Loss Ring Fencing on Rental Properties

The government will introduce loss ring-fencing on residential rental properties, which is scheduled to become law effective from 1 April 2019. This means it will apply for the 2020 tax year.  The tax legislation proposed is complex and politically motivated.

 What Changes are proposed?

 For years, residential property investors have been able to use losses on rental properties to offset their personal tax. Residential rental properties are often "negatively" geared. This means that the expenditure exceeds the income, resulting in a loss. The government has proposed ring-fencing these losses and preventing investors from using any losses against their personal tax. Read more…

Mixed-Use Assets New Legislation

From the beginning of the 2013–14 tax year owners of "mixed-use" holiday homes will have to work out their income tax obligations differently.

You have a mixed-use holiday home if during the tax year; your property is used both for "private use" and "income-earning use".

What is "private use"?

Private use of your property means:

•   Use by you or your family, even if rent is paid.

•   Use by non-associated people if you earn rent at less than 80% of market rates.

What is "income-earning use"?

Income-earning use of your property means use by a non-associated person from which you earn rent at 80% or more of market rates.

Exemptions

If your income from income-earning use is less than $4,000 for the year, you can opt to keep the holiday home outside the tax system. That means your rental activity doesn't need to be included in your income tax return. You don't return any of your income and you can't claim any of your expenses for the holiday home.  You can also choose for your rental activity to remain outside the tax system if:

•   You make a loss, and

•   Your gross income from income-earning use is less than 2% of the rateable value of the property.

What income is taxable?

You must pay income tax on rent earned from income earning use.  Any rent from private use is exempt from income tax.

What expenses are deductible?

Expenses from mixed-use holiday homes fall into three categories:

1.      Fully deductible. You can claim 100% of any expense which relates solely to the income-earning use of the holiday home. Examples: Costs of advertising for tenants, costs of repairing damage caused by tenants.

2.      Not deductible.  You can't claim any expenses relating to the private use of the holiday home.

For example: Costs of a boat and quad bike stored in a locked garage and unavailable to the non-associated people renting the holiday home.

3.      Apportioned. If an expense relates to both income earning use and private use, you need to apportion it using this formula:

 

Apportionment formula:

 

Expense    ×    ______Income-earning days__________

                      Income-earning days + private-use days              Examples: mortgage interest, rates, insurance

 

Record keeping

Please keep records so that we can work out your tax obligations at the end of the tax year. Your records should show: private-use days, income-earning days, the expenses you paid, and the name of each tenant together with their relationship to you and the rent they paid.

This new legislation changes to way your income shall be calculated. If you can begin your record keeping under the new rules immediately that shall greatly assist in the preparation of your 2014 income tax returns.

Carry forward of Losses

If you make a loss from your mixed-use holiday home, and your gross income from income-earning use is less than 2% of the rateable value of the property, you can not claim the loss in the current year.  You will have to carry forward the loss to offset against income from your holiday home in a future tax year.

A New Way of Paying Tax AIM

A New Way of Paying Tax – The Accounting Income Method

 The IRD are trying to simplify Provisional Tax. They have introduced and are pushing for the "Accounting Income Method" (AIM). You may have heard about it.

 It's coming and from the 1 April 2018 it will become available for small businesses that use IRD approved accounting software. This means you're able to pay Provisional Tax based on your business's profits. The idea is good – pay your tax when you earn the money. The detail isn't so good – the devil is in the detail. Read more…

Do your plans for the festive season include functions to celebrate with clients and the team? What about gifts? If they do, here are some tips on the tax implications.

Entertainment

When you're entertaining clients or colleagues, some entertainment expenses are tax deductible while others aren't. It can be tricky working out what's deductible as a business expense and what isn't.

The basic idea is that an expense is business-related if you spend the money to help your business earn income. Most business-related expenses are fully deductible. If the expense doesn't help your business earn gross income, it's private and you can't claim it as a tax deduction.

It becomes a little trickier Read more…

Free Trade & TPPA

The Trans-Pacific Partnership Agreement (TPPA) is a hot topic at the moment but free trade is at the centre of what the twelve nations are trying to achieve.

Wouldn't it a better place if there were no restrictions on our trade?  Quotas and tariffs are designed simply to protect the country that imposes them for the benefit of those industries that perhaps can't produce a commodity as cost efficiently as others that wish to export to the country that needs the product. 

Let the market forces decide!  If there is a demand for a product, people will supply it.  The price will be what a willing buyer and willing seller agree.  Get back to basics.

Supply and demand – an economic theory, the relation between these two factors determines the price of a commodity.  This relationship is thought to be the driving force in a free market.  As demand for an item increases, prices rise.  When manufacturers respond to the price increase by producing a larger supply of that item, this increases competition and drives the price down.  Stated another way, generally, if there is a low supply and a high demand, the price will be high.  In contrast, the greater the supply and the lower the demand, the lower the price will be.

Tariffs and Quotas upset the free market.  What is your competitive advantage when you make something?  Is it the natural resources available - the sun, rain and wind?  Or is it intellectual property (IP) the know-how and can do we possess?  We have an abundance of wind that makes wind farming cost efficient.  We have large green spaces and the conversion of grass into milk is legendary around the world.  Providing subsidies to farmers to grow nothing (fallow fields) has long been a bone of contention.  Who are they helping by providing money for nothing?  There is no encouragement to better the farming practices.

In business we are constantly looking to better what we do, to be efficient in our processes and production. We work towards making a good margin on the products we make and export to the world.  The sale of our products at fair prices should not be sabotaged by tariffs and quotas protecting locals who don't have the skills and resources we have.  We should have fair trade for all.

 

 

Hamish Pryde

16 February 2016