Tax decision will concern investors

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News that the IRD considers as few as five rental properties to be a business will likely register as an unpleasant surprise for many property investors.

Tuesday, October 9th 2012, 12:00AM 4 Comments

by The Landlord

The NZICA has revealed that the IRD has won its case claiming that an investor could not use losses from her rental properties to claim Working For Families credits because she was operating her portfolio in a way that amounted to carrying on a business.

There will be countless investors around the country in her situation. With relatively small property porfolios, they offset their losses against their incomes to increase their Working for Families credits.

They could conceivably get about $3000 per child per year – that’s a lot of money to pay back if the IRD decides their operation is a business and those losses are disallowed.

Remember, while the losses may be deemed to be out of bounds for Working for Families calculations,  that doesn’t mean they haven’t come out of an investor’s pocket in the first place.

This raises a host of questions. If five properties can be a business, what about four? Or three? Would an investor with seven rental properties who also has a full-time job be considered to be running a business on the side? What about an investor with one, expensive property worth the same as multiple others? Are they then liable for GST?

The IRD says someone cannot be in the business of renting unless there is an intention to make a profit. Just holding a property to derive rental income wouldn’t make a business. But what exactly counts as a profit appears to be up for debate.

Things such as the scale of the operation are considered, the commitment of time, money and effort and the pattern of activity.

In this case, the woman’s investment properties were all acquired within quite a short period and she admitted the ability to claim the losses and receive more Working for Families credits was one of the factors that made property investment appealling.

It is common for accountants to suggest that landlords use rental property losses to maximise Working for Families credits – it’s about making the best use of debt. The debt isn’t taken on without risk and for most investors it is quite some time before they can expect any tangible profit from their property portfolios, no matter what kind of suggestion of intangible profits the IRD claims to have uncovered.

It's another example of landlords being unfairly targeted. Can you imagine someone running a sophisticated portfolio of shares in their spare time being called a business?

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