Why landlord is a business that is not treated as a business

Providing a service to make a profit fits the definition of business, but there is ongoing debate over whether private landlords who rent out homes should qualify.

If someone collects rent on a rental home they are running a business, whether their rental property is a deliberate investment, or an accidental acquisition, the Ministry of Business, Innovation and Employment (MBIE) website states.

That means there are rules and regulations that landlords need to comply with.

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But landlords say they are not treated like other businesses, and are subject to more rules and regulations, and that is not fair.

One counter-argument is that because housing is considered a human right, landlords have a responsibility to provide a decent home, and that makes them different from other types of businesses.

So Stuff asked some experts to put forward their arguments on why landlords are treated differently to other businesses, and whether it should be.

Property Investors Federation vice-president Peter Lewis

Inland Revenue, MBIE, and WorkSafe all classify, control and treat the provision of rental accommodation as a business.

That means landlords have the legal obligations of being in business, and yet many people question whether providing residential rental accommodation is a business.

There is no hesitation in treating motels or hotels, which rent out rooms by the night or week, as a business. Landlords rent out properties for longer periods of time, but that is the only difference.

But the provision of residential rentals is treated differently to other businesses. The removal of interest deductibility on rental income, while other businesses are able to deduct interest, is a good example.

It has pushed rents up as landlords to try to recover costs, because the goal of a business is to make a profit. There is no reason that landlords should not aim to make a profit from what they do, just as other businesses do.

Some people believe landlords should be a charitable enterprise, not a business, but I think it’s okay to make money by providing a service that people want. Landlords pay taxes on the rental income they make, and part of that goes to fund the social welfare state.

Housing is no more of a human right than food, or water, but the suppliers of those goods are not subject to the same demands, around freezing prices for example, that landlords are subject to.

If there is a right to housing, someone has to supply it. Either the state does and pay taxpayers, or private landlords, who are more efficient than the state, do, and they earn money from it. Nothing is free.

Infometrics chief executive Brad Olsen

The ability to deduct interest is definitely part of being a business, and, on pure economic principles, landlords should be able to deduct interest from their rental income.

But if providing residential properties is a business, then all the other rules of business should apply to landlords too.

Additionally, landlords need to think about the quality of the service they provide. For businesses, there are fair trading rules and consumer guarantee protections in that space.

And that means the healthy home standards are required, and are not an unnecessary burden as some landlords have claimed.

Part of the confusion is because housing is a human right, and providing it is a public good.

There are reasons why we do not let private companies run the police or the military, but rent properties sit in the middle of the continuum.

That means landlords are not purely a commercial business, there are other elements to it.

But food is a human right, and there is not particularly heavy regulation for food growers and supermarkets, although there is an expectation that prices in those markets will not get too out of whack.

Tax expert Terry Baucher, from Baucher Consulting

It is not technically correct to say no other business is denied interest deductibility, and that landlordship is unique in that sense.

Take a look at the thin capitalization rules or New Zealand companies with overseas parent companies. Within these rules, there is a 60% safe-harbour threshold, and if the threshold is exceeded there is no interest deduction.

While there are some differences, their existence shows there are similar rules for other businesses within New Zealand’s tax regime.

One of the big questions around landlord as a business is the expectations around returns.

As a businessman, if I go to the bank to borrow to invest in plant machinery, the bank will ask what the cash return on it will be.

But with a property investment, the cash returns are generally low, so why borrow for that? It is the expectation of an increase in capital gains that drives it.

Large investors, with 10 or more properties who are operating at scale, will generate the returns to provide a liveable income. But if a landlord is borrowing $1 million, and there is a 2% return, that is not a liveable income.

And that is the difference between the landlord business and other businesses.

Landlords, particularly general and dad investors with one or two properties, are usually looking for a different type of gain to other businesses. For most, it is an investment for the future, which is fair.

But it is not a business model in the proper sense of the word where the aim is to earn income and produce a return on equity above what is borrowed. As motels and hotels are expected to, for example.

That means it is not correct for landlords to say they are the same as other businesses, and being treated unfairly. The situation for most is actually different.

In itself, the interest deductibility policy is ad hoc, and due to New Zealand’s failure to tax capital properly. But there are distortions in the housing market, and that is a big picture of things that need to be addressed.

Human Rights Commission housing inquiry manager Vee Blackwood

Mum and dad landlords might invest in residential property to build up a nest egg for their future, but if someone is earning money from renting to tenants it is a business activity, and should be treated as such.

But all businesses have human rights responsibilities, and some businesses have further human rights responsibilities by the nature of the service or product they provide.

There are a range of businesses where this applies, such as a business running a prison, which is subject to the convention against torture.

Landlords are one of those businesses because they are a duty bearer under the right to a decent home.

The right to a decent home is a fundamental human right, guaranteed by international human rights laws that successive governments have signed up to. There are seven components to it, including affordability, habitability, and security of tenure.

Some landlords were great, and did lots of work to deliver on their obligations, in part through adhering to tenancy laws.

But there are others who do not understand their responsibilities under the tenancy law, or realize they have human rights obligations.

There has been progress in recent years, with the tenancy law changes and the healthy home standards, but the government needs to do more to ensure landlords are aware of their obligations, and delivering on them.

That could mean regulating landlords as property managers are set to be, or maintaining a record of landlords who are compliant with the healthy home standards.

Compared to many other professions, landlords are largely unregulated. It would not be acceptable to not have the company register, so why is it acceptable to not have a register of landlords?

Comments by Brad Olsen in an earlier version of this article incorrectly suggested that if you sell a business and make a profit you need to pay tax on that gain. The comment has been removed. Article amended at 12.55pm, March 27, 2023.