April 1 marks a significant change in the GST tax treatment of mixed-use assets.

Taxpayers can claim 100% of GST for expenses relating to the income-earning use of a mixed-use asset, for example, the cost of advertising a holiday home online.

However, working out GST claims for expenses relating to both the income-earning and private use of the asset has been more difficult to establish.

In the past, a complex calculation has been needed to apportion GST expense claims relating to both income-earning and private use.

As of this month, GST calculations for mixed-use assets have been simplified. You no longer need to use the old method and general apportionment and adjustment rules will apply instead.

Remember, if you have a mixed-use asset, such as a boat, bach, or plane, please keep records on how and when it is used for business or private purposes.

If you’re unsure about these changes, give your adviser a call.

Do you rent out a bach on Airbnb or do some driving on Uber for extra income? Additional tax changes could affect you that need to know about.

From 1 January this year, platforms such as Uber and Airbnb will collect information from their users including sales income and IRD numbers, and will be required to share it with Inland Revenue and relevant overseas tax authorities by early 2025. The requirement applies to online marketplaces in the ‘sharing economy’ that connect service providers with customers (for example, the owner of a holiday home with short-term tenants, or a driver with riders).

As well as short term accommodation and ride-sharing services, this covers people who provide assets such as cars, caravans, parking, or storage space, personal services such as graphic design on platforms like Pocket Jobs, or who deliver food on apps like Delivereasy. It also covers trades people who provide services to customers through online platforms.

Additionally, from April, people who rent out their bach on Airbnb or Bookabach, drive for Uber or other ride-sharing platforms, or who deliver food and beverages through online platforms should be aware that their online marketplaces are required to collect and return GST of 15%. This applies whether the seller is GST-registered or not, though the rules work a bit differently for people who aren’t registered for GST.

What we need from you

If you provide services on an online marketplace, you’ll still need to declare all income in your tax return and keep records of income earned and expenses incurred. If you would like more information on how the GST rules will apply to you, please contact us.

There are many tax implications when investing in residential property in New Zealand. Property investment and understanding the impact of current tax laws and their application is rather complex now, Please seek professional advice when you are unsure of the implications, as mistakes can be costly!

The Brightline test

For sale and purchase agreements that become unconditional on or before 27 March 2021, the “old” Brightline test is applied.

All other properties with a settlement date on or after 28 March 2021 will be subject to the revised Brightline test.

Interest deductibility

Property purchased on or after 27 March 2021 – interest can be claimed up to and including 30 September 2021. After that, no interest can be claimed.
Property purchased on or before 26 March 2021 can claim the percentages outlined below.

Ringfencing Rules

Previously, losses from rental properties can be offset against other sources of income (wages, salary, business income), thereby reducing an individual’s tax liability.

From 1 April 2019 any loss made from a rental property will be ring-fenced. It will be contained within the rental itself and used on a ‘portfolio basis’. The two types of property income losses can be offset against are:

Future residential rental income from across your portfolio; or
Any taxable income on the sale of residential land.

Any losses left over will stay ring-fenced to be used in the future against this type of income, ie future residential rental income only and cannot be offset against other personally derived income to lower your overall tax payable, potentially giving rise to a refund

What Expenses can be Claimed

Income from residential property rental should not be declared for GST, and any costs shouldn’t be claimed for GST, either.

Property-related expenses

Rates
Insurance
Property management fees
Repairs and maintenance
Travel to and from your property for inspections and repairs

Financing expenses

Mortgage repayment insurance
Loan fees
Interest on mortgage*

Legal and consulting fees

Legal fees incurred when buying a rental property (if less than $10,000)
Legal action to recover unpaid rent
Costs for evicting a tenant
Preparation of a tenancy agreement
Accountancy fees
Valuation fee to obtain a mortgage (but not insurance valuations)
Legal fees for selling the rental property (if your total legal fees are less than $10,000)

Non-deductible costs

Mortgage repayments (except interest*)
Interest subject to the new interest deductibility rules announced 23 March 2021
Repairs and maintenance, if it increases the value of the asset
Insurance valuations
Legal fees for selling the rental property (if your total legal fees exceed $10,000)**
Advertising the sale of a rental property**
Real estate commission**

With the government’s new housing plan announced on 23 March 2021, claiming interest against residential rental income has become severely restricted. If you’re purchasing a rental property, assume that interest cannot be claimed.

For properties acquired on or after 27 March 2021:

Legislation has passed that extends the bright-line test from five years to 10 years on residential property.
The Government intends for the bright-line test to remain at five years for new builds and will be consulting on what a new build is soon.
Legislation has passed that introduced a ‘change of use’ rule. If the sale of your property is subject to the bright-line test, and you don’t use a property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value.
The Government has proposed that residential property investors will not be able to offset the costs of the interest they pay on loans to purchase residential property as an expense against their taxable income. A consultation will be held about this, with any law expected to come into effect from 1 October 2021.

Sick leave entitlement changes

The recent passing of the Holidays (Increasing Sick Leave) Amendment Act increased the employee sick leave entitlement from 5 to 10 days per year. The change comes into effect on 24 July 2021. The day in which the employee’s sick leave increases is based on their next entitlement date and not automatically from 24 July.

Median wage increase

The median wage increased from $25.50 to $27 gross per hour from 19 July 2021. This has implications for employers who may be intending to employ staff on an essential skills visa or residence visa

Covid-19 travel policy

The current pause in the trans-Tasman bubble and Wellington’s recent alert level change serves as a timely reminder that businesses need to plan for on-going travel uncertainty. Make sure you have an updated travel policy in place that covers what to do when an employee’s work or personal trip is extended, and the steps that employees should take when travelling in the bubble.

Covid-19 vaccinations and employees

As the vaccination programme rolls out across New Zealand, you might be wondering what your obligations are as an employer. Make sure you are clear on what you can and cannot do when it comes to Covid-19 vaccinations and your workers. Employment New Zealand has released some guidelines to help employers understand their role in the vaccination process. The guidelines can be found on their website together with a one-page PDF for your workplace.

With the introduction of the 39% tax rate for individuals from 1 April 2021, the Inland Revenue is increasing the information it collects from trusts to assess compliance with the new tax rate and to monitor how trusts are being used.

Trust disclosure obligations

The additional information that needs to be included in a trust’s tax return (from the 2022 tax year) includes:

name, IRD number and date of birth of beneficiaries, settlors and those with power of appointment and removal of trustees
financial statements
details of settlements
details of distributions to beneficiaries

Non-active trusts, charitable trusts, Maori authority trusts, and New Zealand trustees of foreign trusts do not need to provide this additional information.

Increased disclosure obligations to beneficiaries

In addition to the above, from January 2021, trustees need to disclose the following trust information to all beneficiaries, including parents/guardians where the beneficiary is under 18:

that they are a beneficiary
name and contact details of all trustees
that they can request a copy of the trust deed and the financial statements

Trustees can choose not to provide requested information to beneficiaries provided the request has been reasonably considered. The beneficiary does not need to be told the reason for not providing the information.

Change to definition of settlor

There has also been a change to the definition of a settlor. A beneficiary with a current account greater than $25,000 will now be deemed to be a settlor if a market interest rate or Inland Revenue’s prescribed interest rate is not charged. This can have implications for the beneficiary such as student loan repayments and social assistance.

If you are planning to buy or sell a business, you need to be aware of the new purchase price allocation rules that apply to business asset sales as well as commercial property sales. The new rules took effect from 1 July 2021 and impact the way parties allocate the agreed purchase price between tangible and intangible assets.

The new rules overcome the issue of vendors and purchasers allocating different prices to the same asset resulting in a tax mismatch for Inland Revenue. Under the new purchase price allocation rules, the parties either have the option of agreeing an allocation which will be applied for tax purposes by both parties, or if no agreement is made, then a legislative process applies for determining the allocation.

There is a de minimis threshold for transactions where the total consideration is less than $1 million, or if residential land and chattels are involved, the threshold is for consideration of less than $7.5 million.

Since the 2012 income year the depreciation rate for commercial and industrial buildings had been reduced to 0%. Following the Government’s raft of Covid-19 support measures, depreciation can now be claimed on commercial and industrial buildings from the beginning of the 2021 income year. The reinstatement will mean commercial and industrial buildings are now depreciated at 2% diminishing value or 1.5% straight-line. Residential buildings continue to have a 0% depreciation rate.

If you had previously depreciated your commercial or industrial building prior to the 2012 income year, you must continue to depreciate the building from the 2021 income year. Alternatively, if you own a commercial or industrial building that you held prior to the 2012 income year and you had previously elected not to depreciate, you must continue not to depreciate.

Renting your home or bach online?

If you rent a property for short periods, you need to know your tax commitments. New rules announced last May come into force this financial year.

Here’s what you need to know:

2,500	If your tax due at end of year is more than $2,500, you’ll have to pay provisional tax instalments the following year.
60,000	If you earn more than $60,000 a year from your taxable activities, you must register for GST. If you earn less than $60,000 a year, you can choose to register for GST.

If you have the choice, think carefully about whether registering for GST is best for you. Once you’re registered, there are ongoing requirements (such as recordkeeping, invoicing and filing returns) and when you sell your property or stop providing short-stay accommodation you’ll probably have GST to pay.

Unsure if being GST registered is the right way to go? Give us a call for advice.

Hosting boarders at your place?

You need to choose between the standard-cost method and the actual-cost method to work out the income you make from boarders so you know how much tax to pay.

The standard-cost method keeps things simple because when your income from a boarder is equal to or below standard costs, it’s tax exempt. You can also claim standard costs instead of claiming on actual expenses. The weekly standard cost per boarder has just been changed to $186/week for the 2019/20 tax year. What does it include? Food and household bills, gifts, and entertainment and activities you provide for your boarder. You’ll also need to calculate your annual hosting and transport costs.
Five or more boarders? You have to use the actual-cost method. Up to four boarders? You can choose to claim actual costs instead of standard costs. Under the actual cost method all your income from the rental is assessable income and must be declared. To use this method, you need to:
- Keep full records of your actual income
- Keep full records of your expenses
- Fill out an IR3 annual tax return to return income and claim actual expenditure incurred.

If you don’t complete a return of income by the due date for filing, IRD will assume you picked the standard cost method.

Either way, keep your records!

Because you may not know until the end of the tax year whether you’ll want (or be able) to use the standard-cost method, make sure you keep full records. Jot down the number of weeks you had boarders, the total income from boarders, cost of capital improvements or rent paid, kilometres you travelled transporting them, and any other related expenses.

With a third of New Zealanders renting homes, and some for a lifetime, it’s key to have clear, fair rules for tenancies. The Government’s tenancy law reforms announced late last year aim to improve tenants’ security and stability while protecting landlords’ interests. The Residential Tenancies Amendment Bill is now making its way through Parliament, with the Select Committee due to report on it in June this year. We’ll keep you posted on the changes.

What landlords need to know:

You will only be able to increase the rent once every 12 months (instead of six).
You won’t be able to get rid of tenants without a reason. Currently, periodic tenancy agreements can be terminated without cause as long as the landlord gives 90 days’ notice. The RTA will now have a list of reasons you have to choose from.
Tenants will be able to add minor fittings such as brackets to secure furniture against earthquake risk, to baby proof the property, install visual fire alarms and doorbells, and hang pictures.
Rental “bidding wars” will be banned.
The Tenancy Tribunal will be able to award compensation or order work to be done up to a value of $100,000 (instead of $50,000).
New tools will be available to help you take direct action against tenants breaking the rules.

Changes relating to damage, methamphetamine, and unlawful rental premises:

If tenants (or their guests) damage your rental property because of careless behaviour, they’ll be liable. They can be charged up to a maximum of four weeks’ rent or your insurance excess, whichever is lower.
If you have insurance, you need to include this (and the excess) in any new tenancy agreement. You must also note that a copy of the policy is available to the tenant on request.
You can now test for methamphetamine while your tenants are living there. You need to give tenants at least 48 hours’ notice (but not more than 14 days’ notice). You need to give boarding house tenants 24 hours’ notice.
You have to meet all legal requirements relating to buildings, health, and safety that apply to your rental property. You also have to ensure your property can legally be lived in at the start of the tenancy.

To boost the quality of rental properties in New Zealand, the Healthy Homes Guarantee Act was passed in 2017. If you’re a landlord, there are five actions you need to take to ensure your property meets the Healthy Homes Standards.

By 1 July 2024, you need to provide:

Fixed, efficient and healthy heating devices in living rooms, which can warm rooms to at least 18°C.
Ceiling and underfloor insulation that meets the 2008 Building Code or (for existing ceiling insulation) is at least 120mm thick.
The right size extractor fans for sufficient ventilation in kitchens and bathrooms, and opening windows in the living room, dining room, kitchen and bedrooms.
Efficient drainage and guttering, downpipes and drains. If your rental home has an enclosed subfloor, you need to install a ground moisture barrier if it’s possible.
A property with no unnecessary gaps or holes in walls, ceilings, windows, floors, and doors that cause noticeable draughts. All unused chimneys and fireplaces must be blocked.

Before you start

Structures

There are four options.

Sole ownership
Partnership
Company
Trust

The following options apply to married or de facto couples:

Sole Ownership

It could be desirable for the partner who has the higher income to own the property if the project is expected to make losses. In this way, the advantage to be gained from tax losses will be maximized. Similarly, if it is expected to generate profits, it might be better for the partner with the smaller income to own the property.

Please read the section on tax warnings following.

Partnership

It is usually assumed the partners will be equal, particularly if the funding has come from a joint bank account. However, this does not have to be the case. The partnership can be unequal if you prefer it that way. However, if you want an unequal partnership, you will need to be careful with your paper work. See notes following.

Company

There are certain advantages of having a company.

It is easy to rearrange ownership. You only have to change the shareholding. You might want company ownership while there are losses but trust ownership when there are profits. You may also wish to rearrange the proportion of ownership. All you have to do is sell some shares instead of going through the more expensive process of conveyancing.
There are some tax advantages. You will find a discussion of these following.
A limited liability company can reduce your personal exposure to risk. Apart from a personal guarantee you may have had to give for a mortgage, you would not be personally responsible for any other company debts unless you contributed to the claim. The claimant would have to sue your company not you.

Trust

A trust, in some respects, is like a company. Assets owned by a trust are separate from yourselves, and though you may be the trustees, you do not own them.

If you require long term care when you are old, your assets have to be sold to pay for this. A family trust helps to protect those assets. Since you do not own the assets in the trust, they cannot be sold to pay for your maintenance. However, any money owing to you can be claimed from the trust.

If you are in business your personal assets are constantly at risk. A limited liability company is not fool proof protection. For this reason people like to use a family trust to protect their assets. Most start by putting their home in the trust or trusts.

There is a major tax disadvantage of having a rental property in a trust. If it makes losses you are unable to use them to reduce your personal income tax. There has to be sufficient other income in the trust, apart from dividends from New Zealand companies, to set off against those losses. If not, the losses can be carried forward until there is taxable income to set off against them.

Taxation – Company structure

Companies can pay directors’ fees to directors and other remuneration to shareholders. This can be a handy way of diverting some income to the lower income earner. There are limits. You have to be able to justify the amount of income distributed in this way. You may be taxed twice if your claims are found to be excessive. The excess will be considered company income to be taxed at 28 percent and then a dividend to the person receiving it, to be taxed again.

Tax Warnings

You are entitled to arrange your affairs to minimize the effect of tax. However, you are not entitled to enter into arrangements which have the effect of changing the incidence of tax, unless there is a perfectly good commercial reason and the tax effect is relatively immaterial. Some years ago, three accountants decided to transfer the practice equipment to their wives. They wanted their wives to make a profit by leasing the equipment back to them. The Inland Revenue Department was not happy and challenged the accountants in court. The accountants lost because the principal reason for rearranging their practice was to reduce taxation. There would not have been a rearrangement if the leasing had been set up at the start. In another case an accountant sold his car and then got his family trust to buy one and lease it to him. That was not tax avoidance

Therefore, remember to be careful if you are contemplating rearranging your financial structure with only tax in mind. If you were to sell your rental property to your family trust, you could reasonably argue there is a good non tax justification and the tax effect is reasonably minimal. If, on the other hand, you rearrange the proportion of ownership in a partnership structure, when the rental property starts to make profits, there could be an argument from Inland Revenue Department this was done for tax reasons

You should also realize tax law is constantly changing. Something which might be good advice today could not be so good at some later date.

Documentation

Tax law works more on form than substance. Be very careful with your documentation. If you want to have an unequal partnership but are drawing the funds from a joint bank account, make sure there is documentation, confirming the person having the bigger share has borrowed half the difference from the one having the smaller share. If it is intended one of the partners is to receive a salary, be sure to record this in a written agreement valid for at least three years.

Borrowing Money

The law looks at the use for which the money was applied. If you want to move house and need a mortgage to buy the new place, the money borrowed is to buy the new house, even though you may retain the old one for rental purposes. The interest on the loan is not tax deductible.

Be careful with all documentation. Money borrowed for a company or trust should be paid straight into its bank account.

The mortgage documents must also be drawn up in the name of the entity borrowing the money and not in your name but you can still provide a security or guarantee.

Revolving Credit

Revolving Credit is a mortgage which fluctuates according to your deposits and withdrawals. Interest is charged on the balance each day. It therefore pays to put salaries and any other sources of income into the bank account and to withdraw money from it as late as possible. The Inland Revenue Department says each time you take money out you reduce the original debt. In this way, the original debt reduces very fast and within a short time all the borrowed money has become a personal debt and no interest is tax deductible. It is therefore unsuitable funding for rental property owned in your own name or in partnership.

Companies are separate entities for tax purposes. Money moving in and out of the bank account is not seen as repayment of a personal debt. Revolving credit can usually work nicely for a company.

Property Overseas

You will need to comply with the tax laws of that country as well as those of New Zealand. In the case of Australia, the tax laws are quite different from ours. Depreciation rates are different and you have to obtain the services of a quantity surveyor for valuing chattels. Don’t forget capital gains tax.

If you borrow money overseas, you may have to either pay nonresident withholding tax as a deduction from interest payments or pay Approved Issuer Levy. Sometimes these can be avoided by picking the right bank. See us and we will explain.

Negative Gearing

Gearing is the proportion of your own money compared with borrowed money used to buy the property. High gearing means more borrowed money than your own. Some properties are very highly geared. The owners sometimes borrow 100 percent of the purchase price to maximize losses and get tax refunds. In times of high inflation high gearing is most desirable, because your equity keeps increasing as the value of the property goes up. The government is subsidizing your investment through the tax refunds. However, if your property is not gaining in value, high gearing may not be such a good thing.

We do not recommend long term interest only loans. They indicate a property was bought with primarily a capital gain in mind. IRD could therefore argue the gain on sale is taxable.

At the time of writing (November 2009), we also need to warn you the Government may be looking at this area and be contemplating a change to the rules.

Robert Kiyosaki, a modern investment guru, says he always wants to see a positive cash flow from every investment. So long as he expects more money to be coming in than going out, including principle repayments of the mortgage, he is happy.

When you are up and running

Depreciation

Depreciation is a measure of the reduction in value of the asset each year. Depreciation rates vary according to the life of each asset involved. Carpets wear out more quickly than the walls of the house. The Inland Revenue Department recognizes a classification of about 24 different asset types each having its own depreciation rate. Obtain a value of all the chattels in the house. These diminish in value over time. The house, however, will probably rise in value.

You may choose whether or not you wish to claim depreciation. Having made the choice you may not change your mind. They would usually depreciate the chattels because these fall in value.

Legal Expenses

The costs of acquiring a property are not tax deductible. Therefore the legal costs involved in transferring it to you are added to the price you pay, for tax purposes.

Costs relating to finance are tax deductible. Be sure to ask your lawyer to distinguish between these two types of expenditure when rendering an account to you. Most lawyers fail to do this.

Real Estate Agent’s Fees

These are part of the cost of acquiring the property and are treated the same way as the conveyancing costs. Letting fees would be tax deductible but usually the tenant pays. Rent collection fees are tax deductible.

Valuation Cost

The cost of a valuation for buying a property is not a tax deductible cost. The cost of a valuation for obtaining finance, or determining chattels’ value for depreciation, is a tax deductible cost. Be sure to distinguish between these two types of expenditure when getting your bill from the valuer.

Repairs

Repairs are a cost involved in maintaining a property. If you buy a house in a rundown condition, the costs of doing it up are not tax deductible. They are part of the cost of acquiring the property and must be capitalized. This also includes any repairs of any kind that you do before your first tenant moves in.

Sometimes expenditure is a mixture of repairs and improvements. For example, you may decide you want to make the living room bigger. Part of the costs could relate to redecorating the living room but another part would be for the additional floor area. You would need to have these costs split for tax purposes.

Expenses you can claim

Here is a list of expenses you should consider claiming

Accountancy
Advertising for tenants
Agent’s letting fees
Bank charges including finance application fee
Commercial cleaners
Gardening
Insurance
Interest
Light and power
Costs of running your vehicle. A mileage basis is probably the most satisfactory. Consult us for details.
Printing stationery and postage
Rates
Repairs and maintenance
Telephone
Valuation for finance or depreciation.

You could also claim for the use of your home for administration. However, make sure the cost of calculating the claim, including the accounting work, does not exceed the tax saving. Another marginal claim is for the use of your computer.

If your property is owned by a company, you should produce a proper set of accounts.

In the case of trust ownership, the important thing to remember is keeping an account of its indebtedness to yourselves and a record of the capital of the trust. You should prepare proper accounts for a trust, otherwise you risk overlooking transactions and being sued by discretionary beneficiaries. For example, profit is often attributed to beneficiaries together with related tax credits, if any.

Accounting

Accounting for sole ownership or partnership is much easier than for a company or a trust. The accounting can be done as part of the process of preparing your tax return.

Companies need to prepare a balance sheet. There should be a separate bank account for the company and transactions contained in it should be processed into their various income and expense classifications.

Accounting for trusts needs care. Decisions involving the trustees or beneficiaries need to be documented in the form of minutes. Decisions which might or could affect these two should also be documented. For example, if you wish to take money out of the family trust you will need to decide whether this is a reduction of its debt to you or a distribution of income or capital from the trust. If you are purchasing an investment you will also need to make it clear whether this is to be a trust asset as opposed to a reduction of the trust’s debt to you. The important thing to remember is that all trustees required by the trust deed to make decisions, must do this before the transaction goes ahead. It is no good getting one of the trustees to sign afterwards. Failure to keep proper records of trust transactions can lead to it being considered a sham trust. In other words, there is deemed to be no trust at all. Also, you risk being sued by any beneficiaries at a later stage. They may also be able take a large portion of the trust funds

Your accountant will always need the sale and purchase agreement and the settlement statements prepared by your solicitor. These set out the purchase price, adjustments such as the apportionment of rates and they show the amount of borrowed money. You should also obtain a statement from your bank showing the movements in your mortgage account and the balance at the end of the financial year. Be sure to include the lawyer’s bill as this may show costs which are tax deductible.

If you have bought the property as a sole owner or in partnership, you can analyze the income and expenditure for yourself. If you wish, you can supply the totals of these. However, be sure to provide full details of repairs and maintenance costs.

If you have bought assets supply the following:

The name of the asset
To the date on which you bought it
Whether you bought any other assets at the same time and if so details
Whether it was new or secondhand
The cost

The new law on ring-fencing rental losses is now in force, which means:

In most cases ring-fenced deductions will be carried forward and can only be used against residential rental or sale of property income in future years.
Property investors will, in most cases, no longer be able to reduce their tax liability by offsetting residential rental property deductions against their other income, such as salary or wages, or business income.

The new rules apply from the start of the 2019-2020 income year and apply to:

Mainly rental properties but can also include other residential land.
Individuals, partnerships, trusts, look-through companies and close companies.

Own a rental property? We’re happy to talk you through your tax implications so you don’t get caught out.

Buying or selling a home? You’ll now need to provide your IRD number as part of the transaction process. The change will allow IRD to know who’s flipping owner-occupier homes on a regular basis, and better enforce the existing law that ensures people pay tax on the profit. The move won’t impact the rules around who’s required to pay tax on investment property though.

In an effort to level the playing field between property investors and home buyers, a new law ring-fencing rental losses looks set to come into effect on 1 April 2019.

It means you’ll no longer be able to offset tax losses from your residential properties against other income (e.g. salary or wages, or business income).

However, the losses will be able to be used in the future when the properties are making profits, or if you are taxed on the sale of land.

Need more information? Give us a call.