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."
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.
The Residential Tenancies laws have changed. What effect does that have on landlords?
Following Royal Assent on 11 August 2020, the Residential Tenancies Amendment Act 2020 came into force on 12 August 2020. The Residential Tenancies Amendment Act will take effect in three main stages:
Phase 1: Law changes to take effect from 12 August 2020
Phase 2: Law changes to take effect from 11 February 2021
Phase 3: Law changes to take effect by 11 August 2021 (but may take effect earlier if the Government agrees)
WHAT 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 coming 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 of having less cash coming in. 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.
Q: An LTC owns rental properties. Some tenants have stopped paying or reduced payments by 30% due to COVID-19. Can the shareholder-employees receive the wage subsidy? What about a sole trader or partnership or trust that owns a rental/s, same situation? Can they apply?
A: Yes. Tenancy Services has a page on the impact of COVID-19. It (previously) said:
If you are likely to continue having trouble, think about other options:
We note that this sentence above has, as of August 2020, been removed from the page. We also note that some landlords have received a subsidy, whereas others have been declined. We suggest you appeal if you are automatically declined, and consult with your accountant. Inland Revenue's "pat" answer to Ministry of Social Development is not always correct.
The key thing to bear in mind when applying is to be well prepared, frank and open about all relevant facts.* Your application will need to identify the people to whom the subsidy relates and, in the case of the LTC, partnership or trust, undertake to use best endeavours to keep them on as shareholder-employees. See here for the declaration that needs to be made.
6. 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.
What good news is there for the coming weeks and months, in view of the COVID-19 pandemic and its effects on the economy?
Government policy changes include:
* The wage subsidy and leave payments are NOT subject to GST - an Order in Council was passed 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. NB: you only need to show a 30% revenue reduction for a single 4-week period to receive the full 12-week lump sum; you should be able to show that you took active steps to mitigate the financial impact of COVID-19, which could include drawing from your cash reserves (as appropriate), activating your business continuity plan, making an insurance claim, proactively engaging with your bank or seeking advice and support from either the Chamber of Commerce, a relevant industry association or the Regional Business Partner programme.
^ How it works is that the principal payments temporarily stop and the interest is added to the mortgage
NB: It is fair to point out that we are accountants and not lawyers. The measures taken by the Government are being monitored and may be changed, as they see fit. Our answers are based on our understanding of the somewhat limited information that has been made available publicly at this point.
What are your options for managing your loan or mortgage during the COVID-19 outbreak?
RESTRUCTURE / renegotiate
Depending on when you last fixed your loans, you may be able to get a lower rate now. Look into what the bank's break fee would be (break fees are deductible on rental properties); chat to your mortgage advisor if the bank isn't playing ball. Or if they are being greedy at a difficult time.
You might also be able to push the loan term out e.g. from 25 years to 30 years. Yes it will cost you more interest but will improve cash flow now by lowering repayments.
It's not really a "holiday", but rather a "payment deferral." How does it work? While you don't have to make payments during the mortgage holiday, you still get charged interest. What's that going to cost? Well, it could be significant. If your loan is 500k, then it could add about 15k to it (assuming 4% interest p.a.). If you didn't increase your repayments once the holiday is over, you'd pay about 35k more on your loan!
So, think carefully about this. One thing you can do is request the 6-monthly holiday, then if you don't need all six months, end the holiday and renegotiate.
MORTGAGE HOLIDAY + VOLUNTARY REPAYMENTS
As above, but you keep making payments as you can afford them. This will give you some relief but reduce the interest on the loan. Or save money, and then whack it on the loan when you go back to work/cashflow returns to normal. Achieves a similar thing.
Instead of paying principal and interest, look at paying interest-only. There should be no break-fee for this at the moment. Just keep in mind that if property values drop, you could end up owing more than the property is worth. It has happened, but is unlikely.
You may be able to extend the term of your loan, which would lower repayments. Of course, you will pay more interest in the long-term, but it will help immediate cashflow.
Inland Revenue have released the September 2019 Tax Information Bulletin (TIB), which clarifies this.
For the purposes of this blog post, we are going to assume that the LTC or an individual only holds residential rental property i.e. no commercial, they are not a trader or an associated person or a developer etc, they don't have an Airbnb-style short-stay accommodation house in the picture.
Can losses from an LTC with residential rental property be offset against income from rentals owned by a partnership or in your personal name?
It depends on whether
However, the answer is essentially, "Yes", if:
So the result is, you can have a negatively-geared LTC, and given the above points, the losses can flow through to you as a shareholder. You can then offset this against profits from a personally-owned rental (either solely owned or in a partnership). The situation also works in reverse ie there are profits in the LTC and losses in the personal/partnership rental.
Note that you can't offset any losses against income from other sources e.g. wages, like you used to in the good old days. That is what the concept of "ring-fencing of losses" means. The losses are "ring-fenced" so that they only apply to residential rental property.
Some interesting points
Do restructure strategies such as selling your old family home to an LTC still work?
We have previously recommended this, in blog posts such as this one. The answer is that yes, the rules are unchanged, and this still effectively meets IRD requirements for interest deductibility and remains a good strategy.
However, just be aware that any losses are ring-fenced, as described above. For more info, the IRD Sept 2019 TIB is below
As always, situations vary, so please contact us for advice on your specific situation. Call 099730706 or email us here
Capital Gains Tax (if it happens): what will be the effects on rental properties? What strategies could be employed to minimise tax effects? Here is a high-level overview:
WHAT WILL BE TAXED?
Everything except your grandma.
No, not quite. All land except family home, shares, business assets and intangible property. Seems that cars, boats, jewellry, fine art, collectibles and other household durable items would also be excluded.
HOW MUCH TAX?
At present, it would be at the tax rate of who/whatever owns the asset i.e. if a person, and they are earning $70k/year, then 33c/$. However, the common view is that this will be watered down to something more like the Australian rate, which is a flat 15c/$.
That being said, the proposal is to extend the lowest tax threshold of 10.5c/$ from $14k/ year to $20k/year, which is $420/year extra. Break out the party poppers.
Note also, that the proposal includes allowing depreciation on buildings once again. The more things change the more they stay the same! It would also allow deductions for seismic strengthening, something more likely to help commercial property investors.
WHAT'S THE TIMEFRAME?
It isn't going to be backdated, but seems that businesses will have up to five years to work out what the market value of the assets as at April 2021 was.
WHO WILL BE TAXED?
You'll pay CGT on your worldwide assets if you* are tax resident in NZ, e.g., sell a rental property in Australia: CGT will be calculated in NZ. One would imagine however, that where there is a Double Tax Agreement (DTA), then that country has primary taxing rights, and NZ would recognise the CGT paid on that asset sale.
We asked MortgageLab to give us their unique perspective as mortgage advisors. You'll enjoy reading some useful insights and tips from Rupert Gough here.
Forsyth Barr make the following observations:
For more insights and advice on your portfolio, go to
* By "you" we mean the entity that owns the asset
+ Note that if you use part of your family home for Airbnb or want to claim home office costs or if the home is bigger than 4500 m2, then CGT would apply. See this link for more info.
Reference to comments by Mortgage Lab and Forsyth Barr is done with kind permission of each party. This does not constitute an endorsement of Epsomtax.com Limited. All rights belong to their respective owners.
BILL SUMMARY FROM IRD
Ring fencing of property losses is here to stay. What will be the impact, and what strategies should you employ? How will it affect you? Will you still get a tax refund? Here is the latest summary from IRD and our discussion below.
So, from next financial year (19-20), it is much harder to get losses from your rental onto your personal tax return. And therefore, goodbye tax refund for some; less refund for others. Rents will likely rise as investors can't get a tax refund to the same degree. Some investors will opt to sell. Others will be able to grow their portfolio.
This blog post has some good stuff in it, but see also our latest post here
* IRD state in the draft bill: "... we suggest that the ring-fencing rules generally apply on a portfolio basis, so a person with multiple properties would calculate their overall profit or loss across their whole residential portfolio... we are recommending that taxpayers who wish to elect to apply the rules on a property-by-property basis be able to do so. We... do not consider that ring-fenced losses should generally be fully released on a taxable sale of residential property, meaning the losses (if not exhausted from offsetting the income derived on sale) would be able to be used to offset other income. However, for those properties which have had the rules applied to them on a property-by-property basis on the taxpayer’s election, we recommend that the losses become fully unfenced if they are taxed upon sale. This would also be the case where the rules applied on a portfolio basis and all of the properties in a portfolio were sold and taxed. This would most commonly be the case for land that was taxable under the bright-line test because it was sold within five years of acquisition."
So, what does that mean?
The Tax Working Group (TWG) has published its interim report. What will be the impact on property investors? Please see the PDF below for an executive summary, courtesy of Forsyth Barr.
THE GIST OF IT
Basically, the TWG wants to extend taxes on capital gains to things other than property. But, they are also looking at reintroducing building depreciation, so it is not all bad for property investors.
TAX ON CAPITAL INCOME
A capital gains tax (CGT) regime for property and share traders/developers etc already exists in New Zealand, so this is nothing new. The TWG recommendation is to extend this to catch gains on assets that are not already taxed:
IMPACT ON INVESTORS
Some key points:
For more information, please contact either Guy Johnson or Paul O'Driscoll or via the details below.
Content posted by kind permission of Forsyth Barr. This does not represent endorsement of EpsomTax.com Limited or its related companies by Forsyth Barr. All rights and trademarks belong to their owners
We are sometimes asked: what does "tax-deductible" really mean? Does it mean that I get all my money back? Well...
When an item is tax deductible that means that the cost is able to be deducted from taxable income or the amount of tax to be paid.
All purchases are either 100% tax-deductible, partially tax-deductible or not tax-deductible. A 100% tax deductible item does not mean you get 100% of the money spent back. It means that you can claim 100% of the cost against your taxable income. A 50% tax deductible item e.g. phone, means you can claim half the cost against your income.
So, let's say that you want to put new carpets in your rental property. The cost comes to $4000. This would be 100% tax-deductible. You can claim all of that cost against the rental income the property is earning.
But let's then say that you are at the supermarket, and you forgot your personal credit card. So you pay for your groceries from your rental property account. This would not be tax-deductible.
HOW MUCH TAX WILL I GET BACK?
So, how much do you get back when you buy a tax-deductible item? Well, it depends on how much tax you pay. The maximum tax rate is 33%. So the maximum tax refund is also 33% i.e. You will never get back more tax than you actually paid. So we suggest as a rule of thumb: divide the cost by 1/3. This gives you a rough idea of how much tax you might get back.
Of course, tax refunds are subject to things like: were you correctly taxed at your job? Are the property losses ring-fenced so that you get little or no personal tax refund? Is your rental property owned by an LTC, partnership or sole trader that allows losses to be passed to the owners (under current laws) or is it owned by something like a trust or standard company, which don't?
If you have further questions, please place a comment here or contact us.
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!