The Government has confirmed landlords will again be able to deduct interest costs on their mortgages against rental income after the previous Labour Government phased it out.
Currently investors can only deduct interest expenses if their property is a new build.
Associate Finance Minister David Seymour said in a statement landlords will be able to claim 80 percent of their interest expenses from April 1 2024 and 100 percent from April 1 2025 onwards. There is no provision for landlords to backdate interest deductibility to the 2023/24 year, despite it being in ACT and National's coalition agreement.
"Help is on the way for landlords and renters alike. The Government's restoration of interest deductibility will ease pressure on rents and simplify the tax code," Seymour said in a statement on Sunday.
The long-signalled reintroduction of interest deductibility has been controversial, with the Council of Trade Unions (CTU ) claiming the cost will blow out by $1 billion over four years and turn hundreds of landlords into tax-cut millionaires.
Labour leader Chris Hipkins accused the Government this week of "prioritising tax cuts for mega landlords" instead of "helping families with costs like early childhood education or public transport fares".
But the coalition has argued removing interest deductibility creates more costs for landlords, which get passed on to tenants, pushing up rents and increasing the cost of living.
"Landlords have been hit with a double whammy of rising mortgage interest rates and increasing interest deductibility limitations during a cost-of-living crisis. These costs are inevitably passed on to tenants, one of the reasons New Zealand has all-time high rental costs," Seymour said.
"This heaped pressure on landlords and renters alike by reducing the number of rentals, pushing rents up, and making it harder for Kiwis to save for their first home."
The move has been welcomed by investors, with Auckland Property Investors Association's Sarina Gibbon saying "I think it's gonna move the needle".
"It's going to make a huge difference and I think we're just really glad we're going back to a principled approach to taxation," she told Newshub.
Writing for The Conversation in December, Senior Lecturer at School of Accounting and Commercial Law, Te Herenga Waka/Victoria University of Wellington Alison Pavlovich said Labour's policy was "extremely punitive" to some landlords and was likely to have put upward pressure on rents.
"Rather than introducing a tax on capital gains - widely accepted as part of a comprehensive tax system and supported by the Working Tax Group in 2019 - the government chose to implement a distortionary measure in an attempt to address the problem of tax advantages for residential property investors," she wrote.
Inland Revenue was also against Labour's move, saying while it might help bring house prices down, it would also put upward pressure on rents and could reduce the supply of new housing developments in the longer-term.
"The benefit of increased housing affordability for first-home buyers is outweighed by negative impacts on rents and housing supply, high compliance and administration costs for an estimated 250,000 taxpayers, and the erosion of the coherence of the tax system."
Seymour said the reintroduction of deductibility will boost competition in the rental market and make prices more affordable.
"Reducing supply reduces the number of options and drives up prices. Removing the ability for landlords to claim interest expenses made residential properties less attractive and reduced the pool of properties for tenants to choose from."
"There's many studies that have shown rental prices are much more aligned with tenant income and not with landlords costs," said CoreLogic's Nick Goodall. "So we don't see this filtering through.
"The one good thing it might bring is new investors out of the woodwork, which might increase rental stock."
And Goodall said the changes could put people off investing in new builds.
"That incentive will reduce to buy new builds for investors, so weirdly that might actually mean there's less reason for them to build new which we definitely need."
That rental stock is exactly what Renters United wants the Government to focus on.
"If the landlord has higher or lower costs, rent still continues to go up because we've got a massive housing shortage," Luke Somervell said.
"So if you're not dealing with that, all it's gonna be is a cash handout for landlords."
Asked why there is no provision to backdate interest deductibility to April 1 2023, as laid out in the ACT-National coalition agreement, an ACT spokesperson said: "The coalition had to consider a number of factors while deciding on the interest deductibility policy. Namely the economic mess that Labour has left New Zealand in and the complications of making the policy retrospective.
"We agreed to phase interest deductibility back in a way that is affordable and practical while giving landlords and renters the tax relief they need."
Seymour said the changes are expected to be added to the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill, which is currently before the select committee.
Newshub.
