Tax man takes a hard look at landlords

By BRIAN FALLOW

The tax man will take a bigger bite out of landlords' cash flows if changes proposed by officials to the depreciation regime become law.

In an issues paper released yesterday, officials say the present regime for residential rental properties, which allows an annual deduction of 4 per cent of a building's diminishing value over 50 years, may be too quick for rental properties.

They propose replacing it with straight-line depreciation of 2 per cent a year (which would be equivalent to about 3 per cent a year on a diminishing value basis).

But Auckland Property Investors Association president Andrew King said that would just make rental properties more expensive. "It will be passed through to rents," he said.

A key concern for the Government is the extent to which the tax treatment of rental properties is being used to shelter other income.

Even though the number of people declaring rental income increased by 95,000, or 150 per cent, between 1991 and 2002, the net taxable income from landlords fell from $200 million in 1991 to $137 million in 2002, and an estimated $190 million last year.

In 1999 and 2001 the tax take was negative.

If the amount of deductions (not just depreciation but repairs and maintenance and interest costs) exceeds the income from rents the resulting tax losses can normally be used to reduce taxable income from other sources - a phenomenon known as negative gearing.

The amount of tax shelter available from rental housing has been running around $400 million a year since 1999.

From the tax man's point of view, even revenue of $190 million is a meagre 1 per cent yield on the $19 billion which is invested in rental properties according to a 2002 study of New Zealanders' net worth by the Retirement Commission and Statistics New Zealand.

The second problem exercising officials is that more and more landlords are claiming separate and faster depreciation deductions for different parts of a building, such as electrical wiring, plumbing, hot water systems, carpets and internal walls.

Even though depreciation is clawed back by the IRD when the property is sold, taxpayers can enjoy timing advantages, officials say, and in some cases the advantages are permanent.

They suggest giving landlords two options. A list of separately depreciable assets would be drawn up, as in Australia, which would include domestic appliances, hot water cylinders, air-conditioning systems, light fittings, carpets and lifts.

It would not include wiring, plumbing and internal walls, which the IRD considers to be part of the building.

But King said it was logical to depreciate wiring and plumbing faster than the structure of the building because wiring and plumbing did not last as long.

The issues paper says landlords wanting to claim faster depreciation for the listed items would need to obtain market values for the assets on purchase and then again on sale.

The closing date for submissions is September 30.