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.
0 Comments
WEBINAR:
SUMMARY OF CHANGESChanges 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?
FAQQ: 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?, 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. QUESTIONSQ. 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: RENTAL PROPERTY
HOME OFFICE 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:
MORTGAGE/S INFORMATION 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. What business expenses can you deduct in your income tax return? It depends on your business structure, but includes things such as:
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:
Some caveats: 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
SIMPLIFIED VERSIONHere 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! DETAILED VERSION![]() 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
Processing Month 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 ![]() If you have to pay provisional tax, then there is a good chance you're using tax pooling, courtesy of Tax Management NZ (TMNZ). We've collected a few common questions here to help. If your question is not here, please see this page or contact us. Why Is IRD Contacting Me About Overdue Tax If I'm Using Tax Pooling?Q: IRD are calling and texting me saying my tax is overdue? A: Correct. This is to be expected. IRD have no visibility of what money you've deposited into the Tax Management NZ tax pool until it is actually in the IRD bank account. Q: So what do I say to IRD then? I'm a bit freaked out by this! A: Here's what to say:
How Do I Know the Money Will Actually Get to IRD?You make your payments into a bank account administered by an independent trustee, Guardian Trust. Guardian Trust also oversees the TMNZ tax pool account at IRD in which your date-stamped payments are held. At no stage does TMNZ have access to your funds. You can view your account online and request that any amounts held in the tax pool be transferred to your IRD account at any time. More Information/ Arrange My Tax PoolingIf you would like us to arrange your tax pooling or for more information, please see this page or contact us now.
This page is not in alphabetical order, but in order of Top Questions first: Tax Return Filing DatesQ: When does my tax return have to be in i.e. filed with IRD? A: If you have an Extension of Time to file, the date is 31 March. If you are linked to a Tax Agent or Accountant, then usually you will have this extension. Note that the IRD must receive your tax return by this date i.e. if you post it on this date, it will be late. Q: Cool, so I can send my info to you guys about the middle of March and that will be ok then? That gives 2 weeks to get it sorted, right? A. Sorry, but no. In order to get the figures right, there is a process of many eyes checking your financial statements/tax return/s. So we recommend that you allow at least 5-6 weeks for us to collate, code, compile, check and file your financial statements and tax returns. No Income?Q: I didn't earn any income last year, but I am a shareholder in a Look Through Company. Do I have to file a tax return? A: Yes. You will have income or loss from the LTC and this has to be declared to Inland Revenue via a personal tax return. Q: My rental is running at a loss. Why don't I get a tax refund anymore? A: You can blame the government for that. They changed the rules so that losses from rental residential property, are "ring-fenced". That means they can only be offset against profits from the same kind of income. Read more here. What do do about it? Read about our recommended strategies here. LTC LossesQ: I don't see any impact of the LTC losses to the final tax figure? A: Please see the example IR3 tax return below ![]()
How Do The Amounts On The Profit & Loss Relate To My Tax?Here is a typical Profit & Loss report. You can see the Profit hi-lighted in yellow, and the Expenses hi-lighted below (also in yellow). Then at the bottom, you can see that the result is a Loss - which is why it is written in parentheses (brackets). This loss amount (or negative amount) is then put on your tax return. It offsets other rental income you have received. In this sample, assuming the person is being taxed at 33c in the dollar (ie they earn over $70,000 per year), then they could offset the loss of nearly 11k against other rental income (or if they have none, then this loss would be carried forward to future years). How is the Tax Calculated?All sources of income are added, e.g. wages, interest, dividends. Next, all sources of loss are added, e.g., LTC losses. Then tax is calculated on the sum of all of these figures. After that, tax that you have already paid is deducted, e.g., RWT, PAYE, provisional tax. The resulting figure is either a debit (tax to pay) or a credit (a tax refund). Dividends - AECT/EntrustQ: Why does the IR3 (personal tax return) you sent me show a dividend of nearly $500 from Entrust (formerly the Auckland Electricity Consumer Trust or AECT)? I only got about $300-something? A: The Entrust dividend is shown on the tax return as follows
Using this formula, we arrive at the $300-something you received. You can see the exact breakdown here RefundsQ: Why does the tax return show this? I wanted the refund to be credited to my bank account? A: That's exactly what this means. It says, in effect: "do you want to receive the refund in cheque format?" The answer is "No." IRD only gives one other option, and that is a refund to your bank account. Q: Does my LTC get a refund as well as me? A: No. If you have an LTC, the refunds go to you. The company is Looked Through at tax time, hence the name Look Through Company. ResultsQ: Is the amount shown as a refund what we're going to get? A: Probably. All returns filed are subject to review by IRD, and sometimes they don't agree with our calculations. There are a number of reasons for this:
However, don't panic. All errors, wherever they are made, can be easily rectified. JargonQ: What's an IR3 form? What's an IR526? How long does it take to file a return? A: That is what the personal tax return form is called: an IR3. (If you are not NZ tax resident, the form is an IR3NR). The actual filing online takes about half an hour. Then IRD processes it, which can take anywhere from 1 week to 12 weeks or longer. Once they’ve processed it, you then receive your tax refund. The IR526 is the donations rebate form; it has to be processed separately. Note that you can now login to myIR and upload your own donations during the year, and IRD will process them once your personal tax return is done. ACCQ: I own a rental property, or I'm self-employed. Why is ACC sending me a bill? A: If you received rental income in NZ and you didn't use a property manager, ACC can still charge you. And if you are self-employed, you have to pay ACC Employer and Earner Levy These questions are based on questions asked by customers. We'll be adding more examples to this page as they occur.
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? WHAT'S THE PROCESS FOR MY TAX RETURNS? COMMON QUESTIONS ABOUT YOUR FINANCIAL STATEMENTS |
Garreth CollardAccounting for your rental residential investment property; specialised property tax advice. Buy me a coffee! Archives
May 2022
Categories
All
|