Ring Fencing and Special Tax Codes
20 February 2019
At this stage, we are still expecting Ring Fencing to come in from 1/4/19, or the start of the 2020 tax year. So this would mean:
- 31/3/18 year tax refunds - hopefully you have already had these completed or in the process of being completed. If you make a loss and are using a structure that allows this loss to offset your personal income, then you would still get a tax refund as normal.
- 31/3/19 year - same as for 31/3/18 and refund as normal.
- 31/3/20 year - NO tax refund.
So what should you be doing now? If you are using a structure that can get a tax refund, here are some ideas to consider:
1) Repairs - Do them in February or March. The repairs will then be in the 2019 year, and result in a tax refund (based on structure being correct).
Some examples of repairs, (as long as it is an existing rental!):
- pruning trees
- new bath, toilet, sink, vanity
- new kitchen cupboards
- asset $500 or less
- fixing something, ie roof repairs, fence repairs, driveway repairs, foundation repairs.
2) Assets - makes no difference or really small difference.
An asset is depreciated, which means its cost is spread over its useful lifetime. So, if you purchased new carpet in March, you would get one month's depreciation which is likely to make little or no difference.
I would only buy assets if you need to, or if they give a good return in terms of extra rent.
Some examples of assets:
- stove if over $500
- dishwasher if over $500
- new fence.
3) Trusts - For most property investors, Trust losses are already ring fenced. So, in the past, many property investors haven't used them, as there was no tax refund.
But with the changes, it is a great time to consider asset protection, and whether a Trust is the right structure.
Often the shareholding in an LTC can be changed, so that the Trust now owns the shares, but make sure you get full advice on this as there are lots of catches for tax and the 5 year Brightline restarts.
Do you have an LTC making a loss, which gives you a tax refund, plus a Trust making a profit with the profit going to a lower tax payer?
Currently, this structure can be great. But with Ring Fencing, what would the outcome be?
- no tax refund and loss ring fenced - from LTC rental
- tax to pay - from Trust rental.
So it's very important to consider your overall structure and review this before 31/3/19 to make sure it is still appropriate going foward. For the above example it might be better to have the LTC owned by the Trust, so the profitable rental can be offset by the loss rental.
5) Rentals making a loss - Do you really want this long term?
If this is just from chattels depreciation, then it isn't a big deal and the loss will carry forward until you use it in a year or two.
But if this is a real cash loss, how do you change your rentals into making a cash profit in a 1-2 year period?
- Is your rent at market rates? When did you last get an appraisal?
- Can you do a renovation or add assets (heat pump for example) so that you get a better return? Talking to your property manager can help you with this.
- Can you break loans to get a better interest rate? The first step is to ask your bank, "what are the break fees?" You might get a nice surprise!
- Can you add a bedroom? 2 bedroom unit become 3?
- Can you convert a garage to a room, legally? This can give a good return and better overall cashflow.
- Can you subdivide, utilise Duplex rules (Hamilton) or add a minor dwelling?
- Do you have a "lemon" that you really should be selling?
We have some great spreadsheets that can help, or a meeting with me can help you with your aims and goals, and ensure your properties are helping you achieve these long term. If you are not sure, one option is to organise a free 5-10 minute chat with me to see if we can help. You can use this link to make a time for me to call you after that, FREE CHAT with ROSS.
6) Big expenses
If you have some big expenses coming up, then try to get in Feb/March, so that you get a tax refund:
- large travel costs
- large education costs (watch that these are deductible and not relating to another venture such as trading)
- large property advice costs, or legal costs relating to property.
7) Property Trading
Property Trading can be a great way to make some extra profit or cash flow, but it is also risky and hard work!
The draft Ring Fencing rules allow rental property losses to offset property trading profits. BUT does your structure allow this? i.e. if trading in a normal company, and loss in a Trust, you are unlikely to be able to offset the two. A smart overall structure could help and save a lot of tax.
8) Timing of income
If you have trading profits, depreciation recovery, or brightline profits, you might want these from 1/4/19 onwards, rather than 31/3/19 or before. That way you might still be able to get a refund in the 31/3/19 year, and then use the ring fenced loss to offset these extra profits in the 2020 year. So the date of sale or settlement can be critical.
So many options and things to consider - if you are worried about how the Ring Fencing rules will affect your specific circumstances it might be worth having a meeting with me to ensure you set up correctly going forward. Always get expert advice before restructuring properties or shares as there are a lot of tax catches.
SPECIAL TAX CODES
In the past, some of our clients have had Special Tax Codes. With the likely implementation of Ring Fencing, at this stage there is no point in doing a Special Tax Code.