Government working on “ring fencing” rental property losses

The latest crackdown on property investment looks likely to focus on “ring fencing” losses in real estate so they cannot be set against other tax.

Tuesday, June 19th 2007, 6:00PM

by Rob Hosking

Quizzed in Parliament by National finance spokesman Bill English, Finance Minister Michael Cullen said today that although there is no formal government policy yet on the issue, work is going on.

“I personally believe that it is worth investigating…there has been very, very substantial growth in losses, which have substantially outgrown the actual rental income. That clearly points to heavy gearing of the purchase of rental property, and probably has contributed to an overheated housing market.”

Investment in housing benefits from deductibility of interest and depreciation deductions, Cullen says.

“One can borrow 100% of the asset and offset the losses from that against other income. There is no other asset class where one can borrow 100% of the purchase price with no expectation of a return in terms of income, as opposed to capital gain, at the end of the day.”

That area is the focus of Treasury work, he confirmed, and added that the Inland Revenue Department favours “ring fencing” such losses.

Cullen dodged a question from English about when any “ring fencing” regime might be implemented, by saying this would happen “when Mr Key wins the argument with Mr English, because I know that Mr Key supports this particular move.”

Cullen emphasised, in response to a friendly question from Revenue Minister Peter Dunne, that the government has no plans to introduce a capital gains tax, despite apparently being urged to do so by the Reserve Bank this week.

“The government is not working on a capital gains tax...it would have to be a generalised capital gains tax across all asset classes, and the government has no intention of introducing such a regime.”

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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