What business expenses can you deduct in your income tax return? It depends on your business structure, but includes things such as:
WHAT CAN YOU DO?
1. LOANS: In other news, with the OCR dropping to 0.25%, your bank should be passing on rate cuts for any floating loans, and it is worth looking at existing loans to see if you should break and re-fix or extend the term. Break fees are tax-deductible. Ask the bank or your mortgage advisor to do the calculations for you, or use this tool here. You might also want to look at a mortgage holiday, but just be aware that this will increase the loan,^ but it will buy you some time, so in the big picture, may be worth it. We suggest you only do this if you really need to i.e. don't rush and organise that with your bank or broker today; wait a couple of weeks to see how things pan out. (By the same token, if doing so relieves you of stress, then it is probably well worth it. Don't feel bad, either way. These are unprecedented events.)
Please see this detailed page with info about mortgage holidays, including links for all the major banks to apply for one. See also our blog post with 4 options for your mortgage to improve cash-flow right now
2. RENTS: Rent increases are off the table at the moment, as rents have been frozen by the government. In Australia, landlords have been asked to be lenient if tenants start to get behind on their rent, and we suggest you keep in close contact with your property manager over the coming months.
3. PAYMENTS: Of course, cash-flow is king, and in this environment, we suggest asking your suppliers if you can start paying in smaller regular installments, rather than bigger sums. This will help reduce the impact of having less cash coming in. EpsomTax.com group offer interest-free time payment plans to all customers as a matter of course; please contact us to arrange this now.
4. INVESTING: This might also be the time to look out for housing bargains - see this article about timing and buying. If you can get a good deal on a cash-flow positive rental, that's going to introduce some $ into your portfolio. Banks are working as normal, and documents can be signed remotely. Of course, inspecting properties is an issue, and getting tenants in (as moving services are likely not considered to be "essential." Nonetheless, getting pre-approval and "looking" (online/via video) at houses can still be done during this time.
Q: An LTC owns rental properties. Some tenants have stopped paying or reduced payments by 30% due to COVID-19. Can the shareholder-employees receive the wage subsidy? What about a sole trader or partnership or trust that owns a rental/s, same situation? Can they apply?
A: Yes. Tenancy Services has a page on the impact of COVID-19. It says:
If you are likely to continue having trouble, think about other options:
The key thing to bear in mind when applying is to be well prepared, frank and open about all relevant facts.*
Your application will need to identify the people to whom the subsidy relates and, in the case of the LTC, partnership or trust, undertake to use best endeavours to keep them on as shareholder-employees. See here for the declaration that needs to be made.
6. OTHER RESOURCES: Xero.com have provided a page with links to educational content. You don't have to be a Xero user to access all of it. Webinars include managing stress, resilience, business continuity and so on.
What good news is there for the coming weeks and months, in view of the COVID-19 pandemic and its effects on the economy?
Government policy changes include:
# this means that if your end of year tax bill is under 5k, you don't have to start paying provisional tax (2-3 times yearly). Note that doesn't affect the 19/20 year; it affects the 20/21 year. So if you already became a provisional payer for 19/20 year, you still have to pay provisional tax. But it means you might slip under the threshold for FY21. Talk to us about what to do in this situation. It also means that if you bought an asset e.g. a clothes line, or a new letterbox, for the financial year ending March 31 2020, and it is under $1,000, you can claim the lot, instead of having to write it off over several years (depreciate it, in other words). And next year gets better, with the level going up to 5k!
* The wage subsidy and leave payments are NOT subject to GST - an Order in Council was passed to treat it as exempt (Section 5(6E)(B)(iii GST Act). The wage subsidy paid to the employer is not taxable; it is excluded income under section CX 47 of the Income Tax Act 2007; it is also therefore not deductible when paid by the employer as part of wages to employees. The payments made to employees are taxable for the employee and subject to PAYE, KiwiSaver deductions, Student loan etc in normal way. The same is true for self-employed persons: it is taxable income. NB: you only need to show a 30% revenue reduction for a single 4-week period to receive the full 12-week lump sum; you should be able to show that you took active steps to mitigate the financial impact of COVID-19, which could include drawing from your cash reserves (as appropriate), activating your business continuity plan, making an insurance claim, proactively engaging with your bank or seeking advice and support from either the Chamber of Commerce, a relevant industry association or the Regional Business Partner programme.
% You can't apply for the Wage Subsidy Extension for an employee until their 12 week Wage Subsidy has finished. Applications open from 10 June 2020.
^ How it works is that the principal payments temporarily stop and the interest is added to the mortgage
NB: It is fair to point out that we are accountants and not lawyers. The measures taken by the Government are being monitored and may be changed, as they see fit. Our answers are based on our understanding of the somewhat limited information that has been made available publicly at this point.
In addition to the measures announced (see this article and this article), the government recently announced several new measures (this article was updated 22/05/20:
TAX LOSS CARRY-BACK SCHEME
IRD say "Businesses expecting to make a loss in either the 2019/20 year or the 2020/21 year would be able to estimate the loss and use it to offset profits in the past year. In other words, they could carry the loss back one year. This change means we could refund some or all the tax already paid for the year they were in profit. It means firms could cash out all or some of their losses in 2019/20 or 2020/21. Without this change, firms would have to carry forward any loss to a year when they make a profit."
Points to note:
If you are unable to pay this tax on time because of the effect of COVID-19 on your business, IRD expect that you will pay this tax as soon as practicable. In such cases our recommendation is that you contact IRD now to let them know you can’t pay the tax on time and negotiate a payment plan. That will typically be an arrangement to pay the tax over a number of months (or fortnightly or even weekly), and possibly with a deferred payment start date. As part of that process, although this is not specifically mentioned on the IRD website, a pre-requisite may be that you have applied to your bank for some help under the business finance support package underwritten by Government. The advantage of talking to IRD as soon as possible is that you will most likely qualify for remission of late payment penalties and interest.
If you would like us to talk to IRD on your behalf, please let us know at your convenience. We will then contact you to discuss the best approach, and whether or not to use this or tax pooling.
* IRD can remit Use of Money Interest (UOMI) and penalties; criteria are:
To prove you've been "significantly affected", you'll likely need to provide at least three months’ banks statements and/or credit card statements, a list of aged creditors and debtors and probably profit and loss statements and/or balance sheet from your business.
Alternatively, you might also be able to apply to
What are your options for managing your loan or mortgage during the COVID-19 outbreak?
RESTRUCTURE / renegotiate
Depending on when you last fixed your loans, you may be able to get a lower rate now. Look into what the bank's break fee would be (break fees are deductible on rental properties); chat to your mortgage advisor if the bank isn't playing ball. Or if they are being greedy at a difficult time.
You might also be able to push the loan term out e.g. from 25 years to 30 years. Yes it will cost you more interest but will improve cash flow now by lowering repayments.
It's not really a "holiday", but rather a "payment deferral." How does it work? While you don't have to make payments during the mortgage holiday, you still get charged interest. What's that going to cost? Well, it could be significant. If your loan is 500k, then it could add about 15k to it (assuming 4% interest p.a.). If you didn't increase your repayments once the holiday is over, you'd pay about 35k more on your loan!
So, think carefully about this. One thing you can do is request the 6-monthly holiday, then if you don't need all six months, end the holiday and renegotiate.
MORTGAGE HOLIDAY + VOLUNTARY REPAYMENTS
As above, but you keep making payments as you can afford them. This will give you some relief but reduce the interest on the loan. Or save money, and then whack it on the loan when you go back to work/cashflow returns to normal. Achieves a similar thing.
Instead of paying principal and interest, look at paying interest-only. There should be no break-fee for this at the moment. Just keep in mind that if property values drop, you could end up owing more than the property is worth. It has happened, but is unlikely.
You may be able to extend the term of your loan, which would lower repayments. Of course, you will pay more interest in the long-term, but it will help immediate cashflow.
Inland Revenue have released the September 2019 Tax Information Bulletin (TIB), which clarifies this.
For the purposes of this blog post, we are going to assume that the LTC or an individual only holds residential rental property i.e. no commercial, they are not a trader or an associated person or a developer etc, they don't have an Airbnb-style short-stay accommodation house in the picture.
Can losses from an LTC with residential rental property be offset against income from rentals owned by a partnership or in your personal name?
It depends on whether
However, the answer is essentially, "Yes", if:
So the result is, you can have a negatively-geared LTC, and given the above points, the losses can flow through to you as a shareholder. You can then offset this against profits from a personally-owned rental (either solely owned or in a partnership). The situation also works in reverse ie there are profits in the LTC and losses in the personal/partnership rental.
Note that you can't offset any losses against income from other sources e.g. wages, like you used to in the good old days. That is what the concept of "ring-fencing of losses" means. The losses are "ring-fenced" so that they only apply to residential rental property.
Some interesting points
Do restructure strategies such as selling your old family home to an LTC still work?
We have previously recommended this, in blog posts such as this one. The answer is that yes, the rules are unchanged, and this still effectively meets IRD requirements for interest deductibility and remains a good strategy.
However, just be aware that any losses are ring-fenced, as described above. For more info, the IRD Sept 2019 TIB is below
As always, situations vary, so please contact us for advice on your specific situation. Call 099730706 or email us here
Trust law changes: New Zealand. What are they, and how will they affect you and your trust?
The main changes are:
Now, you might already be doing this, but here are some more changes; the new law lists core documents that all trustees need to retain:
If you are a client of EpsomTax.com Limited, you already do this.* But if you don't have up-to-date financial statements for your trust, you will have a lot of work (and expense possibly) ahead of you (contact us for a quote on 099730706). That might be this lady's problem...?
Anyway, another big big change for trustees is that you will need to tell the beneficiaries info such as:
BENEFICIARIES BECOME SETTLORS - HOW?
Here is the jargon: Section 67 of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 enacts an amendment to section HC 27 of the Income Tax Act 2007.
That amendment provides that when a beneficiary of a trust is owed an amount by the trust, the beneficiary does not become a settlor of the trust if –
How do you know if one of your beneficiaries is owed more than $25,000 by the trust? The trust will need a balance sheet, at the very least, to track this.
What should you do if this is the case?
Yikes! So, some big changes coming. For a more detailed summary, please visit this page at Rainey Collins.^
* See a link to our blog articles on this subject here
^ The information on this page has been kindly reproduced by permission of Rainey Collins. This does not constitute an endorsement of EpsomTax.com Limited by Rainey Collins. EpsomTax.com Limited cannot provide legal advice. Please contact Rainey Collins for more information on what this means for your trust.
Capital Gains Tax (if it happens): what will be the effects on rental properties? What strategies could be employed to minimise tax effects? Here is a high-level overview:
WHAT WILL BE TAXED?
Everything except your grandma.
No, not quite. All land except family home, shares, business assets and intangible property. Seems that cars, boats, jewellry, fine art, collectibles and other household durable items would also be excluded.
HOW MUCH TAX?
At present, it would be at the tax rate of who/whatever owns the asset i.e. if a person, and they are earning $70k/year, then 33c/$. However, the common view is that this will be watered down to something more like the Australian rate, which is a flat 15c/$.
That being said, the proposal is to extend the lowest tax threshold of 10.5c/$ from $14k/ year to $20k/year, which is $420/year extra. Break out the party poppers.
Note also, that the proposal includes allowing depreciation on buildings once again. The more things change the more they stay the same! It would also allow deductions for seismic strengthening, something more likely to help commercial property investors.
WHAT'S THE TIMEFRAME?
It isn't going to be backdated, but seems that businesses will have up to five years to work out what the market value of the assets as at April 2021 was.
WHO WILL BE TAXED?
You'll pay CGT on your worldwide assets if you* are tax resident in NZ, e.g., sell a rental property in Australia: CGT will be calculated in NZ. One would imagine however, that where there is a Double Tax Agreement (DTA), then that country has primary taxing rights, and NZ would recognise the CGT paid on that asset sale.
We asked MortgageLab to give us their unique perspective as mortgage advisors. You'll enjoy reading some useful insights and tips from Rupert Gough here.
Forsyth Barr make the following observations:
For more insights and advice on your portfolio, go to
* By "you" we mean the entity that owns the asset
+ Note that if you use part of your family home for Airbnb or want to claim home office costs or if the home is bigger than 4500 m2, then CGT would apply. See this link for more info.
Reference to comments by Mortgage Lab and Forsyth Barr is done with kind permission of each party. This does not constitute an endorsement of Epsomtax.com Limited. All rights belong to their respective owners.
BILL SUMMARY FROM IRD
Ring fencing of property losses is here to stay. What will be the impact, and what strategies should you employ? How will it affect you? Will you still get a tax refund? Here is the latest summary from IRD and our discussion below.
So, from next financial year (19-20), it is much harder to get losses from your rental onto your personal tax return. And therefore, goodbye tax refund for some; less refund for others. Rents will likely rise as investors can't get a tax refund to the same degree. Some investors will opt to sell. Others will be able to grow their portfolio.
This blog post has some good stuff in it, but see also our latest post here
* IRD state in the draft bill: "... we suggest that the ring-fencing rules generally apply on a portfolio basis, so a person with multiple properties would calculate their overall profit or loss across their whole residential portfolio... we are recommending that taxpayers who wish to elect to apply the rules on a property-by-property basis be able to do so. We... do not consider that ring-fenced losses should generally be fully released on a taxable sale of residential property, meaning the losses (if not exhausted from offsetting the income derived on sale) would be able to be used to offset other income. However, for those properties which have had the rules applied to them on a property-by-property basis on the taxpayer’s election, we recommend that the losses become fully unfenced if they are taxed upon sale. This would also be the case where the rules applied on a portfolio basis and all of the properties in a portfolio were sold and taxed. This would most commonly be the case for land that was taxable under the bright-line test because it was sold within five years of acquisition."
So, what does that mean?
The Tax Working Group (TWG) has published its interim report. What will be the impact on property investors? Please see the PDF below for an executive summary, courtesy of Forsyth Barr.
THE GIST OF IT
Basically, the TWG wants to extend taxes on capital gains to things other than property. But, they are also looking at reintroducing building depreciation, so it is not all bad for property investors.
TAX ON CAPITAL INCOME
A capital gains tax (CGT) regime for property and share traders/developers etc already exists in New Zealand, so this is nothing new. The TWG recommendation is to extend this to catch gains on assets that are not already taxed:
IMPACT ON INVESTORS
Some key points:
For more information, please contact either Guy Johnson or Paul O'Driscoll or via the details below.
Content posted by kind permission of Forsyth Barr. This does not represent endorsement of EpsomTax.com Limited or its related companies by Forsyth Barr. All rights and trademarks belong to their owners
We are sometimes asked: what does "tax-deductible" really mean? Does it mean that I get all my money back? Well...
When an item is tax deductible that means that the cost is able to be deducted from taxable income or the amount of tax to be paid.
All purchases are either 100% tax-deductible, partially tax-deductible or not tax-deductible. A 100% tax deductible item does not mean you get 100% of the money spent back. It means that you can claim 100% of the cost against your taxable income. A 50% tax deductible item e.g. phone, means you can claim half the cost against your income.
So, let's say that you want to put new carpets in your rental property. The cost comes to $4000. This would be 100% tax-deductible. You can claim all of that cost against the rental income the property is earning.
But let's then say that you are at the supermarket, and you forgot your personal credit card. So you pay for your groceries from your rental property account. This would not be tax-deductible.
HOW MUCH TAX WILL I GET BACK?
So, how much do you get back when you buy a tax-deductible item? Well, it depends on how much tax you pay. The maximum tax rate is 33%. So the maximum tax refund is also 33% i.e. You will never get back more tax than you actually paid. So we suggest as a rule of thumb: divide the cost by 1/3. This gives you a rough idea of how much tax you might get back.
Of course, tax refunds are subject to things like: were you correctly taxed at your job? Are the property losses ring-fenced so that you get little or no personal tax refund? Is your rental property owned by an LTC, partnership or sole trader that allows losses to be passed to the owners (under current laws) or is it owned by something like a trust or standard company, which don't?
If you have further questions, please place a comment here or contact us.
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!