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.

What are your options for managing your loan or mortgage during the COVID-19 outbreak?​

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.

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

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 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

Trust law changes: New Zealand. What are they, and how will they affect you and your trust?

The main changes are:

• Trustees will now have some mandatory duties to fulfill
• Trustees must disclose certain information to all the beneficiaries - no more opacity!
• Trustees are being given more flexible powers
• It should become cheaper to setup and run a trust
•  You might be able to remove and appoint a trustee and not have to get the courts involved
• Trust lifespan will be up to 125 years
• Some beneficiaries could become settlors!

Here is the jargon: Section 67 of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 enacts an amendment to section HC 27 of the Income Tax Act 2007.

That amendment provides that when a beneficiary of a trust is owed an amount by the trust, the beneficiary does not become a settlor of the trust if –

• a. the trustee pays to the beneficiary in the income year interest on the amount owing at a rate equal to or greater than the prescribed rate of interest:
• b. the amount owing at the end of the income year is not more than $25,000.

This amendment comes into force on 1 April 2020, and does not have retrospective effect.

How do you know if one of your beneficiaries is owed more than $25,000 by the trust? The trust will need a balance sheet, at the very least, to track this.

What should you do if this is the case?

1. Pay out the beneficiary (check with your lawyer first), or
2. Pay interest to the beneficiary for the use of their money, as described above

​Yikes! So, some big changes coming. For a more detailed summary, please visit this page at Weston Ward & Lascelles Lawyers.^

* See a link to our blog articles on this subject here
^ This link does not constitute an endorsement of EpsomTax.com Limited by Weston Ward & Lascelles. Please contact them or your own lawyer for more information on what this means for your trust. EpsomTax.com Limited cannot provide legal advice; for accounting and taxation advice, please contact us.

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:

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.

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.

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.

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:

• Lower income groups will likely benefit from the proposed changes, but the effect is likely to be undesirable for middle to upper income groups.
• It seems that there will be more reluctance on the part of business owners to take risks/invest, as the rewards in terms of capital gains will now be taxed. 
• Environmental taxes will be another cost for businesses, and therefore the average Joe who buys from businesses.
• The agricultural sector will likely be particularly hard hit by environmental taxes... which may also drive up the price of food and dairy.

For more insights and advice on your portfolio, go to 
http://www.forsythbarr.co.nz/contact-us/form/register 

* 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.

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 19/20 financial year it is much harder to get losses from your rental onto your personal tax return. And therefore, goodbye tax refund for most; 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.

* IRD stated 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?

• If you elect to apply the new rules on a property-by-property basis (losses are not offset against income from other property in your portfolio, but rather are confined to that property), then when you sell the property you can use the losses against any taxable profit on that property AND against any other income you have. This is what IRD means by "fully unfenced."
• If you want to use the portfolio approach (loss from one property can be offset against income from another), then when you sell a property and there is tax to pay, you can't use any accumulated losses to reduce this tax
• But, if you use the portfolio approach, and you sell the entire portfolio, and there is taxable income, and you have some accumulated losses, then those losses will be fully unfenced i.e. you can use them to reduce tax payable.

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:

• Land and property (other than the family home)
• Intangible property, including goodwill
• All other assets held by a business or for income producing purposes that are not already taxed on sale (such as plant and equipment)
• Shares in companies and other equity interests

The Final Report arrives in February 2019.
​​

Some key points:

• Sir Michael Cullen has indicated that any new CGT would not be retrospective, so this is a huge relief for existing investors. 
  
• Losses arising from the sale of an asset would be carried forward, and subject to ring-fencing e.g. you sell a rental property, and make a loss: this loss can only be used against another rental property.
• No changes to company tax rates or GST.
• Won't be introduced until 2021/22

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...

No.

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.

If you have further questions, please place a comment here or contact us.

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:

1. Bring forward any repairs or maintenance. It is our view that you should attempt to do these during the current financial year (2018-19). You can then be sure that you can actually claim any losses against your income (if using a LTC, sole trader or partnership to own your rentals).
2. Think about restructuring mortgages as they come up for renewal. Suddenly, paying some principal on that rental mortgage isn't such a bad idea.
3. Think about restructuring full stop i.e., your trust owns a rental which makes a loss, but your LTC owns a rental which makes a profit. The loss from the trust still likely can't offset the profit from the LTC, even under the new "portfolio approach" rules. So a restructure is worth considering. Be careful though, because if done purely for tax reasons, then this would likely be viewed as tax avoidance by IRD.  Any tax benefits must be incidental to the restructure.
4. Start thinking about other types of investments that you can bring into your portfolio, e.g. a mixed-use asset, a commercial building or a share in one, an Airbnb-style house etc

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.

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:

• property, regardless of cost price or current value, and
• boat or aircraft which had a cost or market value of $50,000 or more when you bought it, and
• additional item or accessory relating to the asset, eg a quad bike stored at a holiday home.

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.

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.