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Ring-fencing: I am not worried. Neither should you.

Lucia shares her thoughts on the government's proposal to ring-fence rental losses and why investors shouldn't panic.

Lately, ring-fencing seems to be on every investors’ minds. Why shouldn’t it be? Ever since the Inland Revenue Department published issue paper Ring-fencing rental losses and called for public submission, the industry has been abuzz with ‘predictions’ that this will spell the end of residential property investment as we know it.

I for one think drawing hasty conclusions that are nothing more than gobbledygook does no-one any favours. To ring-fence rental losses in the proposed form will not, and should not, deter those that are long-term true investors. 

Let’s break it down: 

  • It is being phased in from 1st April 2019 for the 2020 financial year and will likely take at least three years to come into full swing; 
  • Losses can be offset against profits made on other properties under the same entity; 
  • Losses can be offset against future profits which means overtime there is no net change to the tax effects of your rental’s activities; 
  • If you are a true investor then you understand that you are running a business (not just parking your money in a property). Why on earth would any business owner aim to make a loss is beyond my comprehension. Flipping over this argument, you will see that the key is not in bemoaning tax policies but rather look at ways to increase your rental income; 
  • In its proposed form, the policy will only impact businesses that use ‘negative gearing’ as an inducement to sell their building products such as new builds. Buying new builds is a very particular strategy not shared by most investors. 

Overall, I do feel that there has been an unwitting conflation between policy decision and market reality. Just because the policy flavour du jour is ring-fencing doesn’t mean all property investors are running around making a tax loss. Just because you can’t claim your losses doesn’t mean you are going to make a loss. The ones who panic at a mere whiff of ring-fencing are doing nothing more than pulling a bait-and-switch on themselves. Keep your head down, focus on the business at hand – that is running a profitable rental portfolio!

 

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Lucia Xiao Finax

Finax founder, Lucia Xiao regularly publishes thoughtful articles sharing market insights as well as tips to help you succeed.

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