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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New Changes To Tax-Loss Continuity Rules

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational.

The legislation is aimed at being passed before the end of March, 2021 and will be applicable for the 2021/22 tax year and later income years as well.

As part of the changes being made, the government has announced the “same or similar business test”.

Currently, the law states that if a company or an organisation has more than a 51% change in ownership it cannot keep its tax losses. With the introduction of the ‘same or similar business’ businesses can now carry forward their losses. In order to meet the requirements of the test, the business in question must continue in a same or similar way to how it did prior to the change in ownership.  

Companies at this point in time might be looking to raise capital to keep afloat for now and to recover in the future. Raising the capital though, may result in a change to the existing shareholding structure within the company. The changes which are aimed to relax the rules will ensure companies in this position can carry forward losses to offset income when it turns to profit. The ability to carry forward losses will help in making the business more valuable to investors. The new rules should also help in improving access to capital for businesses. 

The same or similar business test is essentially a business continuity test which allows a company to carry its losses forward after a change in ownership, as long as the underlying business continues.

Even with the new changes, this doesn’t imply that the 49% continuity test has been replaced in any way. If a company continues to satisfy the existing 49% of the rules, they won’t have to rely on the Business Continuity Test.

There is no change to the commonality rule either which requires 66% commonality of ownership for companies to offset losses. In case one company acquires another company with losses, it will be not be able to offset pre-acquisition losses from that company. In case the company being purchased is a dormant company the test will not allow dormant companies to carry forward those losses.

All carry-forward losses won’t be subject to the test. Only losses incurred from the 2013/14 year onwards will be able to be carried forward under this test.

Some more guidance on the law will be released in draft after the SOP is released. However, if you have any queries regarding the proposed changes or how it might affect your business, feel free to get in touch with us by mailing us at info@jzr.co.nz or by calling us on +64-9-972-2236.

Written by Rowain Pereira

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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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A Summary of all the Tax Changes and Support Schemes for COVID-19

A Summary of all the Tax Changes and Support Schemes for COVID-19

The year 2020 and the world’s current economic status has taken a battering with the outbreak of COVID-19. With governments racing to create relief and incentive schemes for local businesses, the purpose of this article is to simply outline all the key tax changes and support schemes that have been introduced by the government of New Zealand  to help local businesses mitigate the impact of COVID-19.

Major Tax Changes

1.     Reintroducing Depreciation on Commercial & Industrial Buildings

All depreciation deductions will be reintroduced for new and existing industrial and commercial buildings, including hotels and motels. There is no application process as the increased deduction will be available as part of normal tax filing processes. For more information click here.

2.     Immediate Deductions on Low Value Assets

Businesses will be able to deduct the full cost of more low-value assets in the year they were purchased, rather than having to spread the cost over the life of the asset. Currently, taxpayers are able to claim immediate deductions on the purchase of assets valued at lesser than $500. The threshold for this will now be increased to include assets that cost up to $5000 (for the 2020/21 income year).

The temporary increase in the threshold, is designed to incentivise businesses to bring forward investments to encourage spending. The threshold is being permanently increased to $1,000 (from 2021/22). For more information click here.

3.     Change to Provisional Tax Threshold

The government has increased the threshold for having to pay provisional tax from $2,500 to $5,000 for the 2020/2021 financial year only. For more information click here.

4.     Writing Off Interest On Some Late Payment Tax

The IRD has been given the power to waive interest on late tax payments for businesses who’ve had their ability to pay their taxes on time significantly affected by the Covid-19 outbreak. The relief will apply to interest on all tax payments (including PAYE & GST) due on or after the 14th of February, 2020. For more information click here.

5.     Change to Carrying Forward of Tax Losses

The government has introduced a ‘same or similar business’ test, which means a business could carry forward losses. To meet the test, the business must continue in the same or a similar way it did before ownership changed. This test is modelled on Australia’s rules.

Some companies will be looking to raise capital to keep afloat now and to recover in the future. Raising capital may result in a change to the existing shareholder structure. Relaxing the rules will ensure companies in this position could carry losses forward to offset income when they return to profit. A bill will be introduced in the second half of 2020 after consultation with tax advisors, and will apply for the 2020-21 and later income years. 

6.     The Temporary Loss Carry Back Scheme

Businesses that are expecting to make a loss in 2019/20 or the 2020/21 financial year will be able to estimate the loss and use it offset profits in the past year. The scheme introduces the concept of offset years, which are the pair of years affected by the carry-back. The first year is named as the taxable income year and the second as the net loss year. For more information click here.

Simply put, this means that they can carry their losses back a year. This will allow the IRD to refund some or all of the tax paid for the year in which the business was in profit. For more information click here.

 Business Support Schemes

1.     Wage Subsidy Resurgence

A new Resurgence Wage Subsidy Scheme payment has been announced by the government for employers and self-employed people who have been impacted by the recent resurgence of COVID-19.

All New Zealand employers who have had or expect to have a drop in their revenues of at least 40% due to the resurgence of COVID-19 may apply for the scheme. Businesses must show a drop of at least 40% in their revenues for a 14 day period between the 12th of August to the 10th  of September, compared to a similar period last year. Application dates for the scheme are open from 1pm on the 21st of August until the 3rd of September 2020. For more information on eligibility criteria and how you can apply, please click here.

2.     Small Business Cashflow Scheme 

The small-business cash-flow scheme (SBCS) will provide interest free loans for a year to small businesses which have been impacted by the COVID-19 to help support their cash-flow needs and fixed costs as well. The scheme will provide assistance of up to $100,000 to firms employing 50 or fewer full time employees.

The scheme will provide $10,000 to every firm, and an additional $1,800 per equivalent full-time employee. To further encourage businesses the loans will be interest free if they’re paid back within a year. If the loan amount cannot be repaid within a year, then a 3% interest fee will be charged for a maximum period of five years. Repayments are not required for the first two years.

3.     Business Finance Guarantee Loan Scheme

The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum. The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates. The scheme is also only available to financially solvent firms (i.e. firms whose assets are greater than their liabilities).

As a New Zealand small business owner if you would like to apply for any of the schemes or would like us to help you with issues your business might be facing, please contact us on info@jzr.co.nz or call us on +64-9-972-2236

 

Written by Rowain Pereira

Tax

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What’s New for Property Owners: Airbnb to Boarders

What’s New for Property Owners: Airbnb to Boarders

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.

Written by Rowain Pereira

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Are You a Landlord? Keep-up with the Changes

Are You a Landlord? Keep-up with the Changes

With one third of Kiwi’s renting their homes (some even for a lifetime), it’s important to have clear and fair rules for tenancies. This article will highlight some of the recent changes that have been made to rental property rules.

The government’s tenancy law reforms announced towards the end of 2019 are aimed at mainly protecting security and stability of tenancies for tenants. The Residential Tenancies Amendment Bill is making its way through Parliament and is currently with the Select Committee before moving on the to the next stage, the Second Reading.

If you’re a landlord:

  • Rent can only be increased once in twelve months, as opposed to six.
  • Tenants cannot be evicted without reason. Currently, periodic tenancy agreements can be terminated without reason, if you give your tenant 90 days’ notice. However, now you must select a reason from a list by the Residential Tenancies Act, stating a reason for the termination of the agreement.
  • Tenants will now be able to add minor fittings such as brackets to secure furniture against earthquakes, baby-proofing the property, installation of visual fire alarms or doorbells, or hang pictures.
  • Rental “bidding wars” will be banned.
  • The Tenancy Tribunal will be able to award compensation or order work to be done up to a value of $100,000 (instead of $50,000).
  • New tools will be available to help you take direct action against any tenants breaking the rules.

In context to damages, methamphetamine, and unlawful rental premises, the following changes will now be applicable:

  • If tenants (or their guests) damage your rental property as a result of careless behaviour, they will directly be liable. They can be charged up to a maximum of four weeks of rent or your insurance excess (whichever is lower).
  • If you have insurance, you must include this (and the excess) in any new tenancy agreement. A copy of the policy agreement should also be made available to the tenant on request.
  • You can also now test for methamphetamine while your tenants are living there. They must however be given at least 48 hours’ notice (but not more than 14 days’ notice). Boarding house tenants must be given at least 24 hours’ notice.
  • All legal requirements relating to the buildings, health, and safety apply to your rental property as well. It is the duty of the landlord to ensure that the property can legally be lived in at the start of the tenancy.

If you would like advice on how to manage the income being generated from your rental properties, or if you have any queries relatives to the new amendments being made to the Residential Tenancies Bill, please feel free to reach out to us on info@jzr.co.nz or call us on +64-9-972-2236.

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