EPSOMTAX.COM
  • HOME
  • ABOUT
    • IN THE NEWS >
      • OWNERSHIP STRUCTURES
      • TURNING SKILLS INTO MONEY AND A BETTER LIFESTYLE
    • PARTNERS
    • SERVICES
    • TESTIMONIALS
    • WHY USE A PROPERTY ACCOUNTANT
  • FAQ
    • AML/CFT
    • ANTI-CORRUPTION
    • AUDIT SHIELD
    • DATA PRIVACY
    • FORMS
    • GETTING STARTED IN INVESTMENT PROPERTY
    • HOW TO CALCULATE RENTAL YIELD
    • INFO FOR NEW INVESTORS
    • INVOICES
    • NEW VS OLD VS LAND&BUILD
    • TAX RETURN FAQ
    • TAX POOLING
  • CONTACT
  • BLOG

WE'RE BLOGGING TODAY

WHERE TO INVEST? 9 STRATEGIES

6/25/2021

0 Comments

 
With the government's shock introduction of laws slashing interest deductions on existing rental properties, where can you as an investor put your money? What will get you the best return while still maximizing tax deductions? We present 9 strategies: 
  1. New builds.  New build homes will not be subject to the interest deduction limitations, and will only be subject to a 5-year Brightline period. 
  2. Commercial property, as it is not subject to these new rules.
  3. Mixed commercial ie commercial with a flat, may be worth looking into as well; you would likely not be able to claim interest on the accommodation portion but could on the commercial portion, so would need to "do the numbers" to see if it adds up.
  4. Short-stay accommodation, because it is not subject to these interest deduction limitations if a Mixed Use Asset - see this link for more info. (Talk to StayHub about how it could work; contact us to discuss your property/ies)
  5. Boardinghouse accommodation e.g. near large hospitals and the universities, there is a demand for this. These can consist of 4 mostly-self contained units, with shared major cooking and laundry facilities.
  6. Relocatable homes. If you relocate a home to a section, it is considered a "new build" (see point 1).
  7. Add a dwelling to your home. If you add a dwelling and a new Council Code of Compliance (CCC) is required, it is considered a "new build" (see point 1).
  8. Split 1 house into 2. If you add a dwelling and a new Council Code of Compliance (CCC) is required, it is considered a "new build" (see point 1).
  9. Buy a rental property overseas. Overseas properties are not impacted by the changes, so you can still claim interest on the borrowings.
0 Comments

GOVERNMENT RENTAL PROPERTY TAX CHANGES - UPDATED

6/18/2021

 

WEBINAR:

SUMMARY OF CHANGES

Changes announced in April 2021 by the government: 
  • ​Bright-line test increased to 10 years (except for new-builds, which remain at 5 years); more info here
  • amending the "main home" exemption which would require tax to be paid on gains
    made for periods the property is not used as the owner’s main home (a "change of use" rule).
  • not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This will start from 1 October 2021, and will be phased in over 4 years for existing properties. There will be an exemption for newly built homes. More info here
  • Ring-fencing rules applied to short-stay accommodation e.g Airbnb
​Note that this law is very much "being made up as they go along" so lots of things are unknown, or not even decided on yet.

HOW DOES THIS AFFECT ME?

At present, when you receive rents, you can offset expenses against that rental income to reduce the taxable profit.  A big part of this is interest paid on the rental mortgage/s.

If the expenses are more than the income (a "loss"), the Ring Fencing laws mean the loss can't offset non-rental income, and the loss instead is carried forward to the next year. If you have two or more rentals, the loss from one property can offset the profit from another (depending on how your affairs are structured).

However, under these new laws, the interest deduction will (over 4 years) be reduced, then finally removed.  Rental properties will make more profit, and for almost everyone: there will be a lot of tax to pay.

And of course, if you can't claim the expenses on interest, but still have to pay it... where does the money come from? You have to raise the rent.

WHAT SHOULD I DO?

  1. Don't panic! Most investors have losses from FY20 and FY21, which can be carried forward to offset future income. This would defer the tax impact for a couple of years, giving you time to make changes.
  2. Consider selling your existing rental and getting a "new build property." According to the Labour Party website, "If you invest in a new build property, you will be exempt from changes to the bright-line test and interest deductibility policy."
  3. Look at your budget. Expect that around March 2023 you will have 25% more to pay, then 50% more the following year, then 75% more, then 100% more for the period starting April 2025. You might end up being a provisional tax payer in a couple of years time.
  4. Look at raising the rents to help offset the reduction in interest expense that you can claim.
  5. Consider selling heavily-debt laden properties. Look for something more cash-flow neutral or positive. Check with us first to make sure you are not caught by the various tax laws.
  6. Check whether it is time for a restructure e.g. a change of shareholdings or sale or properties to a new entity etc: contact us. Just be aware that if something is done primarily for tax benefits, it is viewed by IRD as tax avoidance. Also be aware that in some cases, a restructure can restart Brightline. Note however that the new proposed laws are also offering "roll-over" relief ie where you restructure into an entity with the same ownership, it is not viewed as a restart of the Brightline test.
  7. Worth looking into commercial property, as it is not subject to these new rules.
  8. Mixed commercial ie commercial with a flat, may be worth looking into as well; you would likely not be able to claim interest on the accommodation portion but could on the commercial portion, so would need to "do the numbers" to see if it adds up.
  9. Also definitely worth getting into short-stay accommodation, because it is not subject to these interest deduction limitations if a Mixed Use Asset - see this link for more info. (Talk to StayHub about how it could work; contact us to discuss your property/ies)
  10. Talk to your financial advisor about boardinghouse accommodation e.g. near large hospitals and the universities, there is a demand for this.

FAQ

Q: So what can I claim?
A: You can claim all the usual costs e.g. property management, repairs & maintenance, rates, insurance, legal etc. Re interest: It depends on timing. The following chart shows how much you can claim, depending on when you "acquired" the property:
Interest % claim by year
Q: How do I work out the tax impact?
A: The calculator below will help you work out the taxable income. The exact tax depends on many things e.g. owned personally or via a trust or LTC? How much wages you receive etc etc.​ Note that this calculator assumes you already own/have "acquired" the investment property/ies.
interest-deduction-calculator.xls
File Size: 52 kb
File Type: xls
Download File

Q: My rental was a new build. Does it still qualify as a new build under these laws?
A: Probably not. 

Q: Is short-stay accommodation caught by the new interest deductibility limitations?
A: It would appear that mixed-use-assets (MUAs) - which are holiday homes partly used personally and which are vacant for at least 62 days in a year - are not caught by these new rules, but IRD specify this (at 2.33) "the Government considers it important that where a residential property could be used to provide long-term rental accommodation, the income tax treatment is the same whether the property is used to provide long-term rental accommodation or short-stay accommodation. Any income tax advantage provided for properties used for short-stay accommodation could reduce effective housing supply." In other words, it would seem that yes, it is caught. Just remember that this is all "draft" at this stage, so not actual law.

Q: When did I "acquire" my rental property?
A: For tax purposes, a property is generally acquired on the date a binding sale and purchase agreement is entered into (even if some conditions still need to be met). More info here. Note that for the purposes of the changes outlined here, a property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.
​
Q: My property sale will be taxable due to the Bright-Line Test (BLT).  Can I claim the interest costs in that scenario?
A: No one knows. IRD say "The Government will consult on the detail of these proposals. Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of the sale."

Q: How do the "main home" changes work?
A: Actually, it reminds us a bit of how CGT works in Aussie. There is a great explanation at Stuff together with an example.  (Thanks Stuff.co.nz!)

Residential care subsidy and gifting

6/1/2021

 
Picture

Your lawyer has possibly mis-advised you - although in good faith.  Why do we say that?  Well, here's a quick checklist before you start panicking:

Quick checklist 
  1. Do you have a trust?
  2. Have you done any gifting?
  3. Are you worried about getting residential care subsidies in future?
    • If not, you can stop reading here
    • If you are, keep reading
    • If you are not sure what I mean, see below for an explanation
  4. Have you (and your partner if applicable) gifted $27,000 per year or $54,000 per year?

​The gist of it
Previously, the country's lawyers had advised people to gift no more than $54,000 per couple per year so that they wouldn't be accused of excessive gifting when it came time to be assessed for a residential care subsidy.  If your assets come under certain figures the Govt. will subsidise your rest-home care.  People generally gradually and cautiously gift their house to their trust so that anything they do doesn't stray into excess.  

BUT!  A recent series of court decisions, upheld all the way to the Court of Appeal, has now said 

Gifts of more than $27,000 per year, per application made before the five year gifting period, may be added into the assessment. For couples, gifting is $27,000 in total – not per person.

​See this page on the WINZ website for more info

What does this mean for you?
Here's what the Law Society of NZ said:*

The result of the High Court’s decision is that many people who have undertaken a gifting programme to a family trust may now unexpectedly find themselves ineligible for the residential care subsidy. This will come as an unwelcome shock to many. It will also likely cause many members of the profession concern at the prospect of claims from disgruntled clients for previous advice on gifting programmes.

The long and the short of it is that if you have already gifted more than $27,000 per annum to your trust, then this may now viewed by MSD as excessive gifting. (NB: If you have mirror trusts then you may be able to get away with $27,000 per trust per year). If you acted on legal advice, then I suggest you approach your lawyer about making a claim against them.  The NZ Law Society makes this comment to lawyers:

Lawyers may wish to consider whether there is a need to notify professional indemnity insurers in respect of the risk of potential claims for previous gifting advice. Some brokers are encouraging practitioners to notify insurers of the risk of potential claims. Practitioners are encouraged to check their particular circumstances with their broker/insurer.

Note that lawyers throughout NZ advised people based on the then-understanding of $54,000 per couple per year, and so acted in good faith.  But, at the end of the day, the advice has been misleading, as this recent judgement has shown.  It's not pleasant for anyone.

Yes, but?!
Yes, but didn't the IRD change the law or something?  What you might be referring to was the repeal of gift duty.  What happened was that the Government passed a law change, meaning that you could gift your entire house to your trust, without incurring gift duty.  Previously there was a limit of $54,000 per couple per year.  Anything above that had gift duty applied to it.  BUT (and here's the key point), the MSD's view of excessive gifting didn't change.  If anything, it has tightened up, as explained above.

Further reading
Residential Care Subsidy (WINZ)
FAMILY TRUST ACCOUNTING - WHAT DO I NEED TO DO? 
TRUST LAW CHANGES NEW ZEALAND

Help!
What to know more?  Call us on 0800 890 132 or email us.

* Note that the quoted blog post from the NZ Law Society is dated Jun 21, 2013, which was before the Appeal Court had made its ruling.  This Court ruling confirmed MSD's view, as stated above.


See our three-video series:
SHAM TRUSTS: COULD YOUR FAMILY TRUST BE A SHAM? 
COMMON RENTAL OWNERSHIP STRUCTURES
WHICH OWNERSHIP STRUCTURE SHOULD I USE FOR MY RENTAL PROPERTY?

And the following blog articles:FAMILY TRUSTS: BASIC CONCEPTS
FAMILY TRUST ACCOUNTING - WHAT DO I NEED TO DO?
COMMON MISCONCEPTIONS ABOUT FAMILY TRUSTS

Image courtesy of Idea go at FreeDigitalPhotos.net

    Garreth Collard

    Accounting for your rental residential investment property; specialised property tax advice.  Buy me a coffee! 

    View my profile on LinkedIn

    Archives

    January 2023
    August 2022
    July 2022
    June 2022
    May 2022
    February 2022
    December 2021
    November 2021
    October 2021
    June 2021
    May 2021
    April 2021
    October 2020
    September 2020
    June 2020
    April 2020
    March 2020
    September 2019
    February 2019
    December 2018
    September 2018
    June 2018
    April 2018
    January 2018
    December 2017
    November 2017
    October 2017
    August 2017
    July 2017
    June 2017
    May 2017
    March 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    April 2016
    March 2016
    January 2016
    December 2015
    November 2015
    October 2015
    July 2015
    June 2015
    March 2015
    February 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012

    Categories

    All
    Accounting
    Airbnb
    Companies
    Compliance
    How To
    Investment Property
    Ltc
    Overseas
    Tax Planning
    Trusts
    Video

    RSS Feed

email  Ph +64 9-973-0706  NZ Toll-free 0800-890-132  Fax +64 28-255-08279
Complaints   Privacy Policy & Disclaimer   Unsubscribe   Refunds   English   español
Information provided on this website is not intended to provide an exhaustive or comprehensive statement of tax law, nor is necessarily accurate and therefore should not be used as a substitute for considered written advice. All information published is subject to our disclaimer, terms and conditions, code of ethics and data privacy policy. All prices quoted are in NZD and exclude GST unless otherwise stated. Please note that fixed price fees do not include the cost of responding to an IRD Audit or Risk Review; please see FAQ for more info.

​© Copyright EpsomTax.com Limited 2013-2017. All rights reserved. EpsomTax.com is a registered trademark of EpsomTax.com Limited. All other registered trademarks or trademarks referred to on this website are the property of their respective owners. Use of this website is governed by the laws of New Zealand.
eWAY Payment Gateway
  • HOME
  • ABOUT
    • IN THE NEWS >
      • OWNERSHIP STRUCTURES
      • TURNING SKILLS INTO MONEY AND A BETTER LIFESTYLE
    • PARTNERS
    • SERVICES
    • TESTIMONIALS
    • WHY USE A PROPERTY ACCOUNTANT
  • FAQ
    • AML/CFT
    • ANTI-CORRUPTION
    • AUDIT SHIELD
    • DATA PRIVACY
    • FORMS
    • GETTING STARTED IN INVESTMENT PROPERTY
    • HOW TO CALCULATE RENTAL YIELD
    • INFO FOR NEW INVESTORS
    • INVOICES
    • NEW VS OLD VS LAND&BUILD
    • TAX RETURN FAQ
    • TAX POOLING
  • CONTACT
  • BLOG