That's a good question, and it depends a lot on what entity incurs the loss. Let's break down the various types and what effect they have.
Look-Through Company (LTC)
If you are a shareholder in a Look-Through Company (LTC) and that company makes a loss, then you get to carry that loss through to your personal tax return (usually an IR3). There are a few rules and limitations* which we won't go into at length here.
Let's assume you're a salaried employee, and so you've had PAYE deducted from your wages. Well, at the end of the financial year a wash-up is done on your personal tax return. The above-mentioned loss is deducted from your gross (pre-tax) wages. It might look something like this:
-$ 5,000 Loss from LTC
- - - - - - -
$80,000 Net taxable income
We then calculate (a) how much tax you have paid, and (b) how much tax you should have paid. If (a) is more than (b) then you get a tax refund. If the other way around, you have tax to pay.
Limited Liability Company (LLC)
Ok this situation is totally different. If the LLC makes a loss, then it can't be passed on to anyone. Not the shareholders, not the directors: no one.
Instead, it carries that loss forward to the following financial year. If there is taxable profit, then the loss can be offset against that profit. It might look something like this:
$85,000 Net taxable profit
-$ 5,000 Losses brought forward from previous years
- - - - - - -
$80,000 Net taxable income
If there is no profit, then you just keep carrying the losses forward, year to year.
If you have a trust it's the same as an LLC with respect to losses. They can't be distributed out to the beneficiaries. Rather, they get carried forward until there is profit to offset them against.
A partnership works in a similar way to a Look-Through Company essentially. Losses are distributed to each partner, according to the rules of the partnership.
Sometimes you might combine some of these structures.
For example, a trust might own all the shares in a Look-Through Company. The LTC makes a loss. What happens then? In this case, the losses flow through to the Trust. They are then dealt with as explained above.
In the meantime, please contact us with any questions, or talk to your tax professional.
* From 1 April 2019, tax losses will no longer flow through from LTCs that are residential land rich. Please see us or call for advice on how to get the best results from your portfolio, build wealth and minimise tax
Good question. The best answer is: look at the flow-chart below (kindly provided by IRD).
Basically, if you have overseas investment property and you have a mortgage with an overseas bank, then you might have to pay NRWT.
NRWT is Non-Resident Withholding Tax. Essentially, if you're paying interest, dividends or royalties to people (and banks, e.g. a mortgage with an overseas bank) who aren't New Zealand tax residents, you'll need to deduct NRWT. However, there are exceptions. We'll write some more about that soon, but here's a link to check out in the meantime.
The other alternative is to pay AIL (Approved Issuer Levy). If you pay interest to a (non associated) non-resident lender, and want to pay it at a zero rate of NRWT, you have to apply to Inland Revenue to become an approved issuer. Instead of deducting NRWT, approved issuers must pay a levy on the securities they register with Inland Revenue.
Again, we'll write some more about this later, but here's some bedtime reading on the subject.
Are You A "Cash Basis" Person?
What we refer to above is known as a financial arrangement, ie if you have overseas investment property and you have a mortgage with an overseas bank. IRD says that if you are a "cash basis" person, you have to account for changes +/- in foreign currency as well!
Here's how to tell:
The criteria for a person to be classified as a Cash Basis Person are that the value of all financial arrangements of the person do not exceed certain values and that there is not a difference between accrual and cash recognition exceeding $40,000. This $40,000 is cumulative from year to year.
The rules under the first criterion are that one of the following is satisfied:
Nope. No Idea!
Still stuck? Contact us or your tax professional
Accounting for your rental residential investment property; general taxation advice.