“Congratulations to Chris Hipkins on becoming the new Prime Minister of New Zealand. We applaud his stated aim to “focus on bread and butter issues” like the cost of living and the economy” says Sue Harrison, President of the NZ Property Investors’ Federation (NZPIF). “He could make an immediate improvement to one aspect of the cost of living – that of rents – by reversing the staged removal of mortgage interest deductions as a legitimate business expense. This was put in place on March 2021 by the previous Government.”

“This policy is forcing many landlords to increase the rent they are charging simply to cover the now higher cost of owning their rental properties’, she said “Ultimately it is the tenants, already struggling with other increases in the cost of living, who will suffer.”

It’s pretty well understood that if you borrow money to then derive income you can claim a tax deduction for the cost of borrowing that money. Interest is a cost incurred to derive income and, on that basis, investors should continue to be able to offset that cost against the rental income earned. Interestingly, advice from Inland Revenue to the Government at the time this March 2021 policy was considered warned that the proposed legislation could risk putting up rents for tenants and increase opportunities for tax avoidance. In addition, rising interest rates for mortgaged owners on top of this policy make for a ‘perfect storm’ where some rental properties will need to be sold if owners cannot meet the additional costs. This would decrease the number of rentals available.

Consequently, the reality of these new changes is that rents will need to increase substantially, as indicated by Inland Revenue, in order to try and meet these new costs. This is how one rental property owner explains the situation.

“For a Wairarapa property we have owned for 4 years, this coming year we will pay $22,800 in interest costs and now we can only deduct 50% of this as an expense. This will cost us an extra $3,762 in additional tax or $72 per week. My tenant’s weekly rent will unfortunately need to go up to help cover some of this cost,” says Tim Horsbrugh. “If this policy is not reversed and I cannot deduct any interest cost at all in the future, then the additional tax will be $7,524 or $144 a week, which inevitably will increase the cost of the rental for the tenant yet again, contributing to a further increase in the cost of living for them”.

“If the newly-refreshed Labour Government is serious about combating the rising tide of inflation it should immediately move to reverse these punitive, illogical and misguided changes to tax law” said Harrison.

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