Where will interest rates in New Zealand go next? That's the burning question on the minds of home owners and property investors.
Interest rates play a crucial role in shaping a country's economic landscape. They influence borrowing costs, spending patterns, investment decisions, and ultimately the overall health of an economy. New Zealand, a nation known for its resilient economy and prudent fiscal policies, has been closely monitoring and managing its interest rates in response to various domestic and global factors. As we look ahead, the question on everyone's minds is: where will interest rates in New Zealand go next? In this blog post, we will explore the factors that influence interest rate decisions in New Zealand and discuss potential directions for future rate movements.
Past vs Current Landscape
Back in late 2021, the official cash rate (OCR), which is the benchmark interest rate set by the Reserve Bank of New Zealand (RBNZ), stood at a historic low of 0.25%. This low rate was implemented as part of the country's response to the economic impacts of the COVID-19 pandemic. The goal was to stimulate borrowing, spending, and investment to aid economic recovery.
As we all know, the RBNZ (and many other central banks around the world) overcooked things, and New Zealanders now find themselves dealing with interest rates in the 7% range.
Factors Influencing Interest Rates
Several factors play a role in shaping New Zealand's interest rate decisions:
While I can't predict the future, I can highlight some potential scenarios for New Zealand's interest rates:
The trajectory of interest rates in New Zealand is subject to a complex interplay of domestic and global factors. While it's challenging to predict the exact path rates will take, understanding the key drivers behind rate decisions can provide insights into potential scenarios. As New Zealand continues to navigate its economic recovery and adapt to changing circumstances, the Reserve Bank will play a pivotal role in determining the appropriate direction for interest rates, aiming to strike a balance between supporting growth and maintaining stability.
The share market, bank collapses, and property prices are all interconnected, and changes in one area can have a ripple effect on the others. In particular, volatility in the share market and bank collapses can significantly impact property prices and inflation.
Volatility in the Sharemarket
The share market is often subject to volatility, which refers to the degree of variation of a financial instrument's price over time. The share market can be volatile due to a variety of factors, such as changes in interest rates, political instability, or economic uncertainty.
Volatility can cause share prices to fluctuate rapidly, and this can have a significant impact on investor confidence. When investors become nervous, they may sell their shares, which can cause further declines in the market. This can trigger a domino effect, leading to a market crash.
A market crash can have significant economic consequences, such as a decrease in consumer spending, a decline in business investment, and an increase in unemployment. A market crash can also lead to bank collapses, as banks may have invested heavily in the stock market, and a significant downturn can wipe out their assets.
Bank collapses can have far-reaching consequences, affecting not only the banking industry but also the broader economy. When a bank collapses, it can cause a loss of confidence in the banking system, leading to a run on other banks.
The collapse of a bank can also cause a credit crunch, making it harder for businesses and individuals to access credit. This can have a knock-on effect on consumer spending, business investment, and economic growth.
Bank collapses can also lead to a decline in property prices, as banks may have lent heavily to the property market. When a bank collapses, it may need to sell off its assets to pay its creditors, including its property assets. This can lead to an oversupply of properties in the market, causing prices to drop.
Effect on Property Prices and Inflation
Volatility in the share market and bank collapses can have a significant impact on property prices and inflation. When the share market is volatile, investors may turn to property as a more stable investment. This can increase demand for properties, causing prices to rise.
However, if a market crash or bank collapse occurs, property prices may decline due to oversupply and reduced demand. This can have a knock-on effect on inflation, as property prices are a significant component of the Consumer Price Index (CPI).
Inflation occurs when the general level of prices for goods and services rises over time. If property prices decline, it can lead to lower inflation, as property is a significant contributor to the CPI. This can have both positive and negative effects on the economy. Lower inflation can lead to lower interest rates, making it easier for businesses and individuals to borrow money. However, if inflation is too low, it can lead to deflation, which can have negative economic consequences, such as a decrease in consumer spending and business investment.
Volatility in the share market, bank collapses, and property prices are all interconnected, and changes in one area can have a significant impact on the others. Investors and policymakers need to be aware of the potential risks associated with market volatility and bank collapses and take steps to mitigate these risks. This can include diversifying investments, implementing stronger regulatory measures, and promoting economic stability. By doing so, we can help ensure a stable and prosperous economy for all.
WHAT ABOUT YOU?
What is a Look Through Company or LTC? That's a good question.
Basically, it's the replacement for the old LAQC (Loss Attributing Qualifying Company). At tax time, you look through the company to the shareholders, and distribute the income (or losses) to them.
How is it different from a normal company then?
A "normal" limited liability company can pay dividends and pay salary to its shareholders. Whatever is left after that is what it pays tax on. A LTC distributes all the profit (or loss) to the shareholders. It's more like a partnership, but with a limited company wrapped around it.
How do you figure out who gets what?
The income distribution is based on the shareholding. So if you have a 90% shareholder and a 10% shareholder, then the 90% shareholder gets 90% of the profits/(loss) and the 10% shareholder gets 10%.
So, what's the point of that?
Many people use LTCs to own their residential rental investment property. A common strategy that financial advisors recommend is to purchase negatively-geared rental property (negative gearing means that the expenses are more than the income). The shareholders have to top up the mortgage with their own money, often $50-$100/week. The LTC then has losses at the end of the financial year. These losses are then distributed to the shareholders. In a rental property scenario, rental losses can only be offset against other rental income
Can you give me an example?
Sure. Mr Smith owns a rental property in his own name, which generates about $11,000 of income (after expenses) per year; he also earns $130,000 per year before tax. Mrs Smith works part-time. They set up a LTC and it purchases a negatively-geared rental property. They put about $125 a week into the LTC to help pay the mortgage. Mr Smith has 99% of the shares, and his wife the remaining 1%. At financial year end (31 March), there are losses of about $10,000. Mr Smith gets 99% of these to offset against his wages. The formula is
Wages + rental income - LTC losses = net income
In this case, it would be
$130,000 wages + $11,000 rental income - $9,900 LTC loss = $131,100
Mr Smith paid $33,820 in PAYE tax, based on his salary of $130,000. Because he can utilise the LTC rental loss and offset it against his personal rental income, he only has a small amount of tax to pay at the end of the year ($363).
See this article for more info and examples of how losses work.
How is this different from a partnership?
Another good question. See this article for an explanation.
I'm convinced. How do I get a Look Through Company setup?
Simple! Fill in the form here and click Submit. We'll send you an invoice, and within 2-3 working days your company should be incorporated. Easy and painless.
I've got a few more questions. Can I talk to somebody?
Sure. Contact us today.
That's a good question, and it depends a lot on what entity incurs the loss. Let's break down the various types and what effect they have.
Look-Through Company (LTC)
If you are a shareholder in a Look-Through Company (LTC) and that company makes a loss, then you get to carry that loss through to your personal tax return (usually an IR3). There are a few rules and limitations* which we won't go into at length here.
Let's assume you're a salaried employee, and so you've had PAYE deducted from your wages. Well, at the end of the financial year a wash-up is done on your personal tax return. The above-mentioned loss is deducted from your gross (pre-tax) wages. It might look something like this:
-$ 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
Here are our 6 tips for buying a holiday home:
1. Location is key: When it comes to rental properties, location is everything. Look for properties in areas with strong rental demand and good potential for appreciation.
2. Do your research: Before making any investment, it's important to thoroughly research the market and the specific property you're considering. Look at factors like rental income, occupancy rates, and local economic conditions.
3. Be prepared for the long-term: Rental properties can be a great long-term investment, but they also require a lot of work and attention. Find a good holiday home property manager and cultivate the relationship. You are both in it for the long haul.
4. Have a plan for vacation rental: When it comes to beach or holiday homes, it's important to have a plan for how you'll use the property when you're not there. Will you rent it out to vacationers or use it as a personal getaway? Knowing how you'll use the property will help you make informed decisions about things like location and amenities.
5. Invest in amenities that renters want: Amenities that renters are looking for include things like high-speed internet access, a heat pump and off-street parking. Investing in these amenities can increase the appeal of your property and help you command higher rents.
6. Think about the future: As much as you are thinking about the present, don't forget to think about the future. Evaluate the current market trends, and anticipate what could happen in the future. This will help you make a more informed decision and avoid costly mistakes.
Want to talk about tax? Wealth creation? Planning for retirement? Contact us on 099730706 line 2 or email us.
Investing in property in New Zealand can be a good opportunity to generate rental income and potentially earn long-term capital appreciation.
Here are some things to consider when investing in property in New Zealand:
Contact us on 0800890132 line 2, or via our contact form. We'll help you evaluate your situation and connect you with the right people.
Along with Rupert Gough & Brett Davies (https://mortgagelab.co.nz) plus Daniel Carney (www.goodlifeadvice.co.nz) we re-look at this hot topic, including (1) what's changed in the last 12 months? (2) what does the future hold?
Perhaps you’ve been thinking "I want to buy property," but you’re worried about your debt. Here are 5 debt pay-off strategies! Before you start looking for a real estate agent, scheduling property tours, putting down offers, it’s time to get rid of your debt once and for all - or reduce it as much as possible. When you’re ready to invest in real estate, EpsomTax.com can help you along the way! In the meantime, these tips will help you tackle your debt burden.
Think Outside the BoX
As you browse local listings, you might be worried that the high asking prices will prevent you from breaking into the housing market. But if you think outside the box, you might be surprised by your options. For example, you could consider buying an apartment, purchasing a home with space for a “mother-in-law” suite that you can rent out, or buying a home “as-is.”
If you choose to buy a home “as is,” you’ll save money upfront, but you’ll also be responsible for fixing any problems after you move, like structural issues, eliminating mold and mildew, patching leaks, and getting rid of pests. A seller will not be responsible for fixing problems like this.
OPTIMISE YOUR BUSINESS STRUCTURE
If you’re a business owner, there are a few things you can do to increase your take-home pay and increase your home buying budget. For instance, by structuring your business as a Limited Liability Company (LLC), you can take advantage of additional tax breaks. With LLC status, you can also rest assured that your personal financial assets will be better protected if your business runs into economic trouble. Before you start gathering your paperwork for filing, check the rules in your area for forming an LLC.
CONSOLIDATE YOUR DEBTS
What if you’re juggling multiple loans or forms of debt? You might be wondering which debts you should pay off first, or you might stress out about missing payments. Consolidating your debts can help you avoid these pitfalls. If you’re interested in consolidating your debts, Nectar recommends calculating your average interest rates first, because you’ll want to ensure that your debt consolidation loan interest rate is either equal to or lower than this figure.
PICK UP A SIDE-HUSTLE
If you’re struggling to make all of your payments on time, you may want to call up your creditors and talk to them about setting up alternate payment plans. But you’ll also want to explore a few ways that you could increase your income. Picking up a side-hustle is a great way to pay off your debts on a faster timeline and make your payments more comfortably.
Which side hustle should you pursue? Unity recommends walking dogs, joining a ride-share app, doing odd jobs for your neighbors, or becoming a mystery shopper.
Overall, savvy budgeting is the key to paying down your debt. You need to make sure that at the end of the month, you have plenty of money left over after paying all of your necessary bills. If you know that you’ve been overspending, it’s time to start tracking every penny you spend. Try tracking your spending carefully for a month, and then sit down to go over everything you spent money on. Where can you cut back? Is there anything unnecessary that you were purchasing that you can eliminate from your budget completely?
Dealing with debt can be frustrating. But with the right approach to personal finance, you won’t be stuck with your debt forever. By saving carefully, looking for additional sources of income, and budgeting well, you can pay off your debts and buy your dream home!
Are you interested in real estate investing? Turn to EpsomTax.com to get started! Fill out the contact form on our website today to get in touch or call 099730706 line 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.
In this blast from the past (2013), Daniel Carney of Goodlife Financial Advice brings you this insightful interview with Garreth Collard, Principal at EpsomTax.com
The topic in question is whether an LTC is the right ownership structure for your Residential Investment Property. We pick Garreth's brain to get to the heart of whether an LTC is right for you. A 'must see' for any investment property owners!
Topics Discussed are:
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!