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Property Update - Q3 2019

Ben DuflouWednesday, July 31, 2019



Residential Rental Losses - Now Ring-Fenced!

On 26 June 2019, the Government quietly passed the bill that now ring-fences residential rental property losses, which means losses generated from residential property investments can no longer be offset against other income earned by taxpayers.

 

The obscurely named “Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill rules retrospectively apply from 1 April 2019.  As a result, any residential property losses generated during the 2020 income tax year (1 April 2019 to 31 March 2020 for most investors) and beyond will be quarantined in the same way as Mixed Use Asset losses are treated.

 

Future losses can only be offset against other residential rental profits within the investor’s portfolio, or against taxable gains from the sale of property (capture by the intention test, bright-line test or property trade rules – subject to specific conditions).

 

Quarantined losses not utilised, will be carried forward to be used in future years, though the retention of the losses will be subject to rules around company shareholder and partnership continuity rules, where changes of shareholders/partners could result in the quarantined losses being forfeited.

 

These rules will apply to individuals, partnerships, trusts, look through companies (LTC) and closely-held companies alike.



Key Impacts

With this in mind, any investors who have relied on income tax refunds generated through residential rental losses need to consider the impact on their future cash flow; this was the key reason behind our recommendation that property investors avoid applying for 2020 special tax codes.


For those clients that pay provisional tax or are close to the $2,500 residual income tax threshold, the change to provisional tax could be significant for the 2021 income tax year, and also result in a terminal tax liability for the 2020 income tax year.

 

On face value, the rules would tend to suggest that restructuring property through LTC’s and Trusts, would no longer provide any benefit to investors. However, restructuring debt against income generating assets will always provide benefits to taxpayers, though the cash flow benefits may take a little longer to be realised under these ring- fencing rules.



Consideration

For clients that operate a business or own other investments, there are potential opportunities to reassess their operating structures to mitigate some of the impacts associated with ring-fencing rental losses. 

 

Given the rules are now in place, if you have any questions around how the rules impact you directly, or you wish to discuss whether restructuring would be beneficial, then please contact Ben and the team at All Accounted For to arrange a time to discuss your implications (ben@aafl.nz or 04-970-1182).


Motor Vehicle: Lease vs Buy

Ben DuflouThursday, July 18, 2019



Whether to lease or buy a motor vehicle is a common question for business owners. We highlight some of the pros and cons to consider when looking into purchasing a new vehicle.

Lease

Pros

Cons

Operating lease vehicles are fully tax deductible as an operating expense

Locked in ongoing business expense

Operating lease fixed monthly costs can be easier to budget

In the end, leasing usually costs you more than an equivalent loan

Monthly payments are lower as you’re not paying back any principal

Lease contracts specify a limited number of kms

Driving a late-model vehicle – higher priced, better equipped vehicle than you might otherwise be able to afford

Drive the car during its most trouble-free years

Buy

Pros

Cons

Ownership

Pay for the total cost of the vehicle as well as having to budget for maintenance, insurance, interest on financing

No end-of-lease charges

Higher monthly payments

Drive as many kms as you want

Post warranty repair costs

Freedom to customise the vehicle


Some important questions you should ask yourself are:

  • Is having a new vehicle every three or so years important?
  • Do you travel a considerable distance in your vehicle each year (high mileage)?
  • Is ownership of the vehicle more important than low upfront costs and no deposit?
  • What will be the financial position of your business at the end of the finance period?
  • What are the projected cash flows for your business?
  • Is the vehicle intended purely for business use or will it also be used personally?
As purchasing a vehicle can have a significant financial impact on your business, we recommend you contact us to talk through your options.
 

FBT & Employee Insurance Schemes

Ben DuflouMonday, July 15, 2019
If you offer an employee insurance scheme, it is important to ensure the correct taxation treatment, as recording the benefits through PAYE will impact employees' entitlements for kiwisaver, student loan, working for families and holiday pay.

If you want to know more, click on the link below to read this article by Velocity Financial, in conjunction with All Accounted For.


The General Ledger - June 2019

Ben DuflouWednesday, July 03, 2019


- Has your business made the necessary changes to replace your single-use plastic bags? 
- Are you being inundated with IRD mail relating to PAYE? 
- We introduce our new office administrator, Sarah J. and congratulate Adam for his outstanding tax exam results. 
- Short of space? Our client, Pencarrow Cabins might be able to help.

Click here to find out more.

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