David Seymour

PHOTO: Associate Finance Minister David Seymour. FILE

The Government has affirmed that landlords will once again have the ability to deduct interest expenses on their mortgages from rental income, a practice phased out by the previous Labour administration.

According to Associate Finance Minister David Seymour’s statement, landlords will initially be eligible to claim 80 percent of their interest expenses starting from April 1, 2024, and the full 100 percent from April 1, 2025, onward. Despite the inclusion of interest deductibility in the Act and National’s coalition agreement, there is no provision for backdating it to the 2023/24 fiscal year.

A leaked Cabinet paper suggests that the government is contemplating extending this measure beyond the scope outlined in its 100-day plan. The move aims to address concerns raised by both landlords and renters, with Seymour stating that reinstating interest deductibility will alleviate rental pressure and simplify tax regulations.

However, the reintroduction of interest deductibility has sparked controversy, with the Council of Trade Unions (CTU) warning of a potential $1 billion increase in costs over four years, potentially benefiting hundreds of landlords disproportionately. Labour leader Chris Hipkins criticized the government’s decision, accusing it of prioritizing tax cuts for large-scale landlords over assisting families with essential expenses such as early childhood education and public transport fares.

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Despite opposition, the coalition government argues that removing interest deductibility would only escalate costs for landlords, subsequently leading to increased rents and a higher cost of living. Seymour highlighted the strain on landlords and tenants alike, emphasizing the need for measures to ease the burden, particularly during times of financial hardship.

Critics of Labour’s policy, including Senior Lecturer Alison Pavlovich, argue that it unfairly targets certain landlords and could drive up rental prices. Instead of implementing a capital gains tax, which was recommended by the Working Tax Group in 2019, the government opted for a less effective approach, creating distortions in the property market.

Inland Revenue also expressed reservations about Labour’s policy, suggesting that while it may reduce housing prices, it could also inflate rents and deter new housing developments in the long run, thus undermining housing affordability.

Seymour believes that reintroducing deductibility will foster competition in the rental market and make prices more accessible. He argues that restricting deductibility diminishes property attractiveness for landlords, leading to a reduction in rental options and an inevitable rise in prices.

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Regarding the absence of a provision for backdating interest deductibility to April 1, 2023, an ACT spokesperson cited economic considerations and logistical challenges, emphasizing the need for an affordable and practical phased approach.

The proposed changes are expected to be incorporated into the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill, currently under review by the select committee.