Government’s $3 billion landlord tax cut would be retrospective and trigger some refunds - IRD

The coalition has pledged to revert to the old rules, effectively offering a large tax cut to landlords.

The new Government’s plan to allow landlords to deduct interest costs from their tax bills could be retrospective, according to the Inland Revenue Department (IRD).

For years, landlords had been able to deduct interest costs from their tax bills, reducing the amount of tax they pay. The former Government changed this, increasing the amount of income subject to tax and therefore increasing landlords’ tax bills.

The coalition has pledged to revert to the old rules, effectively offering a large tax cut to landlords. However, the cost of doing so was so great, the three agreed to slowly phase in the new rules. The National-Act agreement confirmed landlords would get a 60 per cent deduction in 2023/24, rising to 80 per cent in 2024/25 and 100 per cent in 2025/26.

The agreement has been the subject of some controversy, because, if read literally, it would mean some landlords receiving a tax refund for the 2023/24 tax year, because the change would apply retrospectively to tax paid during the 2023/24 tax year, which began on April 1, 2023.

The IRD’s deputy commissioner David Carrigan told Parliament’s Finance and Expenditure Committee today that the proposal contained in the coalition agreement would be “technically retrospective because people with rental properties at the moment are currently not receiving the deductions”.

Carrigan explained the way the change would work would depend on when someone needed to file their tax return and whether they had paid provisional tax throughout the year.

“You would look to the way the return is needed to be filed for the 2023/24 year. The earliest it would be due is July 7 this year. If you had an agent [tax agent], [it] is delayed until March 2025. If it was passed as part of Budget night legislation, that would give people time to... reflect that in their assessments,” Carrigan said.

This means that while the changes were retrospective, people filing returns after the tax year had finished could simply file returns reflecting the new law and pay tax at the appropriate rate. This would mean no refunds to those people because they hadn’t paid the tax that would need to be refunded.

However, Labour’s finance spokesman Grant Robertson asked what would happen to people who had paid provisional tax throughout the year - would they get refunds?

Carrigan confirmed this was on the cards.

“Yes, it would [trigger a refund]. That is a good point,” Carrigan said.

“That’s the second order issue you’d have to work through.”

Act leader David Seymour would not speak in detail on Carrigan’s comments, as Cabinet had not yet taken final decisions on how the policy would be rolled out.

“I don’t see [refunds] as bad PR when you are letting people pay less tax, especially when it comes to residential accommodation. There’s a shortage of housing out there. The easier we make it to be a landlord, the more likely it is people are going to find a place to rent,” Seymour said.

He said the “exact timings” of the scheme and “whether it is retrospective” would be clear shortly.

Finance Minister Nicola Willis said she would not speak to Carrigan’s remarks because she had not yet had the opportunity to hear them and the policy had not yet been announced.

Carrigan was appearing before the committee for the IRD’s annual review.

Council of Trade Unions chief economist Craig Renney, who now sits on Labour’s Policy Council, estimated reallowing the deduction of interest costs will cost about $3 billion over the forecast period.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.