Based on the fact Inland Revenue told the Herald investors paid $69m of tax in the 2021/22 tax year, it looks likely Treasury’s forecasts underestimated the impact of the interest limitation rule.
In late 2021, the Treasury saw the rule requiring investors to pay $80m in the year to June 30, 2022.
Because this fiscal year includes the six-month period (October 2021 to March 2022) investors racked up the $69m tax bill, one can assume the Treasury’s estimate will end up being too low.
In 2021, Revenue Minister David Parker made the case it was a good time to launch the policy because the low interest rate environment meant the interest expense investors would otherwise have written off would’ve been minimal.
Nonetheless, interest rates have ended up rising much more than expected.
In 2021, Treasury estimated investors would pay $200m in tax in the year to June 2023, and $350m and $490m in the following two years.
Inland Revenue declined the Herald’s request for it to update the projections, saying this would require a “significant amount of work”.
Property investors have retreated much more from the market over the past couple of years than first-home buyers have. This was what Parker hoped the interest limitation rule would achieve.
In April, investors accounted for only 17 per cent of banks’ relatively tiny amount of new mortgage lending - a portion below the 23 per cent average since the Reserve Bank dataset began in 2014.
Meanwhile, first-home buyers accounted for a record-high 24 per cent of new mortgage lending. This was well above the 16 per cent average since 2014.
Because the interest limitation rule came in around the same time as a number of other policy changes that completely cooled the property market, it’s hard to say how much of an effect it’s having.
Higher interest rates have had the greatest impact on investors’ cashflows.
Relatively tight loan-to-value ratio restrictions (LVR) mean investors need large deposits to get mortgages, while an extended bright-line test means more will have to pay tax on gains received from buying and selling investment property within the bright-line period.
Inland Revenue can’t say how much tax it’s received due to the bright-line test, because this tax in lumped in with all the other income tax investors pay.
The National Party is promising to take the bright line test back to two years, from 10 years, and get rid of the interest limitation rule. It hasn’t specified when it would do so if elected to govern after the October election.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
