Housing policy to boost business ownership?

The Government's new housing policy has removed the tax deductibility for interest costs associated with residential property investment. This new policy, along with the extension of the bright-line test from 5 years to 10 years, will further reduce the commercial benefits of residential property investment.

Chris Small, managing director of ABC Business Sales, says that one side-effect of the changes will be to encourage people to buy businesses instead.

‘Business ownership continues to be exempt from any capital gains tax and all interest costs continue to be 100 percent tax-deductible,’ he writes in the company's latest newsletter. ‘This is a clear message from the Government they are wanting to encourage more of New Zealand’s investment dollars into the business sector and away from the residential property market. The Government has a strong view that business investment is better for the economy and creates more jobs than residential property investments.’

Chris suggests that one line of thought for property investors caught on the wrong side of this new legislation is to consider business ownership as a tax-efficient asset for any bank debt required for property ownership. 

‘New ownership structures for property investments will be encouraged to diversify into business assets so they can still claim all their interest costs for the annual tax return. Experts and accountants have already commented that all new investment structures should move debt out of investment properties and leverage up business assets that continue to offer tax deductibility for interest costs.’

He concludes, ‘We expect this new tax policy to increase interest in business ownership and this will have a positive flow-on effect for the future New Zealand economy.’

The accountant's view

Philip Morrison, of specialist advisors Franchise Accountants, comments: ‘There will certainly be a period of significant adjustment as the initiative is effectively putting increased tax burden on investors. This will see some investors rationalise their portfolio and sell down their properties.  

‘Many of these are mum and dad investors, who might own a rental on fixed salary incomes. If they can’t sustain the tax burden, they may be forced to sell up and look elsewhere for investment income to supplement their pension. This group won’t be investing in businesses. Equally, those that have higher gearing on multiple properties will downsize to get the cashflows working right, while those that have some capital to invest would most likely look to the share market before a business – although some may look for opportunities which offer semi-passive income.

‘Given that, then, my call would be that maybe 10-15 percent of people will be encouraged out of investment properties and into business ownership. This is still a considerable number, especially in the current market. In the long term, the new policies could create a fundamental shift in investment habits, with business ownership becoming more attractive.’