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Residential Rental Properties - Ring-Fencing of Losses
Dan Larsen • April 1, 2019
This Bill is expected to be approved by Parliament in mid-late 2019, but the effective date of the ring-fencing rules would be 1 April 2019. Potential road blocks to the ring-fencing law are inconsistency with potential capital gains tax policy.
The 2019/20 Taxation Bill proposes that residential property investors will no longer be able to offset losses from rental properties against their other income (e.g. salary and wages, business income) to reduce their overall tax liability. Rather, any excess expenditure will be carried forward as property losses until there is enough income from property to utilise those losses. In other words, the losses are "ring-fenced" and can only be accessed by earning property-related income.
For those investors that have more than one property, there will be the option to apply the new rules on a portfolio basis, which is the default approach (i.e. profits from one property can off-set losses from another property provided they are owned by the same entity).
The ring fencing rules don't apply to mixed use asset properties such as holiday houses, which have their own loss limitation mechanism.
The aim of the proposed law change is to level the playing field between property speculators/investors and owner-occupiers. By stopping subsidising investors' mortgage servicing costs, the Government hopes their abilities to outbid owner-occupiers for properties will be reduced. It is also expected to generate $190 million of tax each year from the 40% of investment property owners regularly claiming losses.
IRD has provided extensive communication on payday filing which is effective from 1 April 2019. With payday filing, you'll: Send IRD your payroll information with your normal pay cycle (rather than monthly) Provide employee details for new and departing employees to the IRD File electronically within two working days of the payday, or File by paper within 10 working days of the: Payday, or 15th and end of month if you choose to send us information twice a month. If your annual PAYE and ESCT deductions are $50,000 or more, you must file electronically. If less than $50,000, you can file electronically or by paper. There are no changes to current payment due dates or the way you pay (monthly or twice-monthly like you do now). There are three ways that you will be able to file your employment information online. Directly from your software If supported by your software provider, you can file directly to the IRD without having to upload any files through myIR. You'll need to use your myIR account user ID and password to authorise these submissions from your software. This is a one-off process to establish a link between your software and the IRD. 2. File upload from your Payroll returns account in myIR If supported by your software provider, you can upload files in myIR in the Payroll returns account. You can send your information through File return or File transfer link. From here, the process is similar to ir-File. 3. Onscreen in your Payroll returns account in myIR If you have smaller pay runs, you can use IRD's onscreen data entry method in myIR in the Payroll returns account. Onscreen filing is similar to the current process for filing your Employer monthly schedule (IR348). You may need to review and adapt your current payroll processes to support your business doing payday filing. The IRD have created checklists to make sure that your business is ready for payday filing and can be found at: When using software: https://www.ird.govt.nz/resources/5/8/581b00d1-7ce3-4bbe-b5f9-ecd0261ea8c9/payday-filing-checklist-2018.pdf When not using software: https://www.ird.govt.nz/resources/4/f/4fb3de53-53bf-41a7-a4f7-2ab50db1a27f/payday-filing-checklist-not-using-software-oct.pdf
Renting property on Air BnB or other sites such as Book-a-Bach and Bookings.com can have some significant unintended GST consequences and we encourage all clients to contact us prior to listing. The particular risk areas are: Generating Air BnB rental income of more than $60,000 Listing property on Air BnB which is owned by a GST registered entity Those that own a holiday rental or are looking at purchasing one should be aware that the GST rules for short-term holiday rentals are different from a residential rental property which is exempt from GST. Rather short-term rentals (including the use of Airbnb or Book-a-Bach etc) are considered commercial by nature and therefore, a taxable activity under the GST rules. These rules mean if your annual total rental income exceeds $60,000 then GST registration is mandatory. If you currently own the property in a non-GST registered entity (e.g. personally or a Trust etc) and the annual turnover doesn't exceed $60,000 then you won't need to register for GST. However, if an entities total combined rental income along with any earnings from other taxable activities (e.g. sole trader income) does exceed $60,000 in any 12 month period the entity must register for GST. GST must be returned to the IRD on all short-term rental income and claimed on associated expenses. Another catch is if you own the property in an entity that is already GST registered (e.g. a trust owns a GST applicable commercial property and a Bach) and you then decide to rent the Bach out for short term accommodation. By default that property will now be captured by the GST rules. While having to account for GST on rental income and costs is administrative, the primary issue is that the capital asset of the property is also captured by the GST rules. This means when the property is sold you may have to pay GST on the sales price. You will be able to claim GST on the original purchase price, but the timing of the claim is based on a time-apportioned basis. For instance, if you've owned the property for 3 years and then it becomes subject to GST in the 4 th year, a GST claim can be made for ¼ of the GST credit in the first GST adjustment period. If the property is used 100% for rental (i.e. no private use), the balance of GST on original purchase price can be claimed at the end of the 2 nd adjustment period. Mixed use asset rules (where the property is used partly for private use and partly for income generation) can further complicate GST apportionment. Detailed information is required for rented nights, private use and vacant nights. This is a complex area of tax where many different scenarios can arise. If you would like to discuss this further please get in touch with us.
Recent Changes Include: Capital Gains Tax Proposal Automatic Assessments for Individuals Donation Tax Credits made Easier IRD Receiving Payments – When Received in Time Capital Gains Tax Proposal The media has widely reported the capital gains tax (CGT) proposals of the tax working group. Their recommendation was for a broad-based GCT capturing all asset classes (other than the family home) and applying the taxpayer's marginal tax rate - which means 28 per cent for companies and 33 per cent for many individuals. Media commentary has largely been critical of the proposals, and to be politically viable it is expected the Labour-Green-NZ First coalition will significantly water-down the proposals, with a primary focus on residential property. Their policy announcement is expected later this month. Automatic Assessments for Individuals From 1 April 2019 all individuals whose only income is from salary or wages and investment income, for example, interest on bank deposits, where tax has already been deducted will receive an Income Tax Assessment notification to finalise your end-of-year tax information automatically. This means you will no longer need to request, receive and confirm a Personal Tax Summary (PTS) to claim a tax refund. If you have paid too much tax during the year and are due a refund, the IRD pay the refund directly into your bank account. If you have not paid sufficient tax during the year, you will be required to pay the difference. This will stop individuals from cherry-picking only the years they are due a refund to request a PTS. If you have another source of income such as from business, rental property or from overseas, or have expenses that can be claimed, you'll still need to file an income tax return (IR3) and we will continue supporting you with this process. Donation Tax Credits made Easier The IRD also making some improvements to the claim process for donation tax credits, which will give you the option to submit receipts online during the year. This will help you avoid missing out on a refund for donations if, for example, at the end of the year you're unable to find all your donation receipts and run out of time to get a copy. Alternatively you will be able to complete the return online or use the paper form (the current process). Refunds will still be issued at the end of the year. IRD Receiving Payments – When Received in Time The IRD has made two changes to the practice of receiving payment. Post-dated cheques will not be accepted by the IRD from 1 February 2019 as a method for payment, and the IRD dropboxes for the physical delivery of tax payments are only available in in-house office reception areas. Taxpayers are being encouraged to use digital methods for making tax payments.
