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
NEW TAX RATES NZ
What will the new tax rates in NZ mean for you? Now that the election is decided, there will be a new tax rate to deal with in 2021: 39% on personal income exceeding $180,000 per year.
These coming changes emphasize how important it is to have the right business and/or investment structures in place. There will be tax planning opportunities arising out of the difference between the trust tax rate (33%), the company tax rate (28%), the present top personal tax rate (33%) and the new top personal tax rate (39%).
If you would like a review of your tax position and structure, please complete the contact form below or call us on 099730706 line 2
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
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
You and your significant other each own 50% of the shares in an LTC. It owns negatively-geared rental property. At tax time, you get your 50% share of the loss, which generates a nice tax refund.*
Previously you both earned about the same, but now there is a child in the mix, and one of you is working less as a result, and earning less as a result.
Suddenly that 50/50 company shareholding doesn't look so good. Should you change it to 99/1 to get better tax refunds?
The short answer is no. If you do anything with the motive to purely pay less tax, then you leave yourself open to being accused of tax avoidance.
What to do then? Well, there may well be economic reasons for the change, which had not previously been considered. When you take these into account, any so-called tax benefits could well become purely incidental.
As each situation is different, it's not practical to outline these here, so please feel free to contact us to discuss.
You may also wish to read a related article: Changing Shares in LTCs: Considerations
* 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
What is the NZCO?
NZCO is short for New Zealand Companies Office.It is part of MBIE (Ministry of Business, Innovation and Employment) and administers a number of registers, including a register of companies, their directors and shareholders, and related documents.
What's a Companies Office Return?
All companies are required by the Companies Act 1993 to file an annual return with the Companies Office regardless of whether or not they are trading.
If an annual return is not filed by the due date, the company risks being removed from the register as the Registrar may be satisfied that the company has ceased to carry on business.
IS IT THE SAME AS A TAX RETURN?
An annual Companies Office return is not a tax return, it's simply an annual requirement for a company to provide certain details to the Companies Office.
For more details, see this page at the Companies Office.
Does EpsomTax.com Handle This For Me?
We certainly do. At this time, we don't charge for filing your annual Companies Office return. Most accountants charge $80-$100 + GST, but we don't. Honestly, it only takes a minute or two so we don't feel we can justify charging for it.
We also offer an optional compliance package, which we'll contact you about at the same time. Questions? Please contact us.
MUST WE Have an Annual Meeting?
Yes, it is a requirement for all NZ companies. But don't despair! It's a great chance to go out for dinner on the company. Keep your receipts for the meal, drinks, taxi, babysitter. While you're out (or shortly thereafter), make sure to complete this annual meeting form, which will be sent to us when you click Submit. You can even attach your receipts to it!
As always, if you are not sure or need more information, please don't hesitate to contact us.
What will you need? Well your lawyer should prepare these three documents for you:
This resolution refers to why you bought the property, assuming it is for rental residential purposes. In addition, all of your written/email correspondence should make your intention clear, i.e., when communicating with your lawyer, bank, financial advisor explain that the purpose of the acquisition is for rental residential investment property.
This last file is a LTC election form. You use it to turn an ordinary company into a Look Through Company
Also known as: How do you make an LTC election?
It's reasonably straight-forward. Once the company is incorporated (click here if you want us to do this for you), you then complete and send off an IR862:
Section 1 is fairly self-explanatory, although you may come unstuck at the part where it asks you to choose the income year. Accountants always refer to the financial year as the one ending next March. For example, if today is the 31st of March 2015, then we are in the 2015 financial year. However, if today was the 1st of April 2015, then we would be in the 2016 financial year. So make sure you put the right financial year on the form!
In Section 2 you repeat some of the information from Section 1, and then fill in the details of the Owners. The bits you need to fill in are:
then sign and date the form.
Send this to us, or post it directly to:
PO Box 39010
Wellington Mail Centre
Lower Hutt 5045
Make sure you read the instructions on the back, as you can only have a maximum of 5 Owners.
The other thing we'd usually get you to do is complete a resolution, assuming you are purchasing property. Download our sample resolution below for free.
Hmmm, it's a worry! Please read this excellent article from Fortune Manning Lawyers:
All directors need to be aware of the statutory duty they owe to the company not to trade recklessly and of their potential personal liability for the debts of the company if they do so. There are now several recent cases where the Courts have taken a hard line against directors. The Court of Appeal has recently upheld a High Court decision which found a director liable for reckless trading and personally responsible for the debts and liabilities of the company to the tune of $8,400,000 plus interest from the date of liquidation of the company, not including his liability to related party creditors.
The relevant provision is section 135 of the Companies Act 1993:
A director of a company must not -
There are some peripheral points to note:
The best guidelines for determining whether or not the actions taken by the director were legitimate or illegitimate business risks were set down by the High Court (in South Pacific Shipping Limited (in Liquidation), Re; Traveller & Anor v Löwer (2004) 9 NZCLC 263,570).
The Court said the following factors were relevant:
The "legitimacy" test, used to determine director's culpability, was also supported by the High Court in Mountford v Tasman Pacific Airlines of NZ Limited (2005) 9 NZCLC 263,864.
These decisions have no doubt given liquidators and creditors confidence that where directors are reckless the courts will hold them personally liable for the company's debts.
However, directors can take some comfort in the finding that the taking of legitimate business risks is not reckless. Although, it is a fine distinction. In the two cases decided after South Pacific Shipping and Walker v Allen the Courts have found in favour of the director.
In Global Print Strategies (in Liquidation); Re Mason & Anor v Lewis & Anor (High Court Auckland) the Court found that recklessness requires more than mere negligence. The director must make a conscious decision to allow the business to be conducted in such a way as to pose a substantial risk of serious loss to the company's creditors, or must be wilfully or grossly negligent in turning a blind eye. This introduces a degree of subjectivity to the otherwise objective test of whether a director's conduct was reckless.
In Petros Developments Limited (in Liquidation); Re Advanced Plastics Limited v Harnett & Anor (High Court Auckland) the Court found that the director's conduct was not reckless as the director had the full support of the creditors and the creditors were fully aware of the risks which incidentally were substantial. There was a common strategy between the director and the creditors. The Court made the observation that all business is inherently risky.
The question will always be whether the director's conduct can fairly be regarded as reckless but it is important for directors to bear in mind the principles or guidelines in the South Pacific Shipping case. It is still open for directors to authorise their companies to take risks in business (this is often necessary to promote the company's best interests) but all care should be given to those decisions to ensure the risk taking is legitimate.
Read the full article here here. Note that this article is under review due to some recent courtroom developments. We'll update it as more information comes to hand.
That's a good question. Firstly, it depends on whether your company is a Look Through Company (LTC) or not. If it is, then it may be that your company can buy you a car and there will be little or no Fringe Benefit Tax (FBT) to pay. See here for more info.
If not, then FBT needs to be considered. However, before we get into that we'll discuss the two ways to use a vehicle in your business.
1. Business use of a private vehicle
This means that you own the vehicle in your personal name. You can claim business use of the vehicle up to a point: either claim 25% of total usage costs as a business expense, or claim (possibly) a larger proportion if you keep a logbook, or claim using standard mileage rates as provided by IRD or organisations like AA. There are some limits, rules and regulations around these provisions so make sure you get your maths right!
2. Company-owned vehicle
In this scenario you will have to pay FBT for private use. More about that below. In some situations there is no FBT to pay. However, generally speaking if you are a small business owner and you have a company-owned vehicle there will usually be some FBT to pay (or a personal contribution towards the cost of your private use).
This brings us to...
Fringe Benefit Tax (FBT)
What is it?
FBT is a tax you pay on a fringe benefit. That is, you get some sort of benefit from your company, but it is not wages. The Law says you have to pay tax on that.
How is it paid?
You elect to pay FBT by advising IRD; you can pay at different intervals, generally quarterly or annually.
How is it calculated?
Here are the IRD calculators. Enjoy.
Is it compulsory?
Hmm, it depends on the circumstance. Talk to your accountant. There is not a blanket answer that fits every circumstance.
Perhaps an example would help. Let's say you have a Holden Commodore, purchased for $50,000 incl GST within the last 5 years. It is currently worth $20,000 incl GST. It is available on the weekends for private use. No personal contribution is made towards private use. It is not a pooled vehicle.
Method 1: FBT based on original purchase price:
Method 2: FBT based on the depreciated value:
In this example the depreciated value is quite a bit lower, but the % is higher too: 36% instead of 20%. There are a few rules around minimum values and methods which need to be considered too.
See here for the calc. sheets. There are more calculation examples here at the bottom of the page.
What Should I Do?
The best thing is to do the math on each way of accounting for the vehicle, and then work out what will give the best results. And, we suggest you chat to your accountant about it.
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!