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Rental Properties, Bright-line Tests & Interest Deductions

Rental Properties, Bright-line Tests & Interest Deductions

For decades, owning a rental property has been the backbone of many a kiwi family’s retirement plan. In some cases, leveraging the equity in their own homes, landlords have bought properties with no money down. In the last ten to fifteen years, strong growth in house prices has put political pressure on successive Governments to make housing more affordable. The primary tool used by all of the main political parties has been to make rental property investment less attractive, thereby encouraging investments in other areas.

On 23 March 2021, the Government announced the most recent changes to the rules for landlords. The two main changes are the extension of the bright-line test from five years to ten years and the removal of the tax deductibility of interest for rental properties.

Brightline Test

On 1 October 2015, the “Bright-line test” was introduced for property owners. At the time this meant that if you sold land less than two years after you bought it you had to pay tax on any equity gains you made in the property; the family home being exempt from this rule.

From 29 March 2018 this was changed to five years, and now, from 27 March 2021 onwards, this has been extended to ten years.

Apart from your family home, if you now buy residential land and sell it less than ten years later, you will pay tax on the equity gains from the property. Currently, the proposed change will let newly built houses have a five year “Bright-line test” though the details for how this would work in practice have not yet been finalized.

It is important to note that the family home may not always be exempt.

If the family home is owned by a trust where the people living in the house are not the settlors of the trust, it probably won’t be exempt.

If the family home is rented out for a year or two while the owners are overseas and then sold less than ten years after it was bought, it would only be partially exempt from the “Bright-line test”.

More information about the proposed changes is available from the IRD website.

Key Take Away Message

If you buy a property after 26 March 2021 you may have to pay tax on the equity gains if you sell it less than ten years later.

If you bought a property after 28 March 2018 you may have to pay tax on the equity gains if you sell it before the five years is up.

If you are thinking about selling a property and are unsure whether you will be subject to the “Bright-line test” or not, please contact us before you commit to selling it. These rules apply to everyone, not just landlords.

Interest Deductibility

From 1 October 2021 interest will no longer be tax deductible for money borrowed after 27 March 2021 for rental properties. This includes new loans for renovations and repairs to existing rental properties. The tax deductibility for existing loans on rental properties bought before 27 March 2021 will be reduced to 75% on 1 October 2021, then to 50% on 1 April 2023, then to 25% on 1 April 2024 and finally from 1 April 2025 no tax deduction will be allowed for the interest expense on rental properties.

An exemption to this rule was announced for new builds however the details about what constitutes a new build has not yet been finalized.

More information about the proposed changes to interest deductibility is available from the IRD website.

Key Take Away Message

From 1 April 2025 the interest expense for rental properties will no longer be tax deductible, except for new builds. If you bought an existing property after 27 March 2021 or took out a new loan for repairs and maintenance, then interest will no longer be deductible from 1 October 2021 onwards.

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Should I have a Family Trust?

Should I have a Family Trust?

The words “Family Trust” can evoke all sorts of images; especially for those not familiar with them, but they are a valuable tool for many New Zealanders when it comes to asset protection, tax planning and inheritance/estate planning. Having a family trust can be stressful if not done correctly or planned properly from the beginning, however there are good reasons why family trusts are so popular with kiwis.

Official estimates are that there could be as many as half a million trusts in New Zealand. Many of these will own the family home, maybe a few investments but not much more.

While the advantages of having a family trust out-weigh the disadvantages, they are not a “magic bullet” or “cure-all”. There are disadvantages in having a family trust that are important to know.

Disadvantages of a Family Trust

1. Legal compliance – a trust is a separate legal “person”. This means that there is paperwork and legal requirements that must be met.

2. Cost – there are fees to set a trust up and, in most cases, annual fees for the ongoing costs of managing the trust.

3. Complexity – a trust adds a layer of complexity to things that was not there beforehand. “Normal” every-day decisions, such as buying or selling a house, will need to be properly documented and important documents signed by all the trustees (managers of the trust).

4. Time – with increased legal compliance and complexity, additional administration time will be required for trust related matters.

5. Loss of Ownership – once a trust owns your assets, such as the family home, you are no longer the legal owner. While this is one of the main purposes of a family trust, it can still be daunting to some people to realize that they no longer “legally” own their home.

Given these disadvantages, why do so many people still choose to have a family trust?

Because the Advantages can be worth it…

1. Protection of Personal Assets – if you have a business or provide personalized advice (such as an engineer), your personal assets (family home, rental properties, savings and investments) could be at risk from creditors or lawsuits against you. A family trust isolates you from your personal assets, protecting them from business or legal challenges.

2. Special Purpose – a family trust can be used to ensure that funds are set aside for matters important to you. This may be things such as the long-term care of a handicapped child or helping with the costs of a grandchild’s education.

3. Separating Assets from Relationship Property – whether from concerns of an ex-partner making a claim against your estate in the event of your death, a new relationship not lasting or protecting the inheritance money of children from their present (or future) spouses, a trust helps isolate inheritances from personal assets.

4. Residential Care Subsidies – if you require permanent rest home care when you retire, you may be eligible for a rest home care subsidy. Currently Work and Income (WINZ) tests the income and assets of recipients to determine their eligibility for this subsidy. When assets are transferred appropriately, and in a timely manner to a trust, these assets (and any income they generate) can be excluded from this calculation.

If you want to know more about family trusts, want to know if a family trust is suitable for your circumstances, or want help in initial planning for a family trust, contact us today. We are happy to help you.

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Do I really need an accountant?

Do I really need an accountant?

In New Zealand we have a number 8 fencing wire mentality. Why pay someone to do something that you can do yourself…? Often this thinking goes together with truisms such as “She’ll be right, mate”. When it comes to doing tax returns, it can be easy to take the same approach. After all, how hard can it be to add a few numbers together and file a tax return with IRD?
Here are four reasons why you should consider using an accountant.

1. What is your time worth?
Some people will spend hours, or even days, working out how much profit their business has made in order to complete their tax return. Few people, if any, enjoy doing this. Try multiplying the number of hours spent doing your own tax returns by your charge out rate. It is probably more efficient and cheaper hiring an accountant to do this for you.

2. Money – What is a dollar worth?
Accountants specialize in preparing financial accounts and tax returns every day. They have a good idea about what exactly can be claimed. Since the current Income Tax Act came into force in 2008 Parliament has changed it more than 130 times. That’s about ten changes to the Income Tax Act every year. Accountants specialize in this area; keeping current with the ever-changing tax law as it happens. Put simply, accountants know what can be claimed and what cannot. Some of those things might surprise you.

3. Compliance – We don’t know, what we don’t know.
When it comes to the law, ignorance is not a defense. If you make a mistake with your tax return the
penalties can sometimes be harsh. We regularly see clients claiming expenses for things that cannot be claimed, claiming GST when no GST can be claimed and not correctly accounting for “perks” (such as personal use of a “business” car). Some business expenses can be fully claimed, some partially claimed some must be spread out over several years, and some, while still valid, cannot be claimed at all. It is dangerous to think that just because you spent money on a “business” expense, you can claim it all back in your tax return. Accountants specialize in this area. They know what can be claimed and how much.

4. Peace of Mind
As human beings we often find we have a slight nagging feeling in the back of our minds, when doing
things outside our comfort zone. This can be especially true when it comes to dealing with government departments such as IRD. If you use an accountant you will save time, you’ll probably save money, your tax return will certainly comply with the law, but more importantly, you will have peace of mind knowing that someone who specializes in this area is dealing with the IRD on your behalf.

If you have any questions about your business or tax obligations, please contact us for help.

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Law changes for overseas investment in Kiwi businesses

If you are a New Zealand business seeking overseas investment, there are new requirements you’ll need to follow. Find out about the changes and what you need to do.

When: From16 June 2020

What: Changes have been made to rules that impact New Zealand businesses looking for overseas investment. The changes include:

  • a new requirement to notify the Overseas Investment Office (OIO) about overseas investments, and
  • a new national interest test that will apply to some investment transactions.

OIO will need to be notified about all overseas investments that will result in:

  • more than 25% of a New Zealand business or its assets being owned by investors outside of New Zealand, or
  • an increase to an existing holding beyond 50, 70 or to 100%.

A new national interest assessment will apply in rare circumstances to evaluate whether an overseas investment in sensitive and high-risk assets are in New Zealand’s national interests.  

Changes also mean the application process for lower-risk investment transactions is simplified, and some transactions will no longer need consent.

Changes to the Overseas Investment Act (external link) — Overseas Investment Office

Who: New Zealand businesses seeking overseas investment.

Why: Overseas investment can support New Zealand’s COVID-19 economic recovery, so that businesses can continue to grow and evolve, and keep more New Zealanders in jobs. The right checks and balances are needed to protect businesses that are important to New Zealand’s national security, economy, and communities.

What you need to do: If you are seeking overseas investment, be aware of the changes to when the OIO needs to be notified, and that a new national interest assessment might apply to overseas investors wanting to invest in your business.

Businesses seeking investment should get advice from their advisors, for example a lawyer or accountant.

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Paid parental leave is changing

Paid parental leave is extending from 22 to 26 weeks from 1 July 2020. Here’s what you need to know.

When: 1 July 2020

What: Paid parental leave will increase from 22 to 26 weeks. You are already required to provide job-protected parental leave to eligible employees for a minimum of 26 weeks if the employee meets the 6-month employment test (who’ve worked for you for at least an average of 10 hours a week for six months or more). For employees who meet the 12-month employment test (who’ve worked for you for at least an average of 10 hours a week for 12 months or more), the period of parental leave you are required to provide is 52 weeks.

Parental leave

The ‘keeping in touch’ allowance is increasing to 64 hours. These hours allow an employee to work a limited amount of time during the paid parental leave period, without losing their entitlement for payments. This arrangement needs to be agreed to by you and your employee.

Why: To provide increased support for primary carers including working parents with newborns and families taking on the permanent care of children under the age of six.

What you’ll need to do: This change doesn’t require you to provide additional leave. Just be aware that eligible employees who take parental leave will be paid for 26 weeks and can arrange to work up to 64 hours of ‘keeping in touch’ allowance.

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It’s still accounting, but different

Challenges facing businesses lately have been nothing short of dramatic

Accountants may appear to be on the endangered species list in this era of rapidly-increasing automation, but Adam Davy, head of advisory for BDO New Zealand, says accountants just need to think differently and stay relevant if they want to assure demand for their services in the future.

“As Star Trek’s Mr Spock might say… ‘It’s accounting Jim, but not as we know it’,” Davy says.

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