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.

If you own a property which is being rented out for short stays (up to four weeks) this article will highlight all your necessary tax commitments, as well as all the new property rules which might come into effect this financial year.

Highlights:

• If your tax due at the end of the year is $2500, you will have to pay provisional tax instalments from the following year.
• If you’re earned income is more than $60,000 per year, from taxable activities, it is mandatory for you to register for GST.

It would be wise here, given the choice, for you to consider whether registering for GST is the best option for you. Once you’ve registered for GST, there are on-going requirements like record keeping, invoicing and filing returns which must be maintained. Once you’ve registered for GST, it also means that the sale of that property, or even the discontinuation of services, will still be liable to GST. For more insight to help you make the right decision, you can call us for advice.

If you own a property where you host boarders, 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 the standard costs, it’s exempted from tax. You can also claim standard costs instead of claiming on actual expenses. The weekly standard cost per boarder has been changed to $186 per week for the 2019/20 tax year. The standard cost includes everything from food, household bills, gifts, and entertainment and activities that you provide for the boarder. You’ll also need to calculate your annual hosting and transport costs.

In case you’re hosting five or more boarders at your property, the actual-cost method must be used. If you’re hosting up to four boarders you can then choose to claim actual costs instead of standard costs. When using the actual cost method, all the income generated from the rental is considered to be assessable income and must be declared. While using the actual cost method to calculate your income you will have 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.

In case your return hasn’t been completed before the due date for filing, the IRD will assume that you have picked the standard-cost method.

It is however recommended to keep and maintain your records, because it might be heard to ascertain until the end of the tax year whether you want to use the standard cost or actual cost method. You can jot down the number of weeks you had boarders, the total income generated from these boarders, cost of capital improvements or rent paid, kilometres you’ve travelled transporting them, and any other related expenses.

If you need assistance with selecting the right method to calculate the income made from boarders the applicable taxes on it, feel free to get in touch with us by mailing info@jzr.co.nz or call us on +64-9-972-2236.

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

2. 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.