What good news is there for the coming weeks and months, in view of the 4-week lockdown? This post was updated on 04/04/20 with new info.
The government has announced it is:
# this means that if your end of year tax bill is under 5k, you don't have to start paying provisional tax (2-3 times yearly). Note that doesn't affect the 19/20 year; it affects the 20/21 year. So if you already became a provisional payer for 19/20 year, you still have to pay provisional tax. But it means you might slip under the threshold for FY21. Talk to us about what to do in this situation.
It also means that if you bought an asset e.g. a clothes line, or a new letterbox, for the financial year ending March 31 2020, and it is under $1,000, you can claim the lot, instead of having to write it off over several years (depreciate it, in other words). And next year gets better, with the level going up to 5k!
WHAT ELSE CAN YOU DO?
1. LOANS: In other news, with the OCR dropping to 0.25%, your bank should be passing on rate cuts for any floating loans, and it is worth looking at existing loans to see if you should break and re-fix or extend the term. Break fees are tax-deductible. Ask the bank or your mortgage advisor to do the calculations for you, or use this tool here. You might also want to look at a mortgage holiday, but just be aware that this will increase the loan,^ but it will buy you some time, so in the big picture, may be worth it. We suggest you only do this if you really need to i.e. don't rush and organise that with your bank or broker today; wait a couple of weeks to see how things pan out. (By the same token, if doing so relieves you of stress, then it is probably well worth it. Don't feel bad, either way. These are unprecedented events.)
Please see this detailed page with info about mortgage holidays, including links for all the major banks to apply for one. See also our blog post with 4 options for your mortgage to improve cash-flow right now
2. RENTS: Rent increases are off the table at the moment, as rents have been frozen by the government. In Australia, landlords have been asked to be lenient if tenants start to get behind on their rent, and we suggest you keep in close contact with your property manager over the next two months.
3. PAYMENTS: Of course, cash-flow is king, and in this environment, we suggest asking your suppliers if you can start paying in smaller regular installments, rather than bigger sums. This will help reduce the impact during the 4-week lockdown. EpsomTax.com group offer interest-free time payment plans to all customers as a matter of course; please contact us to arrange this now.
4. INVESTING: This might also be the time to look out for housing bargains - see this article about timing and buying. If you can get a good deal on a cash-flow positive rental, that's going to introduce some $ into your portfolio. Banks are working as normal, and documents can be signed remotely. Of course, inspecting properties is an issue, and getting tenants in (as moving services are likely not considered to be "essential." Nonetheless, getting pre-approval and "looking" (online/via video) at houses can still be done during this time.
5. OTHER RESOURCES: Xero.com have provided a page with links to educational content. You don't have to be a Xero user to access all of it. Webinars include managing stress, resilience, business continuity and so on.
* The wage subsidy and leave payments are NOT subject to GST - an Order in Council is being drafted to treat it as exempt (Section 5(6E)(B)(iii GST Act). The wage subsidy paid to the employer is not taxable; it is excluded income under section CX 47 of the Income Tax Act 2007; it is also therefore not deductible when paid by the employer as part of wages to employees. The payments made to employees are taxable for the employee and subject to PAYE, KiwiSaver deductions, Student loan etc in normal way. The same is true for self-employed persons: it is taxable income.
^ How it works is that the principal payments temporarily stopped and the interest is added to the mortgage
According to Wikipedia*, "phishing is the attempt to obtain sensitive information such as usernames, passwords, and credit card details (and money), often for malicious reasons, by disguising as a trustworthy entity in an electronic communication."
What Do Phishing Emails Look Like?
Quite often they look like a legitimate email from IRD (about a tax refund, or warning of tax owing), or an email from a provider like Office365 or Apple. More info here at netsafe.org.nz*.
How Do You Know If It Is A Phishing Email?
There are often several clues; please see the copy of example emails below.
What Does a Phishing Email Look Like?
Here is one phishing email we received recently. It looks rather convincing, but there are a couple of clues in the email that it is not from a legitimate source
Here is another example of a phishing email. Note again the clues that it is not "legit":
How Can I Keep Myself Safe?
See more tips on this page at netsafe.org.nz
What should I do if I need help or advice?
You can contact Netsafe:
* We have quoted information from Wikipedia (licence terms) and Netsafe (licence terms). Use of this information does not constitute an endorsement of EpsomTax.com by either organisation. This information is not provided for commercial purposes, but strictly in an attempt to help promote community awareness of fraud and how to prevent it and protect yourself.
How to View Documents
You will be sent an email with a link. Click on the link to view the document. This will open in a web browser on your device. To view the document, click on it.
How to Approve Documents
Click on the email link once again, scroll to the bottom of the page and click on the green approve button if you are happy with the contents.
From the 2018 income year (that is, 1 April 2017 onwards), the safe harbour threshold has been increased! Hooray, I hear you say. It's gone from $50,000 to $60,000. It has also been extended to non-individual taxpayers e.g. companies.
What does this mean? Use of Money Interest (UOMI) will only be payable from terminal tax date* for natural persons and non-individuals where their residual income tax liability is less than $60,000 and the following requirements have been met:
The taxpayer must have:
There are a couple of other points: The requirement that they must not have held an RWT exemption certificate at any time during the year has been removed. Oh, and there is an anti-avoidance rule as well, so that you can't manipulate your incomes to fall within the safe harbour provisions.
* Terminal tax date is either 7th February if you do not have an accountant or tax agent OR 7th April if you have an accountant or tax agent who has an extension of time on your behalf.... more info
# Standard method is last years residual income tax + 5%, OR your residual income from two years ago + 10% (only if you haven't filed last year's return yet)... more info
Why is a chattels valuation necessary?
Typical valuations assign a valuation to chattels of $10-15,000. However, they often miss many depreciable items, such as driveways, fences, decks, paths, hot water cylinder, letterbox, garage door motor etc.
When you obtain a chattels-specific valuation, typically the value of the chattels for a new home is $45-50,000+ and for one built in the 1980’s $25-30,000. Even if your chattels valuation comes out at only $30,000 then the value for the tax refund will be around $10,000. The higher the chattels value, the more depreciation can be claimed, which means less tax to pay or larger tax refunds.
Are there any exceptions?
The only exception to the chattels valuation, is if it was a rental already owned by you or another entity you controlled, and you had already filed a tax return for that property at least once. In that case, we can’t “re-value” the chattels.
What will it cost and who does this?
We know of only one firm: ValuIt. Visit their website www.valuit.co.nz or call 0508 482 583 to book a valuation. Please note, we receive no financial incentive or otherwise for recommending them. However, we encourage you to do this without delay, as they are very busy and it can often be 2-3 weeks before someone can get to see your property.
Depreciation: Simple Overview (video)
6 Minutes on Depreciation (video)
Depreciation Clawback and Your Rental Property
Depreciation of Chattels in Your Rental Investment Property
Valuation of Chattels - Why Necessary
First, open your sheet on your iPhone or iPad.
Next, touch the three dots at the top right-hand corner
Then, choose Send a Copy
Lastly, email to us or share to your Google Drive or Dropbox.com, then share to firstname.lastname@example.org
What does this have to do with your tax? Well, we might have asked you to supply information, clarify a request etc etc. We know you're busy! But we don't hear from you promptly. Instead, it drags on and on.
Frankly, that doesn't help you, us, anyone!
So, what we ask is this
1. stop for a moment,
2. send through the info,
3. get their tax refund sooner!
Moral: Stop and sharpen your axe. Work smarter, not harder!
You've established that there are good economic reasons for changing the shareholding in your LTC that owns rental residential property. You and your life partner are the shareholders. What things do you need to consider so that you don't get hit with a nasty (and unexpected) tax bill?
1. Brightline Test
2. Shareholders Current Account
Let's say that the company owes the shareholders $150,000. This is tracked in the Shareholders Current Account, and is a liability (debt) of the LTC.
Bob has 99 shares, and Mary has 1. Bob will sell/transfer 49 of his shares to Mary so that they each have 50 shares. Let’s say at the moment, Bob and Mary are owed $75,000 each by the company.
The LTC has made losses so is technically “insolvent”. The ramification of this is that as 49% of the shares are transferred there is a deemed disposal of 49% of the both advances being a total of $73,500 at a market value of zero (due to the company being insolvent).
Under special tax rules the $73,500 is initially deemed to be income of the LTC to be taxed to the owners in proportion to their shareholding (Bob $72,765 and Mary $235). Under recently-amended income tax rules, this income will not be taxed to the extent it is in proportion to shareholding. In this example Bob has debt of 50% for a shareholding of 99% and Mary has debt of 50% for a shareholding of 1%. Under the new rules he will be taxed on 49% of the debt being $73,500 and Mary will not have taxable income.
In this scenario, the de minimis* threshold of $50,000 would be exceeded when Bob transfers his shares (as the deemed income is $73,500). This same issue arises when either the LTC status is revoked or the company is wound up.
Going forward, ideally all LTC shareholder debt should be in proportion to shareholding. Between family members this can be achieved by way of an assignment of debt as that is another way of presenting what is happening. Then going forward debt should be transferred along with shareholding so the debt stays in proportion.
3. Depreciable Assets With Costs Over $200,000?
Is the cost of any of the LTC’s depreciable assets more than $200,000 each? If so, you then need to ask: Is the value of the accumulated depreciation on assets per shareholder more than $50,000 (the "de minimis" threshold)? If so, then there could be tax implications.
Please contact us for advice. You may also want to read this related blog article "Are Tax Benefits a Good Reason to Make Changes?"
* "de minimis" is a Latin expression meaning about minimal things, normally in the locutions de minimis non curat praetor ("The praetor does not concern himself with trifles") or de minimis non curat lex ("The law does not concern itself with trifles") a legal doctrine by which a court refuses to consider trifling matters.
We often get asked "how much longer will IRD take?" How can you check on the progress of your tax return at IRD? Are they processing it? Is there a problem?
Well, there is a free, simple and easy way you can check yourself:
1. Create a myIR account.
Make sure the address in the bar at the top starts with https://www2.e-services.ird.govt.nz. This is to make sure you haven't ended up at a fake website. There should also be a little padlock showing in the title bar at one end.
Generally you will be wanting to find out how the processing of your personal tax return is going, so choose this option (see graphic)
2. Next, enter your IRD number and then click Continue.
3. Then, enter your details and click Continue.
4. Check the details, and tick the box, then click Continue.
5. Voila! You will receive an email confirmation. You are now ready to view your info using myIR, including the status of your tax return processing.
What is Tax Pooling for?
Tax pooling is used when you've underpaid your provisional tax - or if you haven't paid it at all
Why don't I just pay my tax to IRD direct?
If you find you've underpaid tax, or paid it late, IRD generally charge penalties. And interest. And interest on penalties. And interest on that. As you can imagine, it adds up pretty quickly.
When you pay IRD via Tax Pooling, IRD views the payment as if it was paid on-time. So, no penalties. The Tax Pool company also charges much less interest than IRD.
So, how does it work?
Do I have to pay it on a set date then?
TMNZ have something called FlexiTax, so you can pay as much as you like as often as you like.
Can I pay tax from past years this way?
Yes, TMNZ can help with provisional tax for the current tax year and one just completed.
What if I get audited or make a voluntary disclosure: can I fund my tax this way too?
TMNZ can also help with other tax years and types, provided there has been a notice of reassessment issued by Inland Revenue as a result of an audit or voluntary disclosure.
How do the Tax Pool people make their money?
They charge interest, naturally, but it is a lot less than what IRD charge. Usually, just a little over 1/2 of IRD standard rates.
Where do they get the money from?
Well, big corporates like the banks overpay their provisional tax. In the past, they would overpay it to IRD, and get a miserable interest rate. Companies like TMNZ came along and said "Hey, we'll give you a better rate than IRD." So, they said "OK." Then TMNZ, in turn, on-lends it to the little guys like us, and they pay their bills out of the difference.
Is this legit?
Yes. The service is government-approved and operates under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.
Is the money safe?
Yes, all payments made to TMNZ are made into bank accounts administered by an independent trustee, Guardian Trust. With more than 125 years’ experience in New Zealand, Guardian Trust oversees the tax pool account at IRD in which payments are held. They authorise all payments and tax refunds, as well as transfers to taxpayer accounts. At no stage do TMNZ have any contact with, or access to, your payments.
Please see the document below, or contact us.
We recommend TMNZ for all your tax pooling needs. Visit tmnz.co.nz to find out more.
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!