What are the implications if you have an LTC, now that Labour is aiming to change tax rules for rentals?
10 November 2017
WHAT ARE THE IMPLICATIONS IF YOU HAVE AN LTC, NOW THAT LABOUR IS AIMING TO CHANGE TAX RULES FOR RENTALS?
There are three parts to this:
Part 1: If you have a negative rental, how will the possible changes affect you?
So at the moment you have an LTC, making a loss of $10,000 per year, and the loss is offsetting your personal income and you are saving $3,300 in tax each year.
The likely changes that Labour are suggesting will take some time to put into place, and then Labour is looking at phasing the change in over five years.
- Year ended 31/3/18 = likely no change and still $3,300 refund
- Year ended 31/3/19 = likely no change and still $3,300 refund
- Year ended 31/3/20 = Likely only 80% of loss can offset personal income, refund reduced to $2,640
- Year ended 31/3/21 = Likely only 60% of loss can offset personal income, refund reduced to $1,980
- Year ended 31/3/22 = Likely only 40% of loss can offset personal income, refund reduced to $1,320
- Year ended 31/3/23 = Likely only 20% of loss can offset personal income, refund reduced to $660
- Year ended 31/3/24 = Likely no loss can offset personal income, refund reduced to $0.
Part 2: The losses will still be there and would be carried forward to future years where there was rental profit.
So as your rentals change from negative to positive as you pay down debt, rent rises and depreciation deductions reduce over time, then you would not have to pay tax on the profits for the first few years!
In my opinion, investors should be concentrating on getting passive income from property long term. Therefore, long term, property investors should be paying tax on profits, rather than being worried about whether they will get tax refunds from losses. It kind of gives around five years for a property investor to get their ‘house in order’.
Part 3: An LTC is probably still the right structure anyway.
If the suggested rules come in, and are set up correctly by Government, then all structures will be affected. So if you currently have an LTC, then it is likely to still be a good structure for you. It’s important to always review your structure, but one of the best advantages of an LTC is its flexibility. You can change shareholding long term as your situation changes. Fox example, initially you might have the shares owned by the highest earner to offset their high tax, but long term you might change to a Trust owning the shares to give asset protection and lowest tax on the income. An LTC is also an easy entity to access capital gains!
If the government doesn’t set the rules up correctly (I’d guess a better than 50% chance), then keep an eye on my newsletters and facebook posts, as there is likely to be some clever ways to structure in the future!
So, overall at the moment, don’t panic. If you are currently using an LTC, then it is likely to still be fine. As the new rules become clear, then it would be worth having a free initial telephone chat with me for 5-10 minutes to check if you need to do anything further.