The Times Australia
Business and Money
The Times Real Estate

.

Yes, landlords gain from the repeal of interest deductibility rules – but it was a flawed law from the outset

  • Written by Alison Pavlovich, Senior lecturer in the School of Accounting and Commercial Law, Te Herenga Waka — Victoria University of Wellington

The new coalition government has announced a suite of tax reforms[1], including reintroducing the ability for property investors to deduct the interest costs on their mortgages against their rental income.

Early criticism of the proposed changes has focused on its retrospective nature[2] (it will be backdated to April 1, 2023), potential windfalls to landlords[3] (at the expense of tenants), and the fiscal cost of the measure[4].

Missing from much of the coverage was mention of the previous Labour government’s policy being extremely punitive to some landlords, without necessarily bringing the claimed benefit of improving housing affordability. In fact, it is likely to have put upward pressure on rents.

Alongside the reinstatement of interest deductions, National’s plan to reduce the applicable period of the brightline test[5] – which requires property owners to pay income tax on property sold within a certain time frame – from ten years back to two years.

While property investors will benefit from the proposed changes, there have been some real issues with Labour’s earlier tax reforms. We should be glad to see them gone.

Denying deductions on residential properties

In 2021, the Labour government announced plans[6] to phase out the deduction of interest against income derived by residential landlords.

These changes meant landlords couldn’t offset interest payments against their rental income. If the property was later sold, the accumulated interest costs would then become deductible against any taxable gains.

Read more: Why a proposed capital gains tax could mean tax cuts for most New Zealanders[7]

Much like the extension of the brightline test from five to ten years, proponents of this law change said it would address housing affordability[8] by reducing investor demand.

As it happens, investor demand in the property market has reduced significantly since 2021. But whether denial of interest deductibility has caused or even contributed to this will never be known.

During the past two years, the property market has experienced a slowdown[9] due to rising interest rates, stricter lending rules, and a general reduction in economic confidence in New Zealand.

End of a flawed law

Some criticisms of the new government policy are valid. It is retroactive, benefits property investors, and is expensive for the government to implement. But on the flip side, the policy removes a fundamentally flawed law.

When the government proposed the denial of interest deductibility in 2021, Inland Revenue advised against it[10] on the basis that the change was unlikely to improve housing affordability.

According to this analysis, while the measure might put downward pressure on house prices, it was also likely to result in upward pressure on rent. The policy also had the potential to reduce the supply of new housing developments in the longer term.

An incoherent tax system

More broadly, Inland Revenue said it was concerned the measure added to the compliance and administrative burden on affected taxpayers, and eroded the coherence of the tax system overall.

This last point is important.

A good tax system should be coherent and comprehensive. The introduction of the denial of interest deductibility reduced the coherence of the tax system.

There is a fundamental (and long-standing) principle in tax law: the costs associated with producing taxable income can be offset against that income – with employees being the one major exception to this rule. But in most other cases, expenditure incurred in producing taxable income is deductible.

Removing the deduction of interest expenditure, an often substantial and very real cost to property owners, is a significant departure from this principle. It was likely to cause financial hardship for some landlords.

Read more: New Zealand's tax system is under the spotlight (again). What needs to change to make it fair?[11]

Furthermore, this incoherent measure was introduced, at least in part, to compensate for the obvious hole in the current tax system – the lack of a comprehensive capital gains tax.

The then revenue minister, David Parker, acknowledged the tax system benefits residential landlords[12] by exempting many from tax on any capital gain upon sale of the property.

But rather than introducing a tax on capital gains – widely accepted as part of a comprehensive tax system[13] and supported by the Working Tax Group[14] in 2019 – the government chose to implement a distortionary measure in an attempt to address the problem of tax advantages for residential property investors.

Still no capital gains tax

The government may well be winding back the measures introduced by the previous government to appease its property investor constituents.

And there is no real chance the new government will introduce a comprehensive capital gains tax, which would improve the coherence and comprehensiveness of New Zealand’s tax system.

In fact, by reducing the application of the brightline test to two years, quite the opposite is intended.

But the interest deduction denial was unlikely to achieve a great deal more than an increase in rents. It was a bad law, and there are good reasons for it to be gone.

References

  1. ^ a suite of tax reforms (newsroom.co.nz)
  2. ^ retrospective nature (newsroom.co.nz)
  3. ^ potential windfalls to landlords (newsroom.co.nz)
  4. ^ the fiscal cost of the measure (www.newshub.co.nz)
  5. ^ brightline test (www.ird.govt.nz)
  6. ^ Labour government announced plans (www.newshub.co.nz)
  7. ^ Why a proposed capital gains tax could mean tax cuts for most New Zealanders (theconversation.com)
  8. ^ address housing affordability (www.theguardian.com)
  9. ^ experienced a slowdown (www.rnz.co.nz)
  10. ^ advised against it (www.taxpolicy.ird.govt.nz)
  11. ^ New Zealand's tax system is under the spotlight (again). What needs to change to make it fair? (theconversation.com)
  12. ^ benefits residential landlords (www.taxpolicy.ird.govt.nz)
  13. ^ comprehensive tax system (www.nzherald.co.nz)
  14. ^ Working Tax Group (taxworkinggroup.govt.nz)

Authors: Alison Pavlovich, Senior lecturer in the School of Accounting and Commercial Law, Te Herenga Waka — Victoria University of Wellington

Read more https://theconversation.com/yes-landlords-gain-from-the-repeal-of-interest-deductibility-rules-but-it-was-a-flawed-law-from-the-outset-218818

SME Business News

Why Your Dental Business Needs Professional Digital Marketing Services

Running a successful dental practice today requires more than just great patient care. In a digital-first world, your online presence plays a huge role in how potential patients discover, choos...

Brand Storytelling: How Video Marketing Can Enhance Your Brand Identity

In the competitive landscape of 2025, building a strong and recognisable brand identity is crucial for standing out in the marketplace. One of the most effective ways to shape and communicate y...

Future-Proofing Your Business with Strategic Defence Insight

In an era marked by rapid technological change, global uncertainty, and evolving security risks, the need for long-term resilience in business has never been greater. Organisations across indu...

Maximise Your Amazon Profits with These 5 Simple Seller Strategies

Selling on Amazon offers countless opportunities for individuals and businesses to grow their income. But with so many sellers joining the platform every day, it’s not enough to just list your ...

The Times Features

From Classic to Contemporary: 5 Timeless Costumes for Any Party

When it comes to dressing up for a costume party, you want to choose something that is not only fun but also memorable. Whether you're attending a Halloween event, a themed gathe...

Action Figures as Art: The Growing Trend of Custom Figures and Modding

Action figures have long been regarded as collectible items, valued by enthusiasts and fans for their connection to popular culture. However, in recent years, a growing trend has...

The Ultimate Guide to Securing Grants for Your Small Business in Australia

Running a small business in Australia comes with both opportunities and challenges. While it can be rewarding, funding your business through the early stages or periods of growth...

Men’s Guide to Styling Suits with Sweaters for the Ultimate Winter Look

Winter brings a unique set of challenges when it comes to maintaining a sharp and stylish wardrobe. While suits are a staple of a well-dressed man’s closet, staying warm during t...

Discover the Charm of a Girl's White Dress

Key Highlights Timeless elegance: White dresses feel pure and have classic charm. They are perfect for many types of events. Versatile styles: You can pick from lace, embroid...

Top Medical Grade Red Light Therapy Devices in Australia

Key Highlights Lumitter™ has advanced red light therapy devices that combine new ideas with wellness. Red light therapy helps lower pain and swelling and boosts skin health. ...

Business Times

Why Your Dental Business Needs Professional Digital Marketing Ser…

Running a successful dental practice today requires more than just great patient care. In a digital-first world, your onlin...

Brand Storytelling: How Video Marketing Can Enhance Your Brand Id…

In the competitive landscape of 2025, building a strong and recognisable brand identity is crucial for standing out in the ...

Future-Proofing Your Business with Strategic Defence Insight

In an era marked by rapid technological change, global uncertainty, and evolving security risks, the need for long-term res...

LayBy Shopping