Housing Tax Change: Interest Deductibility

Housing Tax Change: Interest Deductibility

As we outlined in our previous blog article, in March this year the government announced a raft of tax changes aimed at the housing market. The announcement in March covered the government’s policy intent and did not have many specifics.

Details around the deductibility of interest was announced this week, which we will go through in this blog. Here’s a recap of what was announced in March this year.

Recap

The current bright-line period will be extended to 10 years for properties acquired on or after 27 March 2021, except for new builds.

  • The existing “main home” exemption will also be amended to reflect the split between personal and rental use.
  • Interest costs will no longer be deductible for income tax purposes for properties acquired after 27 March 2021 (interest limitation rule). An exemption for new builds will also be introduced.
  • For existing properties, interest deductions will be phased out over four years.

New Builds

The interest limitation rule will not apply to a new build for a period of 20 years, regardless of the owner.

For the purposes of the interest limitation rules, a “New Build” will be defined as a self-contained residence that receives a CCC (Code of Compliance Certificate) on or after 27 March 2020.

In other words, interest costs incurred on residential properties acquired after 27 March 2021 will still be deductible for tax purposes if that property received a CCC on or after 27 March 2020, for a period of 20 years from CCC date.

The exemption will apply to anyone who owns the new build within this 20 year period, and the timing of the exemption is not reset when the property is sold.

Things for you to consider:

Firstly, if you are going to rely on this exemption, make sure you physically sight the CCC date on an official council document (most likely the LIM report). Don’t rely on word of mouth.

Secondly, some so called “old” houses may still qualify as new builds. It is not uncommon for old dwellings to be moved to a new piece of land, where a new CCC would be granted. If that is the case, then it could qualify as a new build.

Thirdly, this 20 year period will lapse at different dates for different properties, as each property will have a different CCC date.

Is interest costs permanently denied?  

Maybe not. Previously denied interest deductions may be available when residential property is sold if the sale is taxable, although the deduction may be limited to the gain on sale.

For example, if you sold within the bright-line period and the gains were taxable, the previously denied interest deduction could be used to offset against the taxable gain.

Things for you to consider

Even though the interest deductions might be initially denied, your accountant should still keep track of the interest costs, as you might be able to use them one day.

Refinancing, Variable Loans, Revolving Facility

Refinancing of pre-27 March 2021 borrowing will be eligible for the phasing out of interest deductions over time. This will be limited to the loan balance as at 27 March 2021.

If the amount outstanding is higher than the amount outstanding as at 27 March 2021, only interest on the amount outstanding on 27 March 2021 will be deductible under the phased approach. Interest on the remainder of the amount outstanding will be non-deductible.

Properties not affected by interest limitation rule

You will still be able to deduct interest for some properties. In particular, main homes are not affected by these rules. If you rent out part of your main home to flat mates or boarders, you will be able to deduct some interest against that income. For a list of other properties that are not affected, please feel free to contact us.

Conclusion

Although these rules have not been turned into law yet, they will retrospectively apply from 1 October 2021. There is much complexity in these proposed rules, and we have only touched the surface of what will become law. Again, please contact us if you have any questions regarding these changes.

In addition to the interest limitation rules, the government has also previously enacted changes to the bright-line rules and the main home exemption, which we will cover in our next blog. Stay tuned.

Written by Gordon Tian

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Housing Tax Changes: All You Need To Know

Housing Tax Changes: All You Need To Know

The government announced a raft of policies on 23 March 2021 (yesterday) aimed at the housing market. Out of the announcement, there were some tax changes that will significantly impact on property owners and investors. The changes are:

  1. The current bright-line period will be extended to 10 years for properties acquired on or after 27 March 2021, except for new builds.
  2. The existing “main home” exemption will also be amended to reflect the split between personal and rental use.
  3. Interest costs will no longer be deductible for income tax purposes for properties acquired after 27 March 2021. An exemption for new builds will also be introduced by the government after a consultation period.
  4. For existing properties, interest deductions will be phased out over four years.

Bright-line Test Proposed Change

The bright-line test means if you sell a residential property within a set period after acquiring it you will be required to pay income tax on any profit made through the property increasing in value. For properties acquired on or after 27 March 2021, the bright-line period will be 10 years (increased from 5 years).

However, for the purchase of “new builds”, the bright-line period will remain at 5 years. The definition of “new build” is yet to be worked out by the government, but it is intended to include properties that are acquired within a year of receiving their code compliance certificate.

For tax purposes, a property is generally acquired on the date a binding sale and purchase agreement is signed, as opposed to the settlement date.

Change To The “Main Home” Exemption

Currently the rules provides an exemption to the bright-line test if it was used as your main home. In order to qualify, you had to have lived in the property for more than 50% of the time of total ownership, and more than 50% of the total floor area of the house was used as your main home.

The current rules applied on an “all or nothing” basis. Meaning, if you qualify for the main home exemption, then none of the gain on sale will be taxable.

This will now change. For properties acquired on or after 27 March 2021, the gain on sale that relates to the period of ownership that the property was not used as a main home will now be taxable. For example, if you rented your house out for 1 year, and then lived in it for 2 years and then sold the property, 1/3 (being 1 year of rental out of 3 years of ownership) of the gain on the sale will be taxable. This change will include new builds.

 Interest Deductions on Residential Property

Currently, the interest that you pay on your mortgage is able to be offset against the rental income, so as to reduce the tax liable to be paid on the rental property. However, for properties acquired on or after 27 March 2021, interest costs incurred after 1 October 2021 will no longer be deductible against rental income.

Existing Properties

For properties acquired before 27 March 2021, interest deductions will be phased out over four years according to the table below: 

The government intendeds to provide an exemption for new builds to this new rule after a consultant period. It will also decide after a consultation period whether all people who are eventually taxed on the sale of property should be able to deduct their interest expense at the time of sale. More details are to come on that.

You will also need to beware that interest costs on any new borrowings on or after 27 March 2021 will not be deductible for income tax, even if the property itself was acquired before 27 March. This is important to know as any “top up” mortgages or possibly refinance via a new loan will mean the interest costs will no longer be deductible.

Tip for Advanced Players

One thing that not many people are aware of is that where you are a nominee to a Sale and Purchase Agreement, the date of acquisition for the nominee is not the Sale and Purchase Agreement date, but rather the date that the Deed of Nomination was signed. So please get your Deed of Nomination finalised before 27 March 2021 if you want to avoid the 10 year bright-line period.

Final Thoughts

These are some very significant changes to the tax rules around properties.  In particular, the biggest cost for a rental property is the mortgage, so the change to interest deductibility rules means that after paying the bank, there might be a significant cash shortfall to pay income tax on the rental properties. This will strain the cash flow for many mom and dad investors.

It’s good that the government is intending to exclude new builds from these changes, but the details of that have not come out yet, so watch this space. We will keep you posted.

Written by Gordon Tian

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COVID-19 Support Payments 2021: All You Need To Know

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland.

To do our part for the community, we would like to let you know the latest developments in terms of government support payments for businesses, so that you are taking advantage of most of the government support available. There are two main support payments which might be relevant to you.

 

Resurgence Support Payment (RSP)

The Resurgence Support Payment (RSP) is a payment to help support viable and ongoing business or organisations due to a COVID-19 alert level increase to level 2 or higher.

Each time the COVID-19 alert level is increased from level 1, the Government may decide to activate the Resurgence Support Payment. It will generally be activated when the period of increased alert level is 7 days or longer

Auckland went into alert level 3 at 11.59pm on 14 February 2021, and came back down to alert 1 at 11.59pm on 22 February 2021. A total period of more than 7 days. As such, the RSP was activated for this lockdown period and eligible businesses can now apply. The last day to apply for the RSP is 22 March 2021.

Auckland again when into alert level 3 at 6am on 28 February 2021. Assuming that this lockdown is for 7 days or more, the RSP should also be available for the second lockdown period, in addition to any wage subsidies. Applications for this lockdown period is not yet available.

Eligibility Criteria

Your business must have experienced at least a 30% drop in revenue compared between:

  • The 7 day period, 15 February 2021 to 21 February 2021 (inclusive), VS
  • A regular 7 day revenue period that starts and ends in the 6 weeks prior to the increased alert level.

Both the affected revenue period and the comparison period must be calculated retrospectively. The calculations must be based on what has happened, not a forecast of what might happen.

Make sure you keep a record of the calculations in case it is requested. This includes:

  • dates of the affected revenue period and comparison period
  • amount of revenue earned in each period
  • how the revenue drop has been calculated.

How Much Can You Receive?

The RSP is calculated as $1,500 plus $400 per FTE (up to 50 FTE). The maximum payment is $21,500. Sole traders can receive a payment of up to $1,900.

  • Employees working up to 20 hours per week are considered part time (0.6 FTE)
  • Employees working 20 hours or more per week are considered full-time (1.0 FTE)

Businesses will have their payment capped at four times (4x) the amount their revenue has dropped over the 7-day period. For example, if your business has 3 FTEs, they would be entitled to $2,700. However, if their revenue drop was $500, their RSP payment would be limited to $2,000.

Tax Implications

Payments received under the RSP are not subject to income tax. Expenditure funded by payments under the RSP is not deductible.

GST-registered businesses will return GST on payments received under the RSP. These businesses will be able to claim input tax deductions for expenditure funded by payments under the RSP.

How Can You Apply?

You will be able to apply for this directly through your business’ MyIR. Click here for more information

Alternatively, JZR as your tax agent can also apply for this on your behalf through our tax agent’s MyIR login. Can you please get in touch with us if you would like our assistance with this.

 

Wage Subsidy Scheme

The Wage Subsidy Scheme will be available nationwide if any part of the country moves to Alert Level 3 or above for seven days or more.

Businesses and the self-employed will be eligible if they experience a 40% drop in predicted or actual revenue over a consecutive 14-day period, compared to a typical fortnightly revenue in the six weeks before the rise in alert level. You would need to be able to show that the revenue drop is due to the change in alert level, not just COVID-19 in general.

More detailed information regarding this wage subsidy is coming soon from the government. In the meantime, you can register here for updates, for when the details are announced and applications are open.

You will be able to apply and receive both the RSP and the Wage Subsidy at the same time once the applications are open for the second lockdown period.

 

We are here to support you through this time. Please do not hesitate to contact one of the team if you have any questions.

Kia Kaha,

JZR Accountants & Consultants

Written by Gordon Tian

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Recent Tax Changes That May Impact You

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner.

There’s been some changes to tax legislation and we have summarised the most important changes which could impact on you.

  1. New top personal income tax rate of 39%
  2. Increase disclosure requirements for trusts
  3. Changes to the Small Business Cashflow Scheme

 The New Top Tax Rate

 A new top tax rate of 39% will apply on personal income in excess of $180,000 for the 2021-2022 and later tax years. For most taxpayers this begins on 1 April 2021. We will be contacting those clients affect by this change to discuss your options in the coming months.

It’s also worthwhile to consider topping up your provisional tax payments throughout 2021 to account for the larger year-end tax bill. Alternatively, we can assist you to purchase tax from Tax Management New Zealand if you happen to miss a payment.

There are corresponding changes to other tax types to align with the 39% rate. These can be found in the table below:

 

Impacted Area

Detail

New Rate

Applicable From

Secondary tax codes

A new tax code (SA) for secondary employment earnings for an employee whose total PAYE income payments are more than $180,000.

39%

1 April 2021

Extra pays

For extra pays for employees with taxable income exceeding $180,000.

39%

1 April 2021

Fringe benefit tax (FBT)

A new top FBT rate will apply to all-inclusive pay exceeding $129,680.

63.93%

1 April 2021

Resident withholding tax (RWT)

The Bill introduces a new RWT rate that mirrors the new top personal rate.

39%

1 October 2021

 

Increased Disclosure Requirements for Trusts 
In addition to the introduction of the new Trusts Act 2019, which will come into force on 30 January 2021, Inland Revenue will require trusts to provide more information on their annual returns for the 2021-2022 income year onwards, including:

  • Distributions and settlements made in the income year; and
  • Profit and loss statements and balance sheets.

This ensures Inland Revenue has a clear picture of how a trust is being used and whether the usage changes as a result of the personal income tax rate change to avoid paying tax, given that the trustee income tax rate remains at 33% (as opposed to the top marginal tax rate of 39%)

The Commissioner can also request the information from trusts for prior years back to the 2013-2014 tax year as appropriate. This allows for comparable information to be gathered.

The increased disclosure requirements do not apply to non-active trusts, charitable trusts and trusts eligible to be Māori authorities. What this essentially means is that Inland Revenue will pay closer attention to your family trusts to see if you’ve been paying the right amount of tax.

 

The Small Business Cashflow Scheme Changes

 
The loan will now be interest free for 2 years (up from 1 year), and restrictions on how the loan can be used have eased. As well as spending on core operating costs, businesses will be able to choose to use the loan to invest in their business, helping it to adapt to the impact of COVID-19.

There are also changes to the eligibility criteria in the following 4 areas:

  1. When the business was established
  2. The decline in revenue test
  3. Employee number test
  4. Re-borrowing

The changes will be in effect from 28 January 2021. Note that the change in the decline in revenue test will significantly change which businesses are eligible as the time period will no longer include the April 2020 lock down.

There are a few more details and if you want to see the full changes, please visit Inland Revenue’s website here. (ird.govt.nz/updates/news-folder/upcoming-changes-to-the-eligibility-criteria-for-the-small-business-cashflow-scheme)

Applications for the scheme will remain open until 31 December 2023.

 

Lastly, we are here to help. If you have any questions regarding the changes or need to have a chat about your tax affairs, please do not hesitate to contact us at info@jzr.co.nz, or call 09-9722236.

Written by Gordon Tian

Tax

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Are You a New Zealand Tax Resident? Why Is It Important To Know

Are You a New Zealand Tax Resident? Why Is It Important To Know

Why is it important?

Like most other countries, one of the ways that New Zealand imposes tax is by the concept Tax Residency. It means that all New Zealand tax residents are liable to pay tax to the Inland Revenue Department (IRD) on their worldwide income.

Your worldwide income includes any income that you derive in a foreign country even if you do not bring the money into New Zealand.

This is very important because it will drastically change the amount of tax you will have to pay to the IRD. This will be particularly relevant if you have significant assets overseas, or if you’re a new migrant to New Zealand, who still have financial ties to your country of origin.

Your worldwide income could include the following:

  • An amount of interest you derive from funds you have in an offshore bank account
  • Rental income (a rental property in Australia? Or China?)
  • Salary and wages paid both by New Zealand companies and offshore companies

Common Misconception

A common misconception that people have is that they confuse the definition of “resident” for immigration purposes with “tax resident” for tax purposes. The definition of a New Zealand resident for immigration purposes is different to the definition of “tax resident”, which is defined in the Income Tax Act 2007. What this means is that whilst you may be on a student or work visa in New Zealand, you might still nonetheless be considered a tax resident of New Zealand. Conversely, you might hold a permanent resident visa but, in some circumstances, still not be a tax resident of New Zealand.

Therefore, this leads us to the next question.

What is the definition of a “tax resident”?

If you want to find out if you are a New Zealand tax resident or not, then you have to look at the definition in sYA1 of the Income Tax Act 2007. Essentially, if you meet either one of points below, then you will be a tax resident of New Zealand.

  1. Be physically present in New Zealand for 183 days in any 12 month period; OR
  1. Have a Permanent Place of Abode (PPOA) in New Zealand

Things to watch out for

Note how the first point mentions that the 183 days is counted in any 12 month period. So it’s not 183 days in a calendar year or tax year. This is an important distinction because you could have triggered this inadvertently if you’re not careful.

The term “Permanent Place of Abode” in layman’s terms is a lasting or enduring place where the taxpayer usually live. A person could have more than one permanent place of abode in different countries. So say if you split your time between New Zealand and Australia, and have a regular place to live in each country, then it could be very possible that you have a permanent place of abode in both New Zealand and Australia.

Common Issues

Properties Owned Overseas

Being a New Zealand tax resident not only means that you will need to pay tax on your overseas income, but it also means that New Zealand tax law apply to your overseas assets as well.

Many of you might have heard of the bright-line test for residential properties, where if you buy and sell within 5 years, then you will need to pay tax on the capital. However, not many people know that if you’re a New Zealand tax resident, then this rule applies to your properties owned overseas as well. So if you bought and sold a residential property in Australia for example, within 5 years after 29 March 2018, then you will need to report that gain to the IRD and pay tax on it.

Rental or Business Income from overseas

Another common issue that we see is clients having rental properties or business income from overseas. In that situation, taxes might have already been paid in that foreign country, and in order to avoid double taxation, we can help you determine if a foreign tax credit might be available and then to accurately ascertain that tax credit amount to reduce your tax payable.

Own shares in a foreign company?

Another common issue that some clients face is if they also own shares in an overseas company. In particular, if they own shares in an overseas privately held company. There are separate rules dealing with such cases which can be very complex and you might need to pay tax on paper gains which you have not received a cash receipt for. So be very careful in that case, and contact us to make sure all the right disclosures are made to the IRD, and that you’re not paying more tax than you should.

Transitional Resident

There is another rule called the “transitional resident” rule, which exempts overseas income from taxation within 4 years of a person first becoming a New Zealand tax resident. There are some strict rules around who can qualify for this, and when the 4 years start and when it ends. There are also some exceptions to this transitional resident rule. So please make sure to contact us if you’re in this situation and we can help you determine which rules apply to you. This could potentially mean thousands if not tens or hundreds of thousands of dollars. So getting the right advice is crucial.

We hope this answers all your queries. Watch this space and stay tuned, because we will be back to talk about what happens when you’re a tax resident in New Zealand as well as another country.

Written by Gordon Tian

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