rising interest rates.

“The removal of interest deductibility means they’re also paying tax on a property that’s generating no cashflow,” Bolton said.

When removal of tax deductibility was announced in March 2021 as part of a wide housing package, Bolton acknowledged that the Labour government was under pressure to address New Zealand’s housing crisis.

Former prime minister Jacinda Ardern said at the time that the package was aimed at increasing housing supply and removing incentives for speculators, to deliver a more sustainable housing market.

Bolton acknowledged that the legislation was rushed through without a full view of the consequences. At the time, demand exceeded supply, whereas now, the reverse is predominantly true.

Considering the bigger picture, Bolton said there were two sides to the discussion on whether to allow property owners to offset their interest expenses against rental income when calculating their tax.

On the one hand, removal of tax deductibility is already underway and house prices are falling, therefore the government could stick to the existing path, he said.

On the other, Bolton acknowledged that interest was a cost of ownership and therefore should be a tax deductible expense (as in any other business).

“Why would you treat investment property any different … the consequences of treating it different will be downstream,” Bolton said.

Examples of longer-term consequences of a fully phased out tax deductibility on interest expenses include increasing rents, landlords converting investment properties to Airbnbs and landlords taking investment properties out of market, he said.

While removal of existing rentals would indicate a freeing up of stock for homebuyers, as overall affordability remains a concern for a sizeable percentage of the population, Bolton said that did not necessarily translate to more Kiwis owning homes.

“I think we’re going to see is probably a disproportionate amount of this passed through to rental costs,” Bolton said.

How National would address cost of living pressures

Luxon said National would address the underlying drivers of rampant price inflation for New Zealanders by focusing the Reserve Bank on a “single inflation-busting mandate”.

National would reduce costs and regulations faced by business, fix worker shortages and bring discipline to government spending, reducing the tax Kiwis pay, he said.

Acknowledging that New Zealanders “deserve to keep more of the money they earn,” Luxon said National had already committed to adjusting tax brackets by inflation.

“With inflation running rampant, everyone is being pulled into higher tax brackets. Someone on the average wage now has a marginal tax rate of 33% - that is not right. Under our policy, the squeezed middle would get to keep $800 to $1000 each year,” Luxon said.

Luxon said National’s recently announced FamilyBoost childcare tax rebate was expected to help 130,000 low and middle income families keep more of what they earn, with “up to $75 more in their after-tax pay each week”.

“Under National’s plan to adjust tax brackets for inflation and introduce the FamilyBoost childcare tax rebate, young families will be up to $5,500 a year better off,” he said.