New Law: Loss Ring-fencing - how does it affect your renovation?

The proposed loss ring-fencing rules have been making headlines of late – but what does it mean for your property? Should you be renovating before it comes in? We take a look at the proposed legislation and how it impacts on property owners.

What does the proposed legislation mean?

A White Paper drawn up by the IRD in March this year seeking to ‘ring fence’ losses from rental properties, means landlords will no longer be able to use those rental losses to reduce other taxable income – for example, wages, salaries, or business income (thereby reducing tax payable).
The proposed new rules will still allow a deduction, but they will prevent offsetting losses against other non-property income sources.
If these proposals do come to pass, the expectation is that they will apply from the beginning of the 2020 tax year. This effectively means they’ll be in play from April 2019;  however, IRD has also suggested that these rules may be phased in over two or three years.

Who will these rules impact and what should they do?

The proposed rules only impact those that derive income from rental properties, so it won’t impact on homeowners or the ‘main home’. But for landlords that have deferred maintenance on their rental properties, it will be important to consider bringing forward that maintenance programme to ensure that they can still obtain the current tax benefit before April 1, 2019.
“However, before landlords consider doing this, they need to make sure that the work they do meets the IRD requirements for deductible repairs, and doesn’t fall into the area of improvements for which no deduction is available,” says Humphries Associates’ Blair Jarvis.
It’s key to understand what is considered an improvement versus what is considered maintenance because you don’t want to invest a lot of money into renovating your property only to find that it doesn’t fall under tax-deductible work in IRD’s definitions.
Jarvis provides a summary of the basic principles of maintenance versus improvements below:
1. Restoring an asset to its original condition would normally be considered a repair.
2. Improving an asset beyond its original condition would normally be considered an improvement.
3. There are specific rules that prevent “apportioning” work done partly between repairs and improvement. Generally, in this scenario, the entire project would be considered an improvement.
4. There are specific rules that deal with repairs undertaken immediately on acquisition, which can mean that deductibility is limited.
5. There are specific rules that deal with repairs undertaken prior to the sale of a property, which can also mean that deductibility is limited.
For those that have rental properties that have fallen behind on maintenance, it’s a good time to evaluate the maintenance needed to bring them up to date and to understand the benefit of addressing that maintenance before the legislation comes in. But before engaging your Refresh consultant, make sure you speak to your accountant first.
Renovation is defined as “to repair or improve something” says Jarvis, and therefore each renovation must be considered on its own merits as to how the IRD requirements apply. Jarvis recommends that anyone looking to undertake a renovation for an investment property needs to seek professional advice before they commit, to make sure their plans fall within the realms of ‘maintenance’ and that they don’t find themselves on the wrong side of the IRD.

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If you would like to discuss your rental improvement ideas with a renovation expert, get in touch to arrange a free consultation. 

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