What Happens If I Make A Loss?
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 which owns rental property
$ 4,000 Income from personally owned rental property
- - - - - - -
$85,000 Net taxable income
-$ 1,000 Rental loss to carry forward to next financial year
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 contact us or call for advice on how to get the best results from your portfolio, build wealth and minimise tax
Are The Losses From My Rental in NZ Tax Deductible in Australia if I'm Working There? Part 2
The Australian Tax Office (ATO) wrote back! Call me pessimistic, but I didn't think we'd get a reply. Nonetheless, a few days ago it arrived. Here's the two questions we asked, and the response of the ATO regarding personal attribution of losses from a Look Through Company (LTC):
Seeing as a New Zealander working in Australia is taxed on his worldwide income, does the ATO allow losses from rental property in New Zealand owned by a New Zealand LTC to be offset against personal waged income earned in Australia?
"For Australian income tax purposes, companies are unable to distribute lossees from rental properties (or other losses) to their shareholders."
In other words, No.
Seeing as a New Zealander working in Australia is taxed on his worldwide income, does the ATO allow losses from rental property in New Zealand personally owned by said individual to be offset against personal waged income earned in Australia?
"If an Australian resident's overseas property tax deductions are greater than their overseas rental income, they will have a foreign tax loss. They can use their foreign income loss to reduce their Australian income."
In other words, Yes.
So, what's in it for me then?
Well, dear reader, the point is this: If you have negatively-geared rental property in New Zealand, which is personally owned i.e., not by a company, then you can claim the losses against your tax in Australia.
How it works is this:
BUT, there is a gotcha. This means that
So, you need to consider the long-term scenario before doing so. We recommend you talk to an accountant who is skilled in this area first.
So, you are all sorted, retirement plan underway, Kiwisaver, managed funds, even a bit of crypto... but wait? Schools aren't set up to teach financial literacy, so how and when should you do that? Is there a better way than just giving the kids pocket money and telling them "spend it wisely"? (Yes) Do you want your kids to be great with money? (yes) We chat to a couple of Kiwi dads (Jamie and Jovan) about the free app SquareOne, curated right here in lil' ole' NZ to help parents teach their kids about financial literacy and wellbeing.
SUMMARY OF CHANGES
Changes announced in April 2021 by the government:
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?
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:
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.
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!)
Is selling your home taxable?
Is selling your home taxable?, Or in other words, do you have to pay tax when selling your home?
Buying and selling your private or family home typically is not taxable. However some are looking to purchase a family home with the intention of reselling it in time, and a few earn their income this way – buying and selling.
If you have established a pattern of purchasing and then selling your “family home,” this could be considered as property speculation or dealing for tax purposes.
So, how do you know whether you are considered a property speculator, dealer or wheer you are an investor?
How do you know if selling your home will be taxable? Think carefully about the answers to these five questions.
Q. Ok, so I just have to hold onto a property for a really long time and then I’m not considered a dealer?
A. No. The amount of time you hold the property is immaterial. It’s your intention at the time of acquisition.If you bought a property with the intention of reselling it, then any capital gain that you make on the sale taxable.
Q. Right-o. So, is there some sort of level? That is, my first couple of properties are tax-free and then I pay tax after that?
A. Ahhh… no. Again, it’s intention, patterns and associations – not numbers of properties sold.
Q. What period of Brightline Test applies to my house?
A. The bright-line property rule looks at whether the property was acquired:
Q. What about sub-dividing? Is that taxable?
A. That's a big subject. Contact us.
Q. Great. It looks like I might have to pay tax then. How do I figure that out?
A. Contact us.
* For more info see this link at Inland Revenue
What records do you need to keep for your rental* property? Here is a general guide. Note that this list assumes you are using a property manager. All costs are for the 12 months preceding 31 March:
In our view, Home Office expenses can be claimed if you have rental property; however, as it is generally passive income (unless you are managing the properties yourself) we recommend a conservative claim, as follows:
For the rental property:
If you'd like a downloadable copy, please see below.
Why keep good records? The better your records, the more expenses can be legitimately claimed, and the better the tax result is for you.
* For guidelines on Business Expenses (non-rental property) please see this page.
Other FAQs you might have:
USING ACCOUNTANCYONLINE.CO.NZ/MY TAX QUESTIONNAIRE
HOW DO I DOWNLOAD TRANSACTIONS FROM MY BANK'S ONLINE INTERNET BANKING?
WHAT IS XERO.COM?
WHAT'S THE PROCESS FOR MY TAX RETURNS?
The IRD provides a guide here under the heading "Deductions You Can and Can't Claim."
Please remember, all advice given is to be taken in the light of our disclaimer. Image courtesy of patpitchaya at FreeDigitalPhotos.net
You have a rental property. Can you claim your holiday as an expense? If you spend time travelling as part of your business you can claim business travel as an expense. A good way to prove the business portion of your travel expenses is by keeping a diary of your travels.
In addition to keeping invoices, receipts and tickets you should also keep details of:
So how does the rental pay for my holiday?
Well, the first thing is to remember that there is no such thing as a free lunch - or a free trip - unless you win a competition or have a wealthy benefactor! However, there are such things as a tax-deductible trip, if not 100%, at least in part.
If you'd like to claim your holiday as a tax-deductible expense, then you need to
Then, your LTC/trust/partnership etc can claim tax deductions for some or all of the trip and other necessary expenses: hotels, car, meals, travel etc. Note however that there are some gotchas:
That leather jacket is not tax-deductible
Let's say you are in Queenstown, and you see a nice leather jacket. So, you buy it. The trip is 100% tax-deductible, because it meets all the criteria above. Can you claim the leather jacket? No. The guideline is "what is the nexus between this expense and the business activity?" If there is no clear link or nexus, then the item is not tax-deductible. In this case, what does a leather jacket have to do with your rental property? Nothing. So it is clearly not tax-deductible.
Don't go overboard with your expenses.
Always remember that tax concessions allowed are based on what the hypothetical "reasonable" person would do. A reasonable person would not eat out at the swankiest restaurant every night they were away. They might do that once, but not every night. So, don't get carried away.
Non-business parts of the trip are not deductible
Let's say that you arrive in another part of the country to inspect your rental property, meet with suppliers and possibly purchase another rental. You have a few days' worth of appointments set up, but you have planned to also take a few days to rest up as well. The total trip is 10 days, with 3 days' business pre-planned, and the rest being vacation. Therefore, you cannot claim the entire trip as a business expense. Instead, work out the proportion related to business (30%, in this example), and claim that percentage of the costs.
Can we claim for both of us then and the kids too?
Highly unlikely. Your children are likely not active working partners of your LTC etc, so you would have to make further adjustments to exclude costs related to their stay. What about your spouse or partner? Well, is your significant other a part of the business, e.g. a director of the company? A trustee of the trust (that owns the rental)? Are they actively involved in the taxable activities of the LTC? Is the firm/professional you are meeting at your destination expecting to meet both of you? Then likely yes you can claim.
Questions? Please feel free to contact us. And for clients, before you go away, please please please contact us.
See also: what the IRD say. Image courtesy of photostock at FreeDigitalPhotos.net
What business expenses can you deduct in your income tax return? It depends on your business structure, but includes things such as:
COVID-19 BUSINESS & TAX SUPPORT
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's the Process for my Tax Returns?
Here are the main steps involved, and an approx. % showing how far through we are at each point. The chart starts at the bottom, and the top is 100%, tax returns filed and assessed by IRD!
Here is a detailed description of each part of the process
Timeframes - How Long Does It Take?
As a rough guide, from the date of invoice issuance to you having the draft financial statements in your hands, we aim for 6 weeks, subject to this disclaimer: these timeframes are indicative only and at peak times of the year e.g. May-October, it will often take longer (like 8-9 weeks)
Before Processing Starts
We'll advise you in February or March via email when this is.
We trust this helps take some of the mystery out of the process. Please contact us with any questions!
Other FAQs you might have:
RENTAL PROPERTY: WHAT RECORDS DO YOU NEED TO KEEP?
USING ACCOUNTANCYONLINE.CO.NZ/MY TAX QUESTIONNAIRE
HOW DO I DOWNLOAD TRANSACTIONS FROM MY BANK'S ONLINE INTERNET BANKING?
WHAT IS XERO.COM?
COMMON QUESTIONS ABOUT YOUR TAX RETURNS
COMMON QUESTIONS ABOUT YOUR FINANCIAL STATEMENTS
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!