Money vs Your Emotions: What You Need to Know! Amazing insights from Lynda the Money Mentalist! 

Inland Revenue released a Tax Information Bulletin (TIB) in September 2019, which clarified 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

1. the LTC decides to apply the ring-fencing rules on a portfolio basis or on a property-by-property basis.
2. the shareholders have any other residential rentals with income/loss to offset against this

However, the answer is essentially, "Yes", if:

1. you have decided to use a portfolio basis for the LTC (that is spread the losses and profits out between the various properties owned by the LTC) 
2. you have at least one residential rental property held in your own name or in a standard partnership i.e. we are not commenting on "limited partnerships" here

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

• If an LTC applies the rules on a property-by-property basis, the shareholders have to also take that approach in their returns. If it applies the rules on a portfolio basis, ditto.
• This is not the case for partners in partnerships. If a partnership has filed a partnership return applying the rules on a particular basis, the partners do not necessarily need to apply the rules on that same basis. So a partnership now gives much more flexibility than the LTC in this one respect.

​
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 now a big "no." Why? Changing ownership structures will now not shift/change non-deductible debt into deductible debt in any residential investment property scenario, including short-stay accommodation. For more info, see this blog article

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

Changes announced in April 2021 by the government: 

• ​Bright-line test increased to 10 years (except for new-builds, which remain at 5 years); more info here
• amending the "main home" exemption which would require tax to be paid on gains
  made for periods the property is not used as the owner’s main home (a "change of use" rule).
• not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This will start from 1 October 2021, and will be phased in over 4 years for existing properties. There will be an exemption for newly built homes. More info here
• Ring-fencing rules applied to short-stay accommodation e.g Airbnb

​Note that this law is very much "being made up as they go along" so lots of things are unknown, or not even decided on yet.

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.

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? 

• What was your intention when you bought the property?
• What pattern have you established in terms of property transactions?
• Are you (and if so, how) associated with a developer, builder or property dealer?
• Will the Bright-line Test* apply?
• Will you be affected by rezoning?

​How do you know if selling your home will be taxable?  Think carefully about the answers to these five questions.

Q. 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:

• on or after 27 March 2021, and sold within the 10-year bright-line period
• between 29 March 2018 and 26 March 2021, and sold within the 5-year bright-line period
• between 1 October 2015 and 28 March 2018, and sold within the 2-year bright-line period.

Please note that the government has indicated that new builds will continue to be subject to a 5 year bright-line period. Before this can be legislated, what is considered a 'new build’ is still to be consulted on. The Government intends for the legislation to be retrospective so that new builds acquired on or after 27 March 2021 will continue to be subject to a 5-year bright-line period. More info here

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 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.

• This applies to individuals only, e.g. an individual receiving a salary of $200,000 will pay an additional $1,200 tax each year
• It does not apply to combined household income, e.g. if you earn $100,000 each as a couple, you won't pay any more tax 
• All other rates and brackets unchanged
• Any new taxes or further income tax increases ruled out for next term (if present government remains in power)
• Applicable from next year
• No changes are proposed to trust (33%) or company (28%) tax rates

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

 1. MORTAGE HOLIDAY: In other news, with the OCR dropping to (and staying at) 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.

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. INTEREST RATES: Check with your bank re break fees on your loans, and look at whether the math adds up to break and renegotiate one or some loans at lower interest rates.

3. RENTS: Rent increases are worth considering, as you can now only increase the rent once a year.

4. 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.

5. 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. Heads-up: Banks are deluged with lending applications, so getting mortgage approval is slow

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:

• Increasing the small asset depreciation threshold to $5,000 for the period 17/03/20 to 16/03/21.  It will return to $1,000 for 2021/22 onwards
• Giving Inland Revenue the discretion to remit use-of-money interest (UOMI) for customers significantly adversely affected by COVID-19. Affects all tax payments due on or after 14 February 2020. (There are some conditions, see here for more info. For those who don't qualify; tax pooling is still a cost-effective option.)
• Increasing the provisional tax threshold from $2,500 to $5,000 i.e. if your 2019/2020 income tax was under $5,000, you are not a provisional tax payer for 2021 year
• Allowing 2% depreciation on commercial and industrial buildings from 2020/21. 
• Giving wage subsidies or leave payments in some situations.* Find out more HERE. 
• Business Finance Guarantee: loans for businesses with annual revenue up to $80 million can apply for loans up to $500,000, for up to three years. Click here for more info.
• COVID-19 small business cashflow loans:  10k minimum loan, 1 year interest-free, no repayments till year 3, then 3% interest p.a.  There are some fishhooks if you miss a payment, so be aware of your responsibilities if you apply and are accepted. More info here.  Apply via the IRD website (use your myIR account)

* 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

What business expenses can you deduct in your income tax return? It depends on your business structure, but includes things such as:

• ACC levies
  
• accounting fees
• bank charges
  
• contractor costs
• depreciation (wear and tear)
• entertainment (be careful!)
• home office expenses
• lease or rental costs
• legal fees
• motor vehicle expenses e.g. WOF, registration, repairs, insurance, FBT
• purchases (for business purposes e.g. stock, materials)
• travel e.g. fuel, parking, business travel
• stationery, printing and office costs
• software e.g. Xero, MYOB
• telephone and internet

This is not an exhaustive list, but you get the idea.  It's good to check out the resources here and if you are not sure if something can be claimed, or what percentage can be claimed, ask your accountant or contact us.

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:

• The loss carry back rules apply to ALL businesses whether trading individually or through a company.
• You will be able to estimate your 19/20 (FY20) financial year provisional tax to NIL based on estimated 20/21 (FY21)  financial year losses. 
• IRD will update their systems to allow the provisional tax already paid at 28 August and 15 January to be refunded.
• You don't have to wait until FY21 accounts are finalised to access the losses.
• If you think there's going to be a loss for this year, let us know and we will include a reasonable estimate of that in the FY20 calculations.
• You do not need to rush to re-estimate your provisional tax before 7 May. Part of the proposed law change would make it possible for you to re-estimate it after the date of the final instalment. This will give you more time to work out any estimated loss for the 2020/21 income year. 
• Just be aware that if you get it wrong, use of money interest will still apply; we are told a new rate will be announced soon.

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:

• tax is due on or after 14 February 2020, and

• the taxpayer’s ability to pay by the due date, either physically or financially, has been significantly adversely affected by COVID-19.

The IRD Commissioner may exercise her discretion to remit the interest if the taxpayer has contacted the Commissioner as soon as practicable to request relief and has paid the outstanding tax as soon as practicable - right up until 25 March 2022.

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

• pay the tax via installment (possibly with a deferred payment start date);

• have IRD partially or fully write-off the debt due to serious hardship, with payment of the remaining tax by installment or a lump sum;

• allow a partial payment, and write-off the balance.

You would need to provide similar proof, as mentioned above.