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.
WILL IT HAPPEN?
Hard to say. Now the cat is out of the bag, it might be hard to put it back in. It is, however, worth noting that attempts have been made to control the property market by brute force before, and they ultimately resulted in a change of government. In the early 1980's, the then Prime Minister, Mr Robert Muldoon, introduced a rent and interest rate freeze in an attempt to control property market growth. The result was that no one could get finance, and so no one could sell either. Eventually, this regime was repealed.
There has been some very strong push-back by influential companies and bodies, which is to be expected. So, we wait and see.
Meanwhile, let's talk about possible strategies:
Until where know where things are going to land, these are only ideas to consider at this stage - although point 1 is probably a bit of a no-brainer.
RESIDENTIAL LAND RICH
IRD have proposed that any entity which is not "residential land rich" won't be subject to the ring-fencing rules.
Please explain?! Well, this is a bit tricky. An entity is which is not "residential land rich" is any entity wherein 50% of more of its assets are not rental residential property. For example, an entity e.g. LTC buys a residential rental, and also buys a commercial property and the value of the rental is less than the value of the commercial property (as measured by open market value of the assets at year end). The shareholders would need to borrow the money and inject the capital into the company. The shareholders could then claim a deduction for the interest in their personal tax returns, and thus offset any profits coming from the company. And if the interest cost is greater than the profits, then that would be a loss to record on their personal tax returns.
However, this would really only work if starting from scratch, and in our view, there are better ways to do it than this method.
You have a mixed-use asset if, during the tax year, it's used for both private use and income-earning use, and it's also unused for 62 days or more.
The rules apply to any:
See here for more info.
So in other words, a mixed-use asset means you have to use it a bit yourself, e.g. a holiday home that you mostly rent out, but that you stay in a bit during the year.
There are various rules (outlined in the above link) which limit what you can claim from these kind of assets, and you have to be careful if you think your gross annual income will be more than 60k (GST registration; that's another issue - especially when it comes to sale time), but it bears thinking about.
SET IN STONE?
By no means. We are recommending a wait-and-see approach at this stage. But start thinking ...
You might find our earlier article on this subject useful as well.
Tax Treatment of Cryptocurrency
IRD is till working out the tax treatment of cryptocurrency. But it has made up its mind on some things. You can read all about it here. The main points so far are:
Cryptocurrency Fraud Warnings
NZ Police in association with City of London Police have just released a warning. See below for the PDF.
Apparently, fraudulent websites alleging to offer cryptocurrency investments are dishonestly using the image of Martin Lewis, the founder and editor for moneysavingexpert.com, as an endorsement for their companies. However, Martin doesn't do adverts. See his blog post for more info here. These sites are also falsely stating that Dragons Den back their schemes.
More info is available at NetSafe, especially re scams. And, just for the record, we don't claim any endorsement by Martin Lewis, his website, NZ Police, City of London Police or NetSafe. Any copyrights belong to their legal owners. We are merely making you aware of what is going on out there. Keep safe!
Shock! Horror! IRD released a proposal to ring-fence rental property losses. What does that mean for you?
At present if you own a rental property (sole trader, partnership, LTC) and it makes a loss, then you can offset that loss against your personal income or the income of the shareholder/s (in the case of an LTC). This means you pay less tax or get a tax refund. In IRD speak, that is
"Currently investors (particularly highly-geared investors) have part of the cost of servicing their mortgages subsidised by the reduced tax on their other income sources."
Thousands and thousands of Mums and Dads across New Zealand have become landlords in this way, and the tax refunds help pay for the mortgage.
From 2019-20 tax year onwards, losses won't be passed on to the owners, so no more personal tax refunds. Instead, ring-fenced residential rental* or other losses from one year could be offset against:
Solutions for Investors
IRD make this comment:
It is suggested that the loss ring-fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.
So, our initial thoughts are that investors with negatively-geared property need to look at
Where to Read the IRD Proposal
Goto this page
Check out Part 2 here
* If your house is a Mixed Use Asset, ie you use it as a holiday home that you rent out to others, then the rules wouldn't apply to you. They also don't apply to your "main home" ie where you live, or if you are buying and selling houses for profit e.g. a trader.
Currently (in mid-2017), the tax thresholds are as follows (before the 39% rate of 2021 was introduced):
As you may recall, these were to be changed. However, due to a change of government, there will be no change to these tax rates. There will no doubt be lots of other changes coming; we will post as soon as information is finalised. At the moment it is all hot air and speculation... fast-forward to COVID-19 and 2021, and the govt has introduced a 39% tax rate that kicks in at 180k per person per year, more info here.
Insurance Premiums Increase
The government announced in today's Budget that it would be increasing the EQC rate insured homeowners pay from 15c per $100 of cover capped at $207 a year to 20c per $100 to a maximum of $276 per year.
The increase could result in people paying up to $69 more per year on their insurance. This comes at a time when the government was already planning a 40 per cent increase in the fire service levy.
The fire service levy increase comes in from July 1 while the EQC levy increase will come in on November 1.
For more info please see this article
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.
See this article for the 2020 changes to provisional tax. Basically, you'll have to pay provisional tax if you had to pay more than $5,000 tax at the end of the year from your last return. $2,500 was the threshold for years before the 2020 return
* 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
You might have noticed that things are taking a little longer to process, both at EpsomTax.com and at IRD. We have entered the middle of the year slow-down. What is it? Well, it doesn't mean we are putting our feet up. Far from it! Rather, it is when the bulk of clients have their work with us (no matter how we try to spread things out), so there is an inevitable hump to get through.
Please be assured we are working as fast as possible, and yes, we have taken on extra staff to cope with it! We apologise for the delay!
If you would like to discuss, or have concerns, please contact us
If you have to pay provisional tax, then there is a good chance you're using tax pooling, courtesy of Tax Management NZ (TMNZ).
We've collected a few common questions here to help. If your question is not here, please see this page or contact us.
Why Is IRD Contacting Me About Overdue Tax If I'm Using Tax Pooling?
Q: IRD are calling and texting me saying my tax is overdue?
A: Correct. This is to be expected. IRD have no visibility of what money you've deposited into the Tax Management NZ tax pool until it is actually in the IRD bank account.
Q: So what do I say to IRD then? I'm a bit freaked out by this!
A: Here's what to say:
How Do I Know the Money Will Actually Get to IRD?
You make your payments into a bank account administered by an independent trustee, Guardian Trust. Guardian Trust also oversees the TMNZ tax pool account at IRD in which your date-stamped payments are held. At no stage does TMNZ have access to your funds.
You can view your account online and request that any amounts held in the tax pool be transferred to your IRD account at any time.
More Information/ Arrange My Tax Pooling
This page is not in alphabetical order, but in order of Top Questions first:
Tax Return Filing Dates
Q: When does my tax return have to be in i.e. filed with IRD?
A: If you have an Extension of Time to file, the date is 31 March. If you are linked to a Tax Agent or Accountant, then usually you will have this extension. Note that the IRD must receive your tax return by this date i.e. if you post it on this date, it will be late.
Q: Cool, so I can send my info to you guys about the middle of March and that will be ok then? That gives 2 weeks to get it sorted, right?
A. Sorry, but no. In order to get the figures right, there is a process of many eyes checking your financial statements/tax return/s. So we recommend that you allow at least 5-6 weeks for us to collate, code, compile, check and file your financial statements and tax returns.
Q: I didn't earn any income last year, but I am a shareholder in a Look Through Company. Do I have to file a tax return?
A: Yes. You will have income or loss from the LTC and this has to be declared to Inland Revenue via a personal tax return.
Q: My rental is running at a loss. Why don't I get a tax refund anymore?
A: You can blame the government for that. They changed the rules so that losses from rental residential property, are "ring-fenced". That means they can only be offset against profits from the same kind of income. Read more here. What do do about it? Read about our recommended strategies here.
Q: I don't see any impact of the LTC losses to the final tax figure?
A: Please see the example IR3 tax return below
How Do The Amounts On The Profit & Loss Relate To My Tax?
Here is a typical Profit & Loss report. You can see the Profit hi-lighted in yellow, and the Expenses hi-lighted below (also in yellow). Then at the bottom, you can see that the result is a Loss - which is why it is written in parentheses (brackets).
This loss amount (or negative amount) is then put on your tax return. It offsets other rental income you have received. In this sample, assuming the person is being taxed at 33c in the dollar (ie they earn over $70,000 per year), then they could offset the loss of nearly 11k against other rental income (or if they have none, then this loss would be carried forward to future years).
How is the Tax Calculated?
All sources of income are added, e.g. wages, interest, dividends. Next, all sources of loss are added, e.g., LTC losses. Then tax is calculated on the sum of all of these figures. After that, tax that you have already paid is deducted, e.g., RWT, PAYE, provisional tax. The resulting figure is either a debit (tax to pay) or a credit (a tax refund).
Dividends - AECT/Entrust
Q: Why does the IR3 (personal tax return) you sent me show a dividend of nearly $500 from Entrust (formerly the Auckland Electricity Consumer Trust or AECT)? I only got about $300-something?
A: The Entrust dividend is shown on the tax return as follows
Using this formula, we arrive at the $300-something you received. You can see the exact breakdown here
Q: Why does the tax return show this? I wanted the refund to be credited to my bank account?
A: That's exactly what this means. It says, in effect: "do you want to receive the refund in cheque format?" The answer is "No." IRD only gives one other option, and that is a refund to your bank account.
Q: Does my LTC get a refund as well as me?
A: No. If you have an LTC, the refunds go to you. The company is Looked Through at tax time, hence the name Look Through Company.
Q: Is the amount shown as a refund what we're going to get?
A: Probably. All returns filed are subject to review by IRD, and sometimes they don't agree with our calculations. There are a number of reasons for this:
However, don't panic. All errors, wherever they are made, can be easily rectified.
Q: What's an IR3 form? What's an IR526? How long does it take to file a return?
A: That is what the personal tax return form is called: an IR3. (If you are not NZ tax resident, the form is an IR3NR). The actual filing online takes about half an hour. Then IRD processes it, which can take anywhere from 1 week to 12 weeks or longer. Once they’ve processed it, you then receive your tax refund.
The IR526 is the donations rebate form; it has to be processed separately. Note that you can now login to myIR and upload your own donations during the year, and IRD will process them once your personal tax return is done.
Q: I own a rental property, or I'm self-employed. Why is ACC sending me a bill?
A: If you received rental income in NZ and you didn't use a property manager, ACC can still charge you. And if you are self-employed, you have to pay ACC Employer and Earner Levy
These questions are based on questions asked by customers. We'll be adding more examples to this page as they occur.
Other FAQs you might have:
RENTAL PROPERTY: WHAT RECORDS DO YOU NEED TO KEEP?
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?
COMMON QUESTIONS ABOUT YOUR FINANCIAL STATEMENTS
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!