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Simple Meth Testing Information to keep your rental safe - Don't Panic!

23 February 2018

 

Simple Meth Testing Information to Keep Your Rental Safe - Don't Panic!


There is a lot of talk out there about meth contamination and possible issues for landlords and property investors.  Personally,  I really don't believe that Meth has to be that big an issue.  Here are a few key points:

 

1.  Get a Meth screening test done for under $200.  
 

2.  Make sure you review your insurance to ensure you have adequate Meth insurance and are fully covered, including Loss of Income, before you get any meth tests done.

 

  • This is just a Yes/No test.  It detects if Meth is present or not.
  • The reading is meaningless.  For example, 0.3 could still be a problem, as one room could be 2 and the other rooms nothing, resulting in a combined screen test of 0.3

      

3.  As many of you know, I own a small meth testing company (www.GetaMethTest.co.nz) that operates in Hamilton (which only does meth testing for landlords for property management purposes and not for new property purchases).  Over the 12 month period to 31/5/17, we have had 94.54% of rental properties tested show no meth on screening tests.  So only 5.46% of rentals tested required the full test to show the exact meth levels in each room!  This was based on the old guidelines, so the new standards are likely to see even less full tests required! 

 

4.  If your screening test is positive, talk to your insurance company:  They should cover the main test, less the excess.

 

 5.  The majority of main test results are coming back under the threshold of recommended guidelines.  So, again, there will be nothing else required to be done.

 

 6.  If, however, further action is required, and you have made sure you have the right insurance cover (see point 1), then your insurance company should fully cover you and any fix up costs and/or loss of rental income will be paid by them.


So, if you follow these simple steps, there should be no problems!


Kind regards
Ross Barnett 

BIG NEWS - Expected Date for Change to 5 Year Brightline Test

16 February 2018

 

BIG NEWS - Expected date for change to 5 year Brightline Test



It's typical, I'm relaxing on holiday and enjoying the snow, when Labour releases some big information.


 

 

 

 

 

 

 

 

 

Legislation is currently making its way through Parliament that will change the Brightline Test to 5 years.  This legislation is expected to gain royal assent in March, meaning any rental property purchased after this date will be taxable if sold within 5 years.

So how does this affect you?

1.  Current Rentals 

Not affected and will still be subject to 2 year Brightline Test. 

 

2. Restructures  -  BIG ISSUE

If you are looking at restructuring (for example, selling a rental from personal name to an LTC), this change to legislation could have a big effect.  The first part, selling to an LTC will be under the old rules.  So, as long as held for more than 2 years, should be OK.  But here are two scenarios to highlight the possible future implications:

a)  Restructure in February before changes.  The new entity has purchased the rental in February, so will still be subject to 2 year rule.  If the rental is sold say three years later, then as long as not caught by another taxing provision, the capital gain would be tax free.

b)  Restructure in April after changes.  The property would be subject to 5 year rule.  So, if the rental is sold say three years later, then any gains would be taxable!


We had hoped that restructures would be excluded from the Brightline rules, but, to date, I haven't seen any changes around this.  It is very important to get expert advice around restructures as there can be other catches and implications.


IMPORTANT   If you are considering a restructure, please email me as it is worth double checking the effect on you.  Often we are juggling the old 2 year period with a restructure, but it might be possible to put in place a sale and purchase agreement before the new rules take effect, and therefore the property going forward would only be subject to the 2 year rule.

 

3.  Buying a Property

The extended Brightline test does not apply to agreements to purchase before the date of enactment of the Bill.  So, ideally, if you are trying to buy a rental property, we want the agreement dated as soon as possible so that it is before the new rules.  Because we don't know the exact date yet, the sooner the better at this stage.  We are expecting the new rules to take effect some time in March 2018.

 

4.  Holiday Home

Main home exemption is only for one property.  So, if you buy a holiday home after the new rules take effect, then if this property is sold within five years, the gains will be taxable under these new rules! 

 

5.  Share Changes

Share changes can also be caught by the Brightline Test.  It is therefore important to consider any share change before the new rules come into effect.

IMPORTANT:    If you are considering a share change, please email me as it is worth double checking the effect on you.  We might be able to complete the share transfer before the new rules come into effect.  Share changes can have other consequences, so it is important to get expert advice on any share change.



Overall, I actually like the change to 5 years.  It helps to separate property investors from property speculators.  For a true property investor, who is buying properties for long term hold, the new rules should have little or no effect.


Kind regards
Ross Barnett 

 

Holiday Homes and GST Risk

6 February 2018

 

HOLIDAY HOMES AND GST RISK 

   

 

 

 

From the 1/04/11 the definition of a dwelling changed for GST purposes.  In the past a holiday home would be exempt for GST, but this change of definition most likely makes them liable for GST.  If purchased before 1/4/11, there is an amendment that excludes holiday homes, but any holiday home purchased after 1/4/11 DOES NOT have the exemption!

So, in theory, you could claim GST on the purchase of a holiday home (as long as not purchased from a GST registered vendor as then zero rating, or purchased from an associated entity as a limitation can apply), and the portion used, for the rental business.

You would then need to pay GST on rent, but could claim GST on other expenses.


Issues with claiming GST

  • Property goes up in value, so when you sell you have to pay a lot more GST than you claim.
  • Watch out for any GST registered vendors when purchasing, as compulsory zero rating (get specific advice!)
  • Often private component, which creates hassles and deemed supply rules.

So, often we recommend that a holiday home is kept out of the GST net and NO GST is claimed.


Risks         

1)  Over GST threshold of $60,000 
For example, an investor buys a multi-million dollar holiday home on Waiheke Island and it is rented for more than $60,000 for the year.  Non GST registered entity:

  • Have to GST register as over threshold, so pay GST on income.
  • Deemed supply (see point 7 below).             


2)  GST register entity later
For example, an investor has a holiday home in a Trust and it is rented out, but for under the $60,000 threshhold.  The Trust buys a commercial property, so GST registers.  The Trust will now have to pay GST on the holiday home rent and be liable for GST on the eventual sale.
 

3)  A Trust is GST registered with commercial property and holiday home

  • If holiday home is not rented and just used privately, then no issue.
  • But if there is a change of circumstances and the holiday home is rented, then falls into GST net.  So might just rent for 2 weeks over Xmas to get the high rent!

  General rule is not to put holiday homes in a GST registered entity.
 

4)  Leftfield result
Entity owns a commercial property, is GST registered and also owns long term residential rental properties.  In theory, there should be no issues as the residential rental properties are exempt for GST.  But:

  • rental property at Papamoa, was long term residential rental, but becomes vacant , so is rented out as a holiday home over summer.  Now falls into GST net.
  • rental property in Christchurch is rented out as long term residential rental property.  But tenant is using it as an office, so no longer fits dwelling definition, so would fall into GST net.


  5)  Farms - Watch what the dwellings are used for.

  • used as family home, will be exempt.
  • rented as long term home to farm worker, will be exempt.
  • used as short term accommodation and rented to shearers, then not exempt.

 
6)  Commercial and Residential

  • If buying from a developer, then not used as dwelling, so whole land and building is zero rated.
  • Bad from purchaser's perspective as effectively paying more!

 
7)  Deemed supply

  • Have to pay GST on deemed value of private use and could push you over $60,000 threshold.      For example, have a holiday home and received $30,000 of rent.  Holiday Home is also used for private use, and market value would be $40,000.  The rent combined with the private use market value is over $60,000, so have to GST register and fall into GST net.
  • Have to pay GST on rent and on deemed private use.
  • Would also have to pay GST on sale!


Clause 13.3

"The vendor warrants that any dwelling and curtilage or part thereof supplied on sale of the property are not a supply to which 5(16) of the GST Act applies".

If you are GST registered, be careful if this clause is changed, as it probably means the dwelling is either not a dwelling for GST purposes, or that GST has been claimed on this by the vendor, so would be zero rated.  Overall result if you're not careful is that the purchaser can pay too much.

Often it pays to check what the dwellings are used for to make sure they are exempt for GST when purchased . This especially applies to farms as per point 5 above.

Kind regards
Ross Barnett

Holiday Homes and Mixed Use Rules

29 January 2017

 

HOLIDAY HOMES AND MIXED USE RULES



Are you looking at renting a holiday home?



 

 



If you use a holiday home for private use, as well as renting out, then the Mixed Use Rules apply.



Mixed Use Rules
 
1)  Only apply if private and rental use.  So, if you solely rent out and don’t use privately, then these rules don’t apply.  Or, if you solely use privately, they don’t apply.
 
2)  If income earned is less than 2% of the market value, then can’t claim a loss.  For example, if property worth $500,000, would need to earn at least $10,000 income per year to be entitled to claim a loss (if one exists).
 
3)  If income under $4,000 per year, can opt out and not return income or claim expenses.
 
4)  Example: Say rented 50 days, used privately for 30 days and available to rent 285 days.
  

a)  Old rules up to 31/3/13.  Can claim 335 (50+285) days out of 365.  So 92% of all expenses.

b)  New rules from 1/4/13.   Can claim 50 out of 80 (50 +30) days.  So 63% of all expenses.

 
5)  Need to keep a very good record of days used privately and by family.
 
6)  Family use is included as private days.  So from example above, if also used 10 days by family (whether they pay full market rate or not), then can claim 50/90 (50+30+10) = 56%.
 
7)  If used for over 303 days per year, then mixed use rules don’t apply, i.e. if basically full time rental.


Next week I will cover holiday homes and GST Risk.


Kind regards
Ross Barnett 

Looking to buy a rental property in 2018? 8 Key Tips

24 January 2018

 

Looking to buy a rental property in 2018? 8 Key Tips.


 

 

 

 

 

Is your next rental property purchase just a gamble on capital gains?  Here are some tips to help you get ahead with rental properties!


1.  Buy a property where you can add value. 

Too many investors just buy a standard property, in a standard area, at fair value, with no opportunity to add value in the future.

  • The easiest opportunity is where the property is under-rented.  For commercial properties, the higher the rent, the higher the value.  So, if you can find property that is partially empty or rented below market value, then it can be quite easy to increase your equity and cash flow.  For residential, higher rent doesn't necessarily mean higher value, but it will improve cash flow.
  • Simple renovations and improvements are my second favourite - Use a good property manager and discuss options with them:

-  If you add a heat pump, how much extra rent will you get?

-  If you add new carpet, how much extra rent will you get?

-  What else could you do to make the property better for tenants?  How much extra rent will you get for these improvements?​

      It is normally pretty easy to get a 10% return on your investment for simple renovations.  But, realistically, if you are smart and work in with your property manager, you can probably get 20%.

  • Rent by room or rent fully furnished?  Be careful with these options, but it can be a way for you to add value and improve cash flow.
  • Add a bedroom - For residential, more bedrooms equals more rent and more value.
  • Add a minor dwelling.
  • Subdivide - For commercial, you might not be able to subdivide, but you might be able to split one bigger tenancy that is hard to rent into smaller tenancies that are easier to rent, and rent for a higher value overall.  For residential, a subdivision can often easily add $100,000 in equity, plus give you the opportunity to have a new rental, with good tenants and low maintenance.
  • Buy at a true discount.  This generally means buying privately!



2.  Work out the cash flow! 

Ideally you want a residential property where the rent pays for all the expenses.  Even more ideal would be if the rent can pay for all the expenses and some principal, so that you pay the rental off over 20-30 years.  
 

NOTE:  This means all expenses, so allow for fair repairs, rates, insurance, travel, accounting fees, etc. 
 

If you are a Coombe Smith client, make sure you have our simple Rental Spreadsheet that helps you see the cash flow now, and over the next 10 years.
 

For commercial - watch the principal requirements.  For example, your commercial property might be making $10,000 taxable profit.  But your bank might require $15,000 principal repayments, plus $3,300 of tax = overall negative cash flow of $8,300.




3. Check the area.

  • I google the population as a starting point for any area I am thinking of buying in.  If the population is decreasing, I would be very careful buying.  More people means more possible buyers and more possible tenants.  Good population growth is likely to lead to rent increases, which is essential for cash flow!
  • This is a great article on property values versus household income.  If household incomes are too low compared to house values, you might struggle to get higher rent in future: https://www.interest.co.nz/property/house-price-income-multiples
  • Look for recent articles and information, such as "100 jobs to go" - http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11980396.
  • If you are not from the area or buying without seeing, be careful that there is nothing in the area that affects your purchase.  A property investor once purchased a rental in a different island, sight unseen.  Unfortunately, it was right next to the sewerage works!



4.  High Gross Yield doesn't necessarily equal positive cash flow

You might find a property in a small town.  $120,000 cost and $275 rent per week.  Based on 52 weeks (I probably wouldn't use 52 weeks in my real calculation), this is an 11.9% Gross Yield.  But rates are $4,500, insurance might still be $1,200, interest might be at 4.5%, so $5,400.  Property Management is often a higher percentage (might be 9.5% plus GST).  Repairs can be the killer, as it often costs the same to repair in a small town as it does in a city.  Suddenly, with low interest rates, this property is still making a cash loss of $1,298 using those figures, some accounting and bank fees and travel.



5.  Don't believe developers.

Property is advertised as $600 per week rent – don’t believe it and get an independent rental appraisal.


Property is worth $700,000 – don’t believe it and either do your own research or get an independent valuation.

Property will give a 10% Gross Yield – is it too good to be true?  What is the catch?  Make sure you do your own research and if rent by room, or fully furnished, check with an independent property manager to make sure sustainable.  You don’t want to rely on $600 per week, when realistically it might have to drop to $500 as no demand for rent by room (for example).
 



6.  Have a plan and a goal -  If the property you are looking to buy doesn't help you to achieve your goal, then why are you buying it?




7.  Plan for change

  • Interest rates may go up.  I like to have some long term loan terms to protect against interest rate rises.
  • Tax refunds might disappear.
  • Better heating and conditions might become a requirement.  Take this as a positive and think of Item 1 above, as you are likely to get a good return on these items, especially if the Government helps pay for them.
  • Regular rent reviews.




8.  Balanced Portfolio

An old saying was to have five cash flow positive properties to support your one capital gain property.  This kind of portfolio should give you stable cash flow and stop you being so reliant on capital gains.  Also, try not to have too many of the same thing.  For example, if you have 20 rentals at Auckland university, what happens if the university suddenly closes down, or its student numbers drop by half?  Having some newer properties also helps to balance the portfolio, as these will have less maintenance in the future.

a.  If you already have two rentals, each running $5,000 negative cash flow per year.  Then, if you purchase another, I would want it to be positive.

b.  If you have five older rentals in Tokoroa, which have great cash flow, but you think no capital gain potential.  Then you might buy the next one in Hamilton to have a more stable tenant base, maybe less repairs and less         hassle, but higher chance of increase in rent and value.
 


I hope you enjoyed reading this. 


If you're not already a client of Coombe Smith, but want some help, we have 3 free telephone chat spots available this week for 5-10 minutes.  These are no-obligation free telephone chats with me.  Please This email address is being protected from spambots. You need JavaScript enabled to view it. RIGHT NOW to book yours in, as mentioned, this is OBLIGATION FREE.


Kind regards
Ross Barnett 

Low Hanging Fruit - 6 Easy Opportunities to make more from Property

12 January 2018

 

Low Hanging Fruit - 6 Easy Opportunities to make more from property

 

A great way to get ahead with property is to concentrate on some easy ideas that you can get done immediately.  I posted this live video on our Facebook page yesterday and it has had a really good response, so I thought you might be interested to watch it too.

Click here to view the video.


Feel free to share the video link with friends and family.

 

What is happening in 2018?
 

  • Simple property seminars in Hamilton, starting late February.  Over the next few months we will be covering:

 

Property Basics

Cashflow

Structures

Trading.

 

  • Simple property webinars on the same topics, most likely starting in March.
  • Video copies of the webinar available to Coombe Smith clients.
  • We are investigating monthly fees, so watch this space if you would prefer to pay monthly.
  • We will be offering discounted meetings with 2018 financial statements and tax returns, to help you plan for the future, focus on cashflow, and make sure you are in the best position once Labour’s changes come through.

 
If you have a topic that you feel would be good for a newsletter/blog, please email me at This email address is being protected from spambots. You need JavaScript enabled to view it. and I might be able to do a future newsletter/blog on that topic.

Kind regards
Ross Barnett 

Common Restructure to Become More Tax Effective (Personal Home becoming a Rental)

9 January 2018

 

Common Restructure to Become More Tax Effective (Personal Home becoming a Rental)

 

 

 

 

 

Are you trying to get ahead on the property ladder by converting your current personal home into a rental, and then buying a new personal house?

This is an example of poor advice that I have recently seen, followed by a common restructure that makes the overall situation more tax effective.


Poor advice and current situation
 
Jack and Jill own a personal house (House A), worth $500,000 with $50,000 of debt in their personal names. 
 
Jack and Jill have been advised to keep House A in their personal names.
 
They have purchased a new personal house (House B) for $600,000 with a $600,000 mortgage.
 
Outcome – Unfortunately with this structure, none of the interest on the $600,000 loan is deductible.  Only the interest on the $50,000 loan on House A will be deductible.  At say 5% interest, this would be a $2,500 deduction, reducing tax by $825 (if at 33% tax rate).
 


Restructure
 
A common restructure is to sell House A to a Look Through Company (LTC) at fair market value.  The LTC would then borrow 100% (can do with one or two banks!) being $500,000.  The interest on the $500,000 is deductible as it is being used to buy a rental property.  At say 5% interest, this would be a $25,000 deduction, reducing tax by $8,250 (if at 33% tax rate).
 
Jack and Jill would then receive the $500,000, pay off the $50,000 current debt, and use the $450,000 cash towards House B purchase.  This way there would only be $150,000 personal debt left, where the interest is not deductible.
 
This creates a tax advantage of $7,425 per year!
 
For any restructure, it is important to look at the cost versus the benefit.  There can be catches such as depreciation recovery, tainting and the Brightline test to consider.  Also, whether there is a commercial reason for the transaction.  So it is important to get expert advice.  QB 12/11 from the IRD gives some great information on this type of transaction as well, and confirms that this type of restructure is not tax avoidance, but it does depend on the exact circumstances!
 


The information below is from my 14/07/17 blog.  It is important reading if you are thinking of converting your current personal house to a rental:

 Convert Your Current Personal House to a Rental?

When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental.  Unfortunately, this is often done for emotional reasons!

If you are thinking about doing this:

1)  Is your existing house a good rental?
Is there high tenant demand in the area?  Look at population figures for the area and talk to a local property manager.
Will you be able to attract a good tenant?
Is the property easy care and low maintenance?
Is there an opportunity to add value in the future?  For example, subdivide or add a minor dwelling.

2)  What is the cash flow?
As a starting point, I would work out the Gross Yield.  This is 50 weeks rent divided by the property value *100.  For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield.

The Gross Yield gives an indication of the cash flow:
5% or under is going to be quite negative cash flow based on 100% mortgage.
7% or better should break even or be positive cash flow.
Between 5% and 7% is still likely to be negative cash flow, but a smaller, more manageable amount.

Review the income less the full expenses.  The example below shows a $8,784 loss expected each year before tax.  After tax refunds, this drops to $4,914 per year or $94.50 per week.


 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3)  What happens if interest rates go up?
At 6.5% interest, the loss after tax refunds increases to $9,950 per year or $191 per week.

4)  Can you afford the cash flow losses?

5)  Do you want to gamble that the property will go up more than the cash loss?

6)  Or do you have a plan to change the cash flow?

  • Minor dwelling to increase rent
  • Subdivide long term and sell section, or build second rental on section
  • Inheritance coming that can reduce the rental debt.  NOTE:  you are likely to pay off any personal debt first.


Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

I hope you have found this topic of interest.


Kind regards
Ross Barnett 

 

Do you want to buy and sell properties for profit?

21 December 2017

 

Do you want to buy and sell properties for profit?


GST and Zero Rating

If you trade residential properties, then you will have to register for GST once you have a continuous taxable activity.  This means that you can claim GST on purchase costs that have GST but you also have to pay GST on the sale. 

If you do a one-off trade, then this is not a continuous taxable activity.  Therefore you would not be required to register for GST.  But there can be a fine line, and it is often difficult to determine, if the trade will be a one-off or if you are likely to do numerous property trades, thus becoming continuous.  I suggest seeking professional advice from a property accountant on this subject and the best approach is to be honest.  If you intend on buying numerous properties to do up and sell for the profit, then you should GST register at the start.

For long term residential property investors, there is no GST, so the above comments are just for property traders.


Zero rating – Over the last year we have heard about a lot of mistakes around the Compulsory Zero Rating (CZR).  Real Estate agents commonly get this wrong and a few recent forum posts on www.propertytalk.com even show lawyers and non property accountants getting this wrong.  If both the vendor and purchaser are GST registered, then the sale will be zero rated for GST.  Therefore if you are a GST registered purchaser and the vendor is GST registered, you should be making any offer for the GST exclusive amount, plus GST (if any).

So for example, you are GST registered and purchasing a section from a developer.  The developer is advertising the section for $240,000.  You want to offer $230,000.  You would therefore work out the GST exclusive value $200,000 ($230,000 / 1.15) and offer on the contract $200,000 plus GST (if any).  As the developer will be GST registered, the sale is then Zero Rated, so you would pay $200,000 but can’t claim back the GST, and the vendor would receive $200,000 but have no GST to pay to IRD.

Following the example above, some recent mistakes I have heard of are the contract being written at $230,000 inclusive of GST.  This sale would still be Zero Rated, and Zero Rated at the $230,000.  So the purchaser would effectively be paying $230,000 + GST, or $264,500.  This would be a $30,000 mistake and this can often be the difference between a good , profitable trade and a bad one.

Therefore it is very important to ensure you know whether a vendor is GST registered or not when you are buying trading properties.  I recommend that you talk to your lawyer about inserting a clause in the sale and purchase agreement to ensure that the vendor is unable to change their GST status once the contract is signed.  Many traders and educators use a standard clause that your lawyer should be able to provide you.


Second hand goods claim – If you are buying from a vendor who is not GST registered (this will often be the case, as they are just personal house owners), then as a GST registered trader you will be able to make a second hand goods claim.  You can only do this on the payments basis for GST (i.e. claim the GST once you pay for it).  The property trader would then claim the GST back in the next GST period and get the GST back as a refund.  This is the purchase price divided by 23 * 3, so for example if a trader purchased a property for $230,000, they would get $30,000 GST back.  IRD will generally audit large GST refunds, so we often get clients to just claim the land/building purchase in that GST period, to keep the GST return very simple for the IRD audit. 
 


GST on rental income if trading properties

We have taken on a client in the past whose old accountant has returned GST on rental income for the last 6 years.  The client owes or has paid around $12,000 in GST per year, totaling $70,000 approximately over the 6 years.

If you are trading properties and registered for GST, you should not be returning GST on rental income!  For properties purchased before 1/04/11 it is best practice to use Lundy adjustments.  For the client above, using the Lundy adjustments reduced the GST adjustment down to approximately $2,000 per year or $12,000 for the 6 years.  Overall we hope to save at least $50,000 and are in the process of reassessing the old GST returns with IRD.  Again, if you are involved in property transactions, it is essential that you use a specialist property accountant who is fully aware of property tips and tricks.

If the property was purchased after 1/04/11, new rules have come in that generally require more GST to be paid back to IRD.  But the first adjustment required is not until 31 March of the year after.  For example, if you purchased a section, built a house in May 2013 and tried to sell it, then couldn’t, so rented it out, the first adjustment period would be for May 2013 to 31/03/15, with the GST adjustment due in the 31/03/15 period.



Profit on Trading Property

There are a lot of people looking at going full time into property trading to make a living and gain wealth.
My first comment is be very careful about quitting your day job.

- This job brings you day to day cash flow, which enables you and your family to live.

- Banks love a steady, solid income.   So without one, you might find lending difficult.

Secondly, do the figures really stack up?   In today’s market it is easy to buy, easy to renovate but the problem lies with selling.   This can result in additional holding costs and also with a lower than expected selling price.

Here is an example of a Property Trade that I have heard an investor talk about.


Example

Purchased for $275,000
Renovations cost $5,000
Could sell for $300,000
From a quick glance, a lot of people think “that’s not too bad” and it’s $20,000 profit.   But, unfortunately, that is not the case.   Below are the likely expenses and I have included commission because in today’s market, many sellers are needing to use an agent to get a good price. 

     

Incl GST

 

Excl GST

INCOME

         
           

Sale of Property

 

300,000

   

Less GST - Divide by 23 * 3

39,130

   
         

260,870

           

EXPENSES

       

Purchase

   

275,000

   

Commission on sale

 

10,350

   

Legal - $1,000 to buy and $1,000 to sell

2,000

   

Accounting

 

500

   

Advertising - Agent or other

1,500

   

Insurance for 3 months

200

   

Rates - 3 Months

 

500

   

Renovations

 

5,000

   

Telephone

   

25

   

Travel - 86 cents per km * 300

260

   
           

Subtotal Expenses

 

295,335

   

Less GST

   

38,522

   
           

Subtotal Excluding GST

   

256,813

           

Less Loan Fee - NO GST

   

1,000

Less Interest 3 months @ 6%

   

3,750

           

TAXABLE PROFIT

     

-693


   
So based on the expenses included, the Trade would make a loss of $693.   If commission is excluded the profit would be $8,307 before tax, or around $6,000 after tax at average tax rates. 

This example shows how quickly a perceived profit can disappear.   If the property was held for longer, then it is likely to make more of a loss.

There are a number of property investors getting tutored about property trading and my understanding is that there are around 90 such students targeting areas in South Auckland.

In my opinion this is too many traders concentrating in the one area. I would suggest being very careful about trying to trade in this area as it is likely there are too many other traders competing to sell their properties.

$50,000 rule

I always think that you need a $50,000 gap between the purchase and sale, with limited renovation expenses.   So for example, buy at $250,000, spend $5,000 on renovations and sell for $300,000.   Based on the same kind of expenses including commission, the profit before tax would be approximately $20,000. 

This level of profit gives the trader some room to move with either the selling price, or to hold the property for longer and to still make some kind of profit.
 
Overall

Property Trading is not easy and you need to ensure you have a market in which to sell your finished product.   With Trading you need to keep your properties moving, so the idea is to do them as quickly as possible and then move onto the next one.   Historically where I have seen Traders come undone is where they take too long or where they get too big too quick (i.e. have 2-3 or more on the go at once).


If you are thinking about trading properties, I suggest you organise a meeting with me to discuss the structures used and the implications of tainting.  Ring Mareese on 839 2801 to organise a meeting or email This email address is being protected from spambots. You need JavaScript enabled to view it..  Please note: there will be a charge for this meeting, depending on the work and information required.

Kind regards
Ross Barnett

Are you thinking of selling after a two year period? Here is a timely reminder about the Bright-Line rules!

19 December 2017

 

Are you thinking of selling after a two year period?  Here is a timely reminder about the Bright-Line rules!

 

 

 

 

 

 

 

 

 

Here are some important points around the Bright-Line Test that you need to be aware of:

Currently 2 year period.  So, in general, if you buy a rental, sell within 2 years, any gains will be taxable.



Measuring the Bright-line Time Period:

  • Effective from 1 October 2015.  So, if Sale and Purchase Agreement dated before that, then Bright-Line doesn't apply.
  • Date of Acquisition = Normally Settlement.
  • Date of Disposal = Sale & Purchase Agreement date.


Must be residential land: There is some criteria around this:

  • Includes overseas residential land!  But should also get foreign tax credit if gain taxed overseas already.
  • Includes B&B's and AirBNB properties.


Off The Plan Sales:

  • Purchase = date of Sale & Purchase Ageement.
  • Sale =  date of Sale & Purchase Agreement.


Subdivided Land:

  • Date of Acquisition = registration of undivided land, i.e. when the whole property is purchased.
  • Date of Disposal = Sale & Purchase Agreement for sale of section.
  • NOTE:  Likely to be taxable under other tax provisions.

 

Leasehold to Freehold:

  • Date of Acquisition = date lease granted Gift.
  • Date of Disposal = date of registration


Compulsory Acquisition:

  • Date of Disposal = date of compulsory acquisition


Mortgagee Sale:

  • Date of Disposal = date of disposal by mortgagee.


Nominations: 

  • Originally IRD viewed nominations as a disposal, and therefore any gains could be taxed under the Bright-Line rules.
  • In early 2017, IRD retracted and have confirmed no sale or disposal on a nomination - which is good news.


Main Home Exclusion:

  • Can be Trust
  • Must be predominately main home, so more than 50% of time used as main home.  If vacant and renovated for more time than used as a personal house, then not main home.
  • Main Home Exclusion can only be used twice in 2 year period.
  • Doesn't apply if there is a pattern of buying and selling personal home.
  • Holiday ok if short term.  Longer time, depends on exact circumstances and as long as you don't set up another home, it should be ok.
  • Subdivide main house.  Generally section sale would also have main home exclusion but would suggest getting full advice on this to double check.


Main home looking at buying and selling for a profit:

  • If intention is to renovate and sell for profit, then taxable under other income tax sections.
  • Main home exclusion would not apply.
  • So be very careful with what your intention is and how this is documented!

Main Home intended to renovate and sell:

  • Gain is taxable.

Main Home, intended to live in and renovate.  But then later decide to sell:

  • Gain not taxable and exclusion for main home should apply (as long as no pattern of buying and selling, and still meet home exclusion provisions).


Relationship Property Transfers:

  • Generally excluded and transfers deemed to be at cost.

 

Inherited Property:

  • Generally excluded.

 

Change of Trustee:

  • If only a change of Trustee, then stays with original registration date.

 

Residential Land Withholding Tax (RLWT):

  • Applies from 1 July 2016.
  • Only for Offshore RLWT person who disposes of land subject to Bright-line rule.
  • Only relates to New Zealand land.
  • Obligation on conveyancer at settlement and to account to IRD.
  • If taxed under other tax provisions, but within 2 years, there will still be RLWT if vendor is an "Offshore RLWT" person.
  • There are three RLWT methods.


I hope this summary of the main points is helpful.

Kind regards
Ross Barnett 

It's amazing how often there is confusion over these simple GST scenarios

15 December 2017

 

IT'S AMAZING HOW OFTEN THERE IS CONFUSION OVER THESE SIMPLE GST SCENARIOS

 

 

 

 

 

SCENARIO 1:   You are looking to buy another investment property (PropertyA) that you will use for short term accommodation (e.g. Air BNB, holiday rental).  Income will be over $60,000, so you have to be GST registered.  You are looking at a particular property that is being advertised at $600,000 plus GST, by a GST registered developer.

If both parties are GST registered, the sale would be zero rated for GST.

From your research, comparable properties are worth and being sold for $600,000, with normal GST inclusive contracts.


What should you offer?
In this case you could buy a comparable property from a non-GST registered party for $600,000, then claim back the GST, so be left with a real cost of $521,739 exclusive GST ($600,000 / 1.15).  Therefore, if the properties were the same and you were happy with the value, then you would only offer $521,739 plus GST for Property A.  If accepted, the transaction would be zero rated.  You would pay $521,739 and you would not claim back any GST.  This would be the same as the real cost for the comparable properties.



SCENARIO 2:  You are a GST registered trader or builder wanting to do a spec house.  A section is being marketing by a GST registered developer for $230,000.  This is the normal price that a personal home buyer would pay for the section, so this would be $230,000 inclusive of GST.

What should you offer?
$200,000 plus GST.  As both parties are GST registered, then the sale is zero rated.  Effectively, this is $230,000 less the GST = $200,000 GST exclusive.

  • Vendor:  Would normally get $230,000, then have to pay IRD $30,000 and be left with $200,000 real sale value.
  • Buyer:    Would normally buy for $230,000, then get the GST back from IRD $30,000 and be left with $200,000 real cost.
  • So the Zero Rating avoids the steps of paying the GST and receiving back the GST, and just settles at $200,000 where both parties would end up at anyway.



SCENARIO 3:  You are looking to buy a long term hold residential property that will be leased to a long term residential tenant.  As such you are not GST registered.  For some reason the vendor is GST registered and asking for $300,000 plus GST.   They say there is only GST on half the property.

What should you offer?
Obviously if depends on what you think the overall property is worth.  But you should be looking at a GST inclusive offer.  So the vendor is really asking for $300,000 plus 50% of the GST = $322,500 ((150,000 * 1.15)+150000).  If you were happy with this amount, you would offer $322,500 GST inclusive.  The GST is then the vendor’s problem, and you have a set purchase price that cannot be affected by GST.  Otherwise if you offer $300,000 plus GST and it turns out the GST is $30,000, then you would have to pay $330,000.



SCENARIO 4:  You want to buy a lifestyle block.  Really just your personal home, with a couple of sheep, a dog, two ducks, three cats and a horse.  Obviously this isn’t a real business, so you shouldn’t be allowed to claim the GST back.  The lifestyle block is for sale for $2 million plus GST.  The GST is only on the extra land, so is 50% of the property in this example.  So the GST inclusive value would be $2,150,000.
 
You are struggling to come up with the funds, so your creative real estate agent and mortgage broker come up with a plan that you should be GST registered.  Then the sale would zero rate, and you would just have to pay $2 million.

Is this a good idea?  NO

  1. Technically you cannot be GST registered as there is no continuous taxable activity.  So what you are doing is illegal.
  2. Is it really in your best interests?  You might save interest on the $150,000 extra, at say 5% for 5 years, being approximately $37,500.  But, you might sell the property in 5 years time for $4 million.  The new purchaser is likely to not be GST registered.  So you would have to pay GST on the sale.  This could be $2.5 million for the GST part, so $326,087 GST to pay.  You only saved $150,000 at the start, but are now paying $326,087.  So taking the interest into account, the GST has cost you an extra $138,587!


I hope this has cleared up any confusion you may have had.


Kind regards
Ross Barnett 

Our Turn to be the Bad Guy - If you renovate, then sell, probably non-deductible!

30 November 2017

 

Our Turn to be the Bad Guy - If you renovate, then sell, probably non deductible!


 

 

 

 



 Scenario 1
 
You have owned a rental for 10 years.
The tenants give their notice to move out.  You decide this would be a great opportunity to sell.
To maximise the sale value, you paint the house outside, you renovate the bathroom and do some other repairs for $20,000.
The property is sold.
 
Unfortunately the $20,000 of costs are not deductible as repairs.  They are a cost of selling and non deductible.
 
The rules do not look at who caused the damage, or why the repairs were needed. 


Scenario 2
 
You have owned a rental for 5 years.
The tenants give their notice and move out.  You decide this would be a great opportunity to renovate and then re-tenant.
You spend $15,000 on painting and other repairs [See point (a)]
Then, as part of your re-tenanting process, your property manager suggests you get a meth test, just in case.  You have already appointed the new property manager and already started to advertise the property.
Meth test = positive.  All attempts to rent stop.
$9,000 is spent to decontaminate [See point (b)]
You decide you have had enough and sell the rental. 

(a)  Is the $15,000 deductible?  Obviously it would need to meet standard repair vs asset tests, but as the property was being renovated to rent out, and there is clear evidence that the property would be re-tenanted, then the $15,000 would be deductible. 

(b)  Is the $9,000 deductible?  Unfortunately not.  The $9,000 is a cost of selling and not associated with receiving rent.


Scenario 3
 
You have owned a rental for 6 months.
The tenants give their notice and move out.  You decide to renovate and then re-tenant.
You spend $17,000 on painting and other repairs.
You then rent the property out for another 2  months, before changing your mind and selling.
 
Is the $17,000 deductible? 
Yes, as long as standard repair versus assets tests are met, this is associated to the rental income, and the property was rented before and after the renovations.
Note – Any gains would be subject to the 2 year Bright-line test!


I hope you have found these examples useful.

I'm running the Keppler 60km run on Saturday, so I'm still working on the commercial property blog.  If you want to learn more about commercial property, make sure you click here to subscribe to our newsletter to ensure you get this great information.

Kind regards
Ross Barnett 

It's time to think about interest rates again

24 November 2017

 

It's time to think about interest rates again

Interest rate risk

 

 

 

There is some talk that interest rates could jump up suddenly.  At this stage it is just talk, but how good is your mortgage strategy?  Have you reviewed it recently?  And what would happen to you if interest rates jumped up suddenly?

 
I last looked at interest rates in November 2016, and, at that time, ASB and BNZ had just raised their 3 to 5 year rates.  I was therefore expecting interest rates to slowly move up over the last year and be maybe 5% by now.  Obviously this was completely wrong with the short term rates.  The 1 to 2 year Interest rates are still extremely low and haven’t really moved.  From www.interest.co.nz the best rates are:

1 Year 4.19%
2 Year 4.29%
3 Year 4.79%
5 Year 5.59%
 
While the 1 and 2 year rates are still extremely low, the longer term rates have moved up slightly.



Four Key Points to Consider:
  

1. Negotiate – If you ask for a better rate, you can often get a discount off the standard rates.  Or use a mortgage broker so that they do the running around for you and can negotiate on your behalf.  You can definitely get a good discount off floating rates!

A great line can be:  "My accountant told me that I should be getting 4.55 for 3 years."  Or "my accountant told me that his other clients are getting at least a 0.2% discount."  Worst case, the bank still won't give you a better rate, but it can be an wasy way to ask for a better rate and you are blaming it all on someone else (me!).

2. Don’t have too much floating – the idea with a floating loan is that you can pay it off before your next fixed loan comes up.  So if you think you can only pay off $20,000, then your debt in your floating loan should be around $20,000.  The best floating rate on www.interest.co.nz is 5.65%, or 1.46% higher than the 1 year rate!  So if you had a high floating loan of $300,000, you would be paying $4,380 extra interest per year!

3.Rental debt vs Private debt – When we complete your financial statements, we will identify in our letter if there is an opportunity to borrow more in the rentals that is tax deductible and therefore reduce your personal home debt where there is no tax deduction.  This can often be a simple change at a very small cost.  For example, if your rental Company owes you a $200,000 shareholder current account and you have a personal house debt over this, then the Company could borrow $200,000 and repay you,. Therefore the interest on the $200,000 would be deductible and could save $3,000 in tax per year!

It’s essential to do this right and to get expert advice.  So if you think this could work for you, then contact us and we can help you through this process. 

4. Spreading loans – If you have all your loans fixed for 1 year, then you are gambling that interest rates will go down.  If you are right, great.  If you are wrong, then it could cost you a lot in extra interest!  Obviously no one has a crystal ball, so everyone is guessing what will happen.

 
I like the approach of ‘don’t put all your eggs in one basket’.  Therefore, if I had a $920,000 mortgage, I might split it into:

  • $20,000 floating
  • $300,000 at 1 year
  • $300,000 at 3 years
  • $300,000 at 5 years.

 
The average interest rate is still only 4.9%.  If you negotiate, you will be able to get this lower too!
 
Under a spreading approach, if interest rates go down or stay the same you still do OK as you have some loan fixed for 1 year.  If interest rates go up, you still do OK as you have some loans fixed for 3 and 5 years.  You might not get the best interest rate, but then you are not gambling on one outcome either.
  
Overall it’s not about panicking and rushing a decision.  Instead, it’s about thinking about your long term approach and your preferred risk level.
 
Kind regards
Ross Barnett 

 

What are the implications if you have an LTC, now that Labour is aiming to change tax rules for rentals?

10 November 2017

 

WHAT ARE THE IMPLICATIONS IF YOU HAVE AN LTC, NOW THAT LABOUR IS AIMING TO CHANGE TAX RULES FOR RENTALS?

There are three parts to this:

Part 1:    If you have a negative rental, how will the possible changes affect you?
 
So at the moment you have an LTC, making a loss of $10,000 per year, and the loss is offsetting your personal income and you are saving $3,300 in tax each year.
 
The likely changes that Labour are suggesting will take some time to put into place, and then Labour is looking at phasing the change in over five years. 
 

  • Year ended 31/3/18 = likely no change and still $3,300 refund
  • Year ended 31/3/19 = likely no change and still $3,300 refund
  • Year ended 31/3/20 = Likely only 80% of loss can offset personal income, refund reduced to $2,640
  • Year ended 31/3/21 = Likely only 60% of loss can offset personal income, refund reduced to $1,980
  • Year ended 31/3/22 = Likely only 40% of loss can offset personal income, refund reduced to $1,320
  • Year ended 31/3/23 = Likely only 20% of loss can offset personal income, refund reduced to $660
  • Year ended 31/3/24 = Likely no loss can offset personal income, refund reduced to $0.


 
Part 2:    The losses will still be there and would be carried forward to future years where there was rental profit. 

So as your rentals change from negative to positive as you pay down debt, rent rises and depreciation deductions reduce over time, then you would not have to pay tax on the profits for the first few years!
 
In my opinion, investors should be concentrating on getting passive income from property long term.  Therefore, long term, property investors should be paying tax on profits, rather than being worried about whether they will get tax refunds from losses.  It kind of gives around five years for a property investor to get their ‘house in order’.
 
 

Part 3:    An LTC is probably still the right structure anyway. 

If the suggested rules come in, and are set up correctly by Government, then all structures will be affected.   So if you currently have an LTC, then it is likely to still be a good structure for you.   It’s important to always review your structure, but one of the best advantages of an LTC is its flexibility.   You can change shareholding long term as your situation changes.   Fox example,  initially you might have the shares owned by the highest earner to offset their high tax, but long term you might change to a Trust owning the shares to give asset protection and lowest tax on the income.   An LTC is also an easy entity to access capital gains!
 
If the government doesn’t set the rules up correctly (I’d guess a better than 50% chance), then keep an eye on my newsletters and facebook posts, as there is likely to be some clever ways to structure in the future!
 
 
So, overall at the moment, don’t panic.  If you are currently using an LTC, then it is likely to still be fine.   As the new rules become clear, then it would be worth having a free initial telephone chat with me for 5-10 minutes to check if you need to do anything further.  


Kind regards
Ross Barnett 

Commercial Property I don't think you should buy!

30 October 2017

Commercial Property I don't think you should buy!

Click here to watch my live video on Facebook.

 

Kind regards

Ross Barnett

I'm nervous.... No I'm Scared

27 October 2017

 

I’m Nervous…. No I’m Scared

The property market has already turned, or is showing signs of turning. LVR rules have had a huge impact, and I was getting set for a consolidation phase. My prediction was that the market would go flat, and that in 2-3 years there would be some desperate vendors, therefore some opportunities to pick up some bargains. I love this video showing what a new investor does at the peak of the market:  https://www.facebook.com/thepropertyaccountant/vide...

Now the game has changed a little bit more;

- 5 year brightline test. This personally doesn’t worry me, but the majority of property investors are after a quick buck. They want to buy a property now, it to jump up in value $100,000, and then to sell so that they can reduce their personal house loan, or buy a fancy car, boat , holiday etc. Paying tax on a property gain scares these investors.

- Tenant friendly. Everything seems to be going the tenants way at the moment, no letting fee, only annual rent rises, 42 day notice becomes 90 day. There is also a lot of tenancy tribunal cases going against landlord, and some landlords are having to pay some serious money back to tenants.

- Extra costs and compliance – insulation, smoke alarms and especially Health and Safety. Health and Safety is frustrating some landlords and also pushing up ‘Tradie’ costs.

I would guess that 65% of property investors have negative cashflow, that means the rent doesn’t cover all the costs. These investors then love and rely on their tax refund. I just did a quick cashflow of a standard rental that an average/normal investor would buy now. $550,000 and getting maybe $475 per week in rent, so just over a 4% gross yield. If the property is 100% mortgaged (this is pretty normal), it costs $10,600 before tax refunds!

That’s right – an average rental, that an average property investor buys now, is costing them $10,600 per year, before tax refunds.

And that is at 4.5% interest rates. What happens if this goes up to 6.5%? The loss moves up to $21,500!

Currently this average investor would be getting back around $5,000 in tax presuming highest tax bracket and some chattels to depreciate. So this brings the overall cost down to around $100 per week. Which is manageable to most investors.

How is this new or average investor going to cope with no tax refund – down $5,000 or another $100 per week?
Plus the extra compliance costs and hassle?
Plus if there is no capital gain for 2-5 years?

Then the biggie – WHAT IF INTEREST RATES GO UP? 1% would be another $100 per week.

Can the average investor survive an extra cost of $200 per week?

My thoughts from this;

- If you are conservative - Wait, watch and hope the market collapses. Then buy some bargains in ½ to 3 years, that have opportunity to add value, maybe through subdividing.

- If you are a little more aggressive - Same as above, but maybe some joint ventures, so that you are still doing things, but with lower risk. Also ensure the new purchases whether trades or holds, can cover themselves easily and don’t put you under pressure

- Aggressive – I just don’t think it is worth going there at the moment

- Buy in the bigger regions, such as Auckland, Hamilton, Tauranga and Wellington, where there is always buyers and tenants. Keep away from dying regions and little regions, especially if they rely on one industry. I always laugh to myself as each property cycle comes around and talk slowly moves to "lets buy in Tokoroa or Whanganui!"

My best advice at the moment, is take your time and don’t be afraid to get some advice and ask for help. Your local property investor association is a great starting place, and we also have some great information, checklists, webinars, seminars, video’s and blogs coming out over the next few weeks on strategy and how to get through the hard times if they come. Make sure you like our page or sign up for our newsletter to ensure you get the info!

If you have negative properties, think hard on how you can turn these into positive – a great starting place is a free 10-15 minute chat with me, where I can often point you in the right direction. Just email my PA, Mareese at This email address is being protected from spambots. You need JavaScript enabled to view it.. It’s completely free and no obligation!

What do you think?

Ross Barnett


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Claim your $1,000 back right here!

30 October 2017

 

Claim your $1000 back right here....

If you earn over $52,000 per year, then you are likely to have just lost $1,000 in tax cuts that National planned to bring in from 1/4/18.

How can a property investor get that back again?


1) Increase your rent. In simple terms it would sound like you need to increase rent $20 per week to gain $1,000, but after taking tax into account you actually need to earn around $29 extra rent per week!

2) Restructure – Over the last 10 years, we have found that the average restructure saves around $2,500 in tax per year, after taking into account any costs!

a. So can you borrow in your rental company to repay a shareholder current account?
b. Can you restructure a rental into an LTC, to make more interest on borrowing deductible?

Both of these need to be done correctly, for the restructure to work!

3) Rent by the room or fully furnished – Both of these will result in more rent, but they only work in certain places and it is important to make sure you can manage these kinds of properties and understand the tenants demand in the area.

4) Chattels depreciation

5) Make sure you are claiming all those small things. By themselves, each of these items is likely to be quite small, but added together they might save you $1,000 per year

· Mileage - For rental property associated travel you can claim 73 cents per km using the IRD rate or you can also use the AA rates which are generally higher. Make sure you have a simple system
· Donations - You can claim back 33% of any donations, as a rebate!
· A good system to account for all repairs, and all the little purchases


6) Insulation subsidies – If you haven’t insulated yet, talk to your property manager about insulation grants or subsidies. These can often reduce your insulation costs by $1,000

7) Kiwisaver – If you are an employee, then joining a super scheme or Kiwisaver makes sense. The government pays $521 into your Kiwisaver each year. Plus your employer matches your 3% contribution (3% of your income), less tax = approx. 2% extra contribution. So on a $50,000 income, you could be gaining $1,521 per year from the government and your employer

8) Renovation – An example from a property manager in Hamilton, was the landlord spent $25,000, and increased the rent $80 per week. A 16% return on investment!


Do you own a business, and also investing in property? Watch out for my next blog on “Maximising the benefits of having a business and property”

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Kind regards
Ross Barnett

How to get passive income from property?

6 November 2017

 

Check out my article for Waikato Property Investors Association - Have you joined yet?

 

How to get passive income from property! A must read on 5 different strategies. Have you joined your local Property Investor Association yet? With so many changes to property it is worth checking out the benefits at the bottom of the article! 

What is happening in the Auckland market?

6 November 2017

 

What is happening in the Auckland market?

The Median sales information shows that Auckland has been very flat over the last 6 months, but is still slightly above last year. At this stage it definitely hasn’t crashed!

What’s your prediction for the next 12 months?

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7 Mistakes Business Owners Make with Property

7 November 2017

 

7 Mistakes Business Owners Make With Property

 

Here is the list of seven items.  After this list, I have focussed on Points 1, 2 and 4 and included more detail and some diagrams to help explain the concepts further.
 

1.  Structure:  Often as property investors, we are looking at tax refunds versus asset protection.  Business owners can do so much better!

2.  Inter Entity Transactions: If your business goes bust, you don't want to lose your property investments too.

3.  I'll do it myself!  If you are a business owner, especially in the Trades (plumber, builder, electrician, etc), it seems easiest to mow the lawns yourself, or fix that fence yourself, or do the painting yourself.  You're saving money by not paying a contractor, right?
  

Often this is wrong, because as a business owner, you are often time poor.  So you already don't have spare time.

  • Often your hourly rate is higher.  If you are going to do work, then you are better to do it for a client.  Maybe earn $80 per hour for your trade versus only paying the handyman $50 to fix a few things.
  • What is your family life worth?  What is some time to yourself for fishing, hunting, or relaxing worth?  Yes, you could mow the rental property lawns, but it is also important to get a work/life balance.

4.  One Bank

5.  Not treating it as a business.  Property is not a hobby!

6.  Not understanding the numbers in business.  A business should:

  • Have monthly financial statements so that you know the monthly profit.  Xero or a similar program can help.
  • Have a Budget and a comparison each month between actual and budget.
  • Review its Balance Sheet at least quarterly and understand its current assets vs current liabilities.
  • Have a marketing plan.  This can be very simple and set out the major advertising over the year to avoid spur of the moment decisions.
  • Regular dividends to move profits through to the business owners.

 

7.   Make a fair profit for your work and then a business profit.  So for a small business, that might be a fair market salary or similar profit distribution of say $100,000 (you should be earning more than your staff!), and then maybe a $60,000 business profit.  Otherwise why are you doing it?  If you are earning less than your staff, there is a major problem!

More profit means there is more to invest in property to obtain more long-term passive income.

Click here to view some great videos that might help you, especially if you are a Trade business (plumber, builder, electrician, etc).


So now I'm going to explain the concepts of Points 1, 2 and 4 above further.

1.  STRUCTURE

As a business and business owner, you have risks.  You could be liable for Health and Safety.  Your business could go bust and you could have personally guaranteed creditors.  These are just two examples, but there are many ways you could be at risk.

Therefore, asset protection is very important.  Ideally you want your family home protected and separate to your business and separate to you.

Two common structures:



Structure B is the Rolls Royce structure.  It means if Trust 1 has to guarantee the Company lending as shareholder, Trust 2 is still separate and, therefore, the Personal Home is separate.  BUT, often banks will require a guarantee over the personal house anyway, which kind of undoes some of the benefits.  It still provides an added layer between the business and the personal house.

 

 

 

 

 

 

So how does this link in with property?  Expanding on Structure A, a standard property structure would be:






We would often make both companies LTC's.  Therefore the profit of the business (Company 1) would flow to the Trust.  The loss (or profit) from the rentals (Company 2) would also flow to the Trust.  The Trust would then be the central point that combines the profit and loss, and then could distribute to beneficiaries.  For example,  $1,000 to each child under 16 which normally has no tax, and distributions to a non-working spouse to use lower tax rates.

LTC's are easy to get the capital gains out of too!  Where as it can be a real pain and expensive to get capital gains out of a normal company.

This structure gives both asset protection and still an offset from the rental loss!

 

If money has been introduced or loaned to the business or rental, then this structure can be improved slightly.  The Trust could formally loan this money to either company, with a General Security Agreement (GSA) in place.  This should give the Trust a higher priority and more chance of getting its funds back in a worst case scenario.  If you are advancing money to any company, seek advice from your lawyer and they will be able to help protect it better!



2.  INTER ENTITY TRANSACTIONS

You have a business operated through a company and some rentals in a separate company.  The business has excess cash, so you transfer it to the rental company to reduce some debt.

 

ISSUE:  Now company 2 (rental) owes Company 1 (business) money.  So in a worst case scenario, you have been doing this for five years and now the rental company owes the business $100,000.  The business goes bust!  The rental company would have to repay the $100,000!

 

 

 


How could this be done better?



 Business profits flow down to Trust through dividends.  Then Trust lends to Rental Company.  This loan could be done with security too.

 

 

 

 

 

 



4. ONE BANK

Often it seems easier to have one bank, say BNZ.

BNZ has the loan on your personal house.
BNZ has the loan on your rentals.
BNZ has the loan on your business.

You have one Bank Manager and life is good.  Right?

WRONG:  If something goes wrong, then BNZ owns you.

Ideally, you want to separate into a number of banks.  As you get more and more rentals, then you should have multiple banks for your rentals too.  For Example:

BNZ - personal house in Trust
Westpac - Rentals
ANZ - Business.

Try to have no cross securities between them.  This way, if the business goes bust, you have one major issue to deal with, but at least your personal house and rentals should be separate.


Great Free Information

I hope this has given you some great information.  Make sure you like our Facebook Page as we are putting up some great videos and information for property investors!


Kind regards
Ross Barnett

What effect will the new Government have on property investing in New Zealand?

20 October 2017

WHAT EFFECT WILL THE NEW GOVERNMENT HAVE ON PROPERTY INVESTING IN NEW ZEALAND?

I’ve just done an 11 minute video on Facebook about the likely changes coming up, and what you should be concentrating on as property investors.  You can view this here. 
 
Next week, I will put my thoughts into writing, just in case you prefer a written version.
 
The big thing is not to panic!  I see the property market as already being flat, and I expect the property market to stay flat in the short term.  It’s a time to focus on property basics.
 
 
FREE STUFF
 

  • We have some free seminars coming up in a few weeks to ensure you are doing the basics, plus to discuss your strategy further:  “How are you going to get passive income from property?”
  • Videos – We have 5 new videos on Youtube that you will find very interesting.  All short and sweet!   Here's the link to watch these.
  • Property investment spreadsheet – for clients.
  • Trading property notes and tips – for clients.

 
I hope you have a great long weekend, and hopefully we will all get some sunshine!

Kind regards
Ross Barnett 

 

Why you should be paying Principal on your Rentals!

6 October 2017

Why you should be paying Principal on your Rentals!

 


Long term, do you want Passive Income from your rentals?

What is the easiest way to achieve this?

Obviously that is easy - it's to have no mortgage.  One of the easiest strategies to achieve passive income from your rentals is to make Principal and Interest repayments, and long term pay off the mortgage.  Sacrificing a little bit now, saving a little harder, and budgeting a little more, can have huge benefits later on and can really help to set you up for your retirement.


How is paying Principal possible? 

It’s human nature to spend all that you have available.  So if you earn $800 in your hand each week, the $800 per week will generally disappear.  Often people don’t know where their income goes, but because it's there, they buy little extras they don’t really need.  But if the net pay was only $750, you would probably still survive.  You might have a few less drinks, lunches and luxuries, but this would force you to manage your money better and adapt to having slightly less.  So, working on this principle, if you were to set up an AP for the $50 per week to go towards your rental to pay down some principal, then you probably wouldn't even notice the difference of a little bit less in your spending account each week. 
 
Over 10 plus years, the small principal repayments will add up to a lot.  You start saving interest on the loan your have repaid, so slowly the interest gets less and less.  Then you have more cash free, so can repay more in principal.  So its all about getting into this winning cycle.


Your available cash Increases

If you just allow the pay rise, finished loan repayments, or tax cut money to sit in your spending account, it’s going to disappear.  On paper you are earning more and have more cash, but you will naturally adjust for this and it will disappear on unnecessary extras.  So instead:

  • If you get a pay rise:  Work out the extra pay and increase the AP to your rentals or home loan to pay off the mortgage quicker.
  • If you finish paying off an HP or car loan:  Set up an AP for the same amount to your rentals or home loan to pay off the mortgage quicker.
  • On 1/4/18, if tax rates change:  Work out your extra net pay, set up an AP to your rentals or home loan to pay off the mortgage quicker.


But, but, but………… the “tax benefits”

I hear this comment all the time.  Yes, it is a slight benefit to pay off your personal home loan quicker.  But most of the time the money just gets wasted and doesn’t go to either the home loan or the rental.  Also the tax benefits are often tiny.  I looked at this in more detail in my 21/3/17 blog, and on a $500,000 rental loan the difference in tax was only $292 per year approximately over five years!
 
Hopefully this helps you to pay off your rentals and obtain passive income long term!


Coming into Coombe Smith offices to see us?  There is now 2 hours FREE parking available on both sides of the road outside our building.  Thank you to Hamilton City Council.  

 

 

 

 

 

 

 

 

 

 



Kind regards
Ross Barnett 

Choosing A Property Accountant

28 September 2017

 

Choosing a Property Accountant.

It doesn't really matter where your accountant is. These days, with emails and Skype, it's often easier not to have a local accountant! Here are the things you should look for:

 

1)  True property accountant.

The easiest way to tell this is to visit their website. If the website is all about property - great. But if it is about business and farming, etc, etc, then they don't specialise in property and might be missing some tricks!

 

2)  Don't go for a one person firm.

A tiny firm often doesn't have all the resources they need. Plus if they die, are sick, go on holiday, how do you get your information? Back ups systems can be hopeless, and how does a single accountant review their own work? (Good firms generally have a double review process!).

 

3)  I personally don't like large firms either, as you often deal with the junior.

 

4)  A Chartered Accountant is generally better as they have compulsory training each year and many years of university and practical experience.

 

Good Luck with your choice.

Ross Barnett

The Property Investor You Don't Want To Be

26 September 2017

Last Friday I released my latest video The Property Investor You Don't Want To Be.  Over 2,000 people have already viewed this video on our Facebook page over the weekend.  If you are thinking about buying a rental, you need to watch this video first!  Only 14 minutes of your time and it might save you from making a big mistake.  Click here to view this video.

Feel free to share the video link with friends and family who are thinking about getting into property investment as it will be very useful for them.

Following on from the election here are my thoughts:  Why not National and Labour?

Rather than political games, why don't the two main parties work together for a better NZ? If you take the best of both parties, the end result could be quite good. They could focus on:

1). Reducing Government overspending

- Start with lower MP salaries
- Reduce the number of MP's by 25%
- Reduce the number of MP's advisors by 25%
- Reduce MP's perks, travel, superannuation and other costs by 25%.

2). Bring in Labour's 5 year Brightline test, to make property speculation harder. With this, the number of personal home exceptions could also be reviewed, as currently this gives a loop hole to be exploited.

3). Currently there is an incentive for people on a benefit to have more children. Maybe try a new strategy, as the current one isn't working.  Perhaps an incentive for people on a benefit not to have children?

4). Still have the tax cuts that National proposed!   The higher income earners already pay a higher percentage of NZ tax, and with the country surplus increasing, it is fair for some of this to go back to those who pay the majority of tax. AND, many of the tax refund recipients will spend the extra $1,000 on luxuries which then creates more money for small business's, leading to more wages, that leads to more overall spending in the economy.

5). Establish a new rule for future elections to stop Political Parties buying votes with last minute election promises.

6). Review the major items discussed during the election such as clean waterways, lower immigration, and more support for those less fortunate, and work together to improve these.

I personally don't think any of the Political Parties is that great, but maybe with the two major parties working together, rather than playing games, the country could be in a better place in 2-3 years time. Also over 80% voted for either of these parties.

What do you think?

Kind regards
Ross Barnett 

What would you do if you won $30 million?

18 September 2017

Hopefully you are the lucky person sitting there, wondering what to do after winning the $30 million Lotto last weekend.  The ideas below also apply to anyone who has come into a reasonable amount of cash, whether through a Lotto win, inheritance, a lucky property transaction or some other means.

What would I do if I had won $30 million over the weekend?  In my mind, the first 3 steps are imporant:

Step 1 – Don’t tell anyone.  Not your friends, family or anyone.  Keep the information to yourself and give yourself a chance to comprehend the win and what you will do with it.

Otherwise suddenly you will have 500 more friends, and your close family will double or triple in size.  They will all be trying to give you ideas and tell you how much they need help.

Step 2 – Pay off all debt.  Pay your home loan off, credit card debt, and all other debt.  This is a safe use of the money.  If needed, you could always borrow again later against these assets, but with $30 million your main issue will be having too much money.

Step 3Create some breathing room and stop rash decisions.  Tie up your money for 3 months, so that you have time to think rationally.

With the money left after Step 2, portion off some ‘fun money’.  You have just won $30 million, so you are bound to want a few extra dinners out, stay in some fancy hotels and maybe have a holiday and buy some cool clothes.  Maybe $200,000?

Split the remainder between 4 or 5 major banks – chat to each bank, but with $5 million or more, you should be able to earn 3% or more per annum fixed for 3 months.  Get the interest paid out monthly to a separate account, or into your ‘fun money’ account.  And get the interest taxed at the top tax bracket of 33% to make things simple.

The whole idea is to slow you down!

  • Don't rush out and buy your dream car (boat or plane) tomorrow.  Chances are that with the $30 million win, your dream car would have changed.
  • Don't help anyone immediately.
  • Don't buy a property, whether a personal home or beach house or investment.  With $30 million, your ideal personal home or beach property will probably change!

At only 3% interest, you will still be earning $50,000 per month after tax is deducted.

 

Step 4 – Planning for your Future

The planning part can be done in the first three months, but I would delay actually committing to anything within the first 3 months.

A)  Set up a Trust with a good lawyer.  A Trust is designed to protect your assets, and now that you have $30 million, you have a lot to protect.

Make sure you go through the whole process with the lawyer, such as transferring any relevant property into the Trust, having an independent Trustee and completing full gifting.

 

B)  Set selfish goals.  Decide how much you personally need/want:

  1. What luxuries do you need, and how much cash do you need for these?  This might be the mansion in the country, the beach house, the cool boat, and the fancy car.
  2. How much income do you need a year?  How much do you want to earn a year, and how much cash do you want available?
  3. Decide how much extra buffer you want to have?  You are unlikely to win $30 million again, so you want to make sure you are set for life.

Pay for advisory meetings with two or three different financial advisors, and look at what investments you could make and the income they would give you.

Remember the golden rules of investment:

  • Don't put all your eggs in one basket.
  • The higher the return, the higher the risk.  With $30 million, you probably don't need to take any risks, so you could probably look at safer, more conservative investments.

 

C)  Helping others:

  1. Make a list of who else you want to help.
  2. Work out how to best help them.

There are different ways to help people.  The obvious is to just give your friends and family money.  If it was me, I would keep away from just giving capital (your $30 million winnings) and I would prefer:

  • Loaning money.  That way, if their relationship breaks up, you can get the loan repaid.
  • Invest the money under a separate Trust, and then distribute the income to those you want to help.  This way you maintain the capital and are just giving the income.
  • Set up Trusts for each person you want to seriously help, and control the Trust for them (or get advisors to help).  It could hold investments for them and help them get further ahead financially.

Hopefully you are the lucky person who has just won the $30 million, and this has given you some great ideas!

Kind regards

Ross Barnett

 

Labour Update - New Taxes and Lies?

14 September 2017

 

LABOUR UPDATE - NEW TAXES AND LIES?

I've been away at my best friend's wedding for two weeks and it is amazing what a change there has been.  I wrote my initial blog on Labour's policies in May 2017, with National polling 43% and Labour at 30%.  On Tuesday, when I started to review any new Labour information, Labour was 43% and National was behind on 39%.  Obviously this is just one poll and other polls will show different results, but overall the election is going to be a lot closer than it appeared in May!

Comment from Jacinda Arden on Tuesday - Completely wrong!

"The fact that someone who works a 40 hour week pays tax and someone who flicks four investment properties and doesn't in the same way - that's a question of fairness."

Facts:

  • People who trade properties (flip) have to pay tax on the profit.  The relatively new Brightline Rules make it almost impossible to not pay tax on trades.  But before the Brightline Rules, a trade was taxable under the 'intention rules' anyway.  So a person who trades four properties per year is taxable on this profit and always has been.
  • A trader who trades four properties per year would also have to pay GST.

I liked this comment from Mathew Gilligan on a property forum:  "Either she knows this is incorrect and is lying to the public (unlikely) or she is ignorant of how the tax system works, making her incompetent.  Which is it?  She is plain wrong."


Land Tax

This is something that Labour won't rule out, so is possible.

In my opinion, this could be very scary for property investors.  The worst part is the unknown.  Could it be $1,000 per year or $20,000 per year?  Most likely it would be a percentage of land value, but what %?

I feel that property investors need to focus more and more on cash flow, and the aim of most investors, at some point, is passive income.  Paying a land tax each year is going to hurt a lot of property investors and either force rents to rise or property investors to sell.  Long term investors who have worked hard and struggled into a good position of low debt on rentals, could suddenly find their passive income disappearing and their retirement plans ruined.

The Rich Should Pay More Tax

Currently anyone who earns over $90,000 is in the top 11% of income earners.  This 11% of earners pay 48% of the national tax!  If we round the figures a little, 10% of people are paying 50% of the tax.  Should higher income earners really be paying more tax?

If you earn over $40,000, you are in the top 42% of income earners, and this 42% of income earners pay 85% of the national tax!

Source:  http://www.treasury.govt.nz/budget/2017/at-a-glance/b17-at-a-glance.pdf



Making life better for renters

  • Extending Notice period from 42-90 days:  Current period is 90 days anyway, unless certain exemptions are met.  The two main exemptions are:
    • Selling
    • Owner or family member going to live in property.

So, it will make it harder to sell with "vacant possession" or harder to move back into the property for your own use.

  • Limit rent increases to once per year:  current law allows once every six months.  It would then become important to make sure rent increases are done regularly and that rent is kept up to market rates.  Otherwise, it could take a while to catch up.
  • Letting Fee:  Labour is planning on banning Letting Fees from being charged to tenants.  The cost of letting properties will still exist, so this cost will either be worn by property management companies, or be paid by landlords, or landlords will long term try to cover by increasing rents.


Capital Gains Tax

Labour plan to hold a working group to work out the best tax changes going forward.  From Jacinda's comments, changes are likely to occur within the first term.

Past Tax Working Groups have suggested Capital Gains Tax.  So there is a reasonable chance that, if Labour are elected, a Capital Gains Tax would be implemented.

As with any tax, 'the Devil is in the Detail'.  Until the details have been finalised, we cannot be certain how this would be implemented.  Based on tax policies in the past, such as the Brightline Rules, any new Capital Gains Tax would only apply to new purchases from a certain date.  It would also take the Working Group, Labour and IRD a while to finalise any Capital Gains Tax.

I would hope that any Capital Gains Tax wouldn't apply to existing properties.  Otherwise this could cause a large number of investors to try to sell some rentals before the policy came into effect, creating a large over-supply of properties for sale that could have a major impact on the sale prices.

Overall:  The main thing to remember with any Capital Gains Tax is that it is only payable if the property is sold, and at this point, you should have the cash available to pay any tax on the capital profit.


Inheritance Tax and using a Working Tax Group

Jacinda's comment says that "inheritance tax is off the table."

The two parameters for her Working Tax Group would be:

  • The family home is not allowed to be taxed.
  • Inheritance tax is off the table.

It's interesting that Labour is looking to use a Working Tax Group to establish the best tax changes, but then not giving them full freedom to look at all the options.  I'm not saying the family home should or shouldn't be taxed, or that inheritance should or shouldn't be taxed.  However, if you are going to review the tax system, surely the group reviewing it should have complete freedom to look at all the alternatives and recommend the best solutions for the country.

Currently, I'm very concerned about any Working Tax Group as the outcomes will largely depend on the criteria given to them (what else will be taken off the table?) and also who is on the Working Group.


Growing the Building Workforce but Cutting Immigration

"5,000 new jobs at its peak" for the construction industry.

New Zealand's current unemployment rate is 128,000 or 4.8%, which is the lowest since 2008!  Labour also plans to reduce immigration by 20,000 to 30,000 per year.  Fourteen to twenty thousand of this immigration is work related.

With unemployment already low, and with low immigration, I'm curious where all these extra people will come from?


Overall I have tried to show the possible policies and taxes that could affect property investors if Labour gets in.  I have not written about National as their policies are already in place, and in past blogs over the years, I have written about the changes they have made.

We welcome any comments on our Facebook page about this blog - Click here to go to our Facebook page.


Kind regards
Ross Barnett 

Negative Gearing - What is it and how does it work?

29 August 2017

NEGATIVE GEARING - WHAT IS IT AND HOW DOES IT WORK?


This blog was written by David Kneebone of Lodge City Rentals (www.lodge.co.nz/Property-Management).  David has kindly allowed me to share this with you. 




 

 

 

 

 

 

 

If you're new to the world of property investment, you will likely have come across the term 'negative gearing'.  It's often in the news, controversial and sounds quite fancy.  But what does it actually mean?  Here is our introductory guide to negative gearing.

What is negative gearing?

Negative gearing is the approach of borrowing money to lose money, usually in the short-term, with a view to making it elsewhere.

In the property investment sector, negative gearing relates to the expected income earned by a property not being enough to cover the costs of owning and managing it.  However, the investor intends for this loss and will make up for it elsewhere, for example with a reduction in tax.

In concrete terms, it's like buying a rental property and renting it out for $30,000 a year, but needing to pay $35,000 a year for interest, rates and other expenses.  The owner can then get a tax deduction on the loss, which is seen as an incentive to invest in housing.

A property may be negatively geared at the start of the ownership, but as rental income increases the property can go from being negatively geared to positively geared.

How does it work?

Let's say a person earns $100,000 a year in their job, and has a rental property making a loss of $5,000 a year.  When it comes to the end of the tax year, that person is taxed on $95,000 income overall.  The loss on the rental property reduces their income by $5,000, and thus reduces their overall tax bill by $1,560.  It's perfectly legal, but controversial because, in effect, other taxpayers end up subsidising their 'poor investment'.


What are the advantages of negative gearing?

  • Ability to borrow more:  See example above.  If you're disciplined with your investments, negative gearing is one way to offset cashflow losses in the short-term.  This enables lower or middle-income earners to invest in property, which they would not be able to afford otherwise.
  • Take advantage of capital growth:  Besides tax savings, arguably the biggest benefit of negative gearing is that it can allow an investor to afford to buy a property with the potential for high capital growth.  Capital growth potential is the most common goal of property investors.  Negative gearing allows you to more easily afford some properties that will increase in value in the future.
  • Better quality investments:  Negative gearing can open up the range of properties an investor can afford to purchase, including properties where the rent would not necessarily fully cover the mortgage and expenses.  This can potentially allow an investor to invest in safe, secure areas that are likely to provide regular rent, which is a sound investment strategy, or to invest in high capital growth areas.


What are the disadvantages of negative gearing?

  • Rules can change:  Your investment strategy is based on a set of rules which can be changed.  The revocation of building depreciation is a good example and this has lessened the benefits of negative gearing significantly.  The fact that you can't control this change means negative gearing is a real risk.
  • Risk:  Borrowing money to fund a property comes with the possibility of rising interest rates and depreciation in the value of your property, which can eat away at the potential capital gains.  Many people incorrectly assume negative gearing is a fool-proof strategy to "save money" on tax.  No investment strategy can be called "fool-proof" or "safe", and significant losses are possible if the investor underestimates the amount of loss they are making on their investment.  Most people embark on negative gearing to achieve capital gain, but there are no guarantees.  Capital gains are not steady or certain, and you may end up without appreciation in value with negative cashflow.
  • Higher debt levels:  Negative gearing can help more people afford more properties, which can drive up house prices.  There are also the unforeseen costs of property ownership which have the potential to make a slightly negative property very negative.


An example of capital growth from negative gearing

Imagine you bought a $440,000 property and took out a $400,000 loan at an interest rate of 7%.  The annual interest payable on the loan is $28,000.

Now imagine you are earning $430 per week in rent, which adds up to an annual rental income of $22,360.

Based on the above example, you are paying $28,000 in interest but only earning $22,360 in rent, which means a shortfall of $5,640 per year.  That's the bad news.

The good news is the property should be going up in value and will be worth more as time goes on.  If the property went up in value by 10% in a year, it has increased its value by $44,000.

At the end of one year, you have paid out $5,640 in interest but the property has increased in value by $44,000, which means you are $38,360 richer than you were 12 months ago.


A change to the depreciation rules

In 2010, changes were made to the rules around depreciation.  Where previously property owners could take three percent of building costs as a tax loss, the change has now meant it is no longer possible to depreciate buildings, thus making negative gearing harder to achieve.  It could be said that the golden days of negative gearing are over.

However, the approach to negative gearing does bring about the discussion of good debt vs bad debt.  While negative gearing may encourage people to borrow more, it can be argued that servicing an income-producing asset is good debt in the long run.

Negative gearing could be the determining factor as to whether an investment is good debt or bad debt.  Is your property making - or not making - a return?  And can you make a previously negatively geared property cash flow positive?  If so, it could be the answer to turning an investment into a winner.


The future of negative gearing


Labour have announced a plan to phase out negative gearing over the next five years in a bid to dampen property speculation and help first-home buyers go up against property investors.

The Property Investors Federation has opposed removing that incentive, saying it could result in a shortfall in rental housing stock.

At Lodge City Rentals, we'll be keeping a close eye on these changes.  In the meantime, if you have any questions about negative gearing and how it could affect you, get in touch with the team today.


(Source:  http://blog.lodge.co.nz/negative-gearing-what-is-it-and-how-does-it-work)


I hope you have found David's blog interesting and useful.


Kind regards
Ross Barnett 

 

So what is really happening in the Hamilton Market? Have we crashed?

22 August 2017

So what is really happening in the Hamilton Market?  Have we crashed?


There is so much talk in the market about property crashing!  When I was putting together the most recent Hamilton information, I was actually expecting the Hamilton Median Sale Price to be down slightly, and for there to be a downward trend.

Well, there isn't.

The graph below shows January 2017 to July 2017 as being very flat.  The peak last year was November 2016 at $527,000, and July 2017 is slightly above at $531,600.


Graph

 

 

 

 

 

 

 

 

 

 

 

 

It is very interesting to note that January 2016 was $388,000!  So in 18 months, there has been an increase of $143,600 or 37%!  Wow!

My pick for December 2017 is that it will be very similar to December 2016 and around $525,000.  Obviously I don't have a crystal ball either, and it is always very interesting to see how close I get.  The big factor that could change this for me is the LVR rules.  I think it would be crazy to remove these.  But if removed, that would likely cause a mini boom, so therefore, would throw my prediction out the window!

Do you have a strategy for a flat market?  What will you do if interest rates go up and there in no major capital gain in the next few years?  This email address is being protected from spambots. You need JavaScript enabled to view it.  or give Mareese a call on (07) 839 2801 to make a time for me to have a quick 10 minute free telephone chat.


Kind regards
Ross Barnett 

 

 

 

Do You Need a Trust?

4 August 2017

 

DO YOU NEED A TRUST?


What Do You Want a Trust For?

Relationship Property?  A Trust isn't bullet proof and you would need to get some expert legal advice around relationship property, and most likely have a relationship property agreement too.
 
To save tax?  For most property investors, a Trust will be less tax effective, as any losses stay within the Trust and cannot offset personal income (so no tax refunds).  For business and property owners that are making a real profit after a fair owner wage, a Trust is a great entity to spread income to other beneficiaries and minimise tax.

 
The main reason is asset protection.


 

 

 

 

The first part to consider is what are you protecting your assets from?  What is your or your partner’s risk of being sued?  I look at:

  • Director risk:  If you are a director in a company (such as a finance company, for example), then you have director responsibilities and risk.  In a worst case scenario, you could be sued as a director.
  • Trustee risk:  Are you a Trustee in another person's Trust.  If so, you could be liable as Trustee.
  • Have you given personal guarantees?
  • What is your potential risk to Health and Safety?  If you are in the construction industry, this could be quite high!  And it's not just owners who can be liable.  Any employee could be held to be liable.

 
You need to consider these items and any others that might affect your risk or your chance of being liable.


 

 

 

 

If you have high risk, then a Trust would help to separate your assets from your risk.  Generally, this would mean putting your personal home in a Trust to start with.  For investment properties and businesses, you need to consider the structure carefully and there can be lots of catches or costs to restructure. 
 
Setting up a Trust is only part of the process and you need to be aware of the ongoing administration and compliance requirements:

  • New Trust laws (due to come in late 2017 or early 2018) setting higher obligations on Trustees.
  • Normally you would have an independent Trustee.  We charge $75 + GST per year for this service. 
  • For signing of documents as Trustee (e.g. Finance documents), we charge $75 + GST.
  • If we are a Trustee, we require a compulsory annual meeting, normally done by phone.  We charge $100 + GST for this phone meeting.
  • Gifting.  We charge $255 + GST.
  • Annual Financial Statements, Minutes and tax returns for the Trust.  This can vary widely depending on the work required, but is likely to cost at least $500 + GST per year.
  • Trust Minutes and discussion for major transactions.
  • Separate Trust bank account and keep Trust affairs separate to personal.

 
Setting up a Trust is done through a lawyer and normally costs $2,500 to $5,000 depending on what is included and what property needs to be transferred into the Trust. 
 
In my opinion, when should you be looking seriously at a Trust?

  • High risk as above
  • Profitable business making $50,000 or more after fair owner wages
  • Profitable rentals
  • As your overall equity builds up to $1million plus, it is worth considering Trusts as you have more to lose.

 
I haven't put these items here as a 'sales pitch', but I hope they give you a realistic idea of the ongoing costs for a Trust and that all the little things can add up! 


FREE STUFF

If you are a paying client of Coombe Smith, we have some information which we can give you for FREE:

  • A list of Five Stategies for property investing
  • A list of expenses you can claim
  • Simple Spreadsheet for rental cash flow
  • Simple Spreadsheet for trading properties
  • Trading property notes, including information on GST and zero rating
  • Rental Property Basics Seminar Video
  • Advanced Property Investors Tricks and Tips Video.

This email address is being protected from spambots. You need JavaScript enabled to view it. if you would like to request any of these.


Kind regards
Ross Barnett

Do You Have Spare Land?

27 July 2017

 

Do You Have Spare Land?

If you have an older house on a large section, or are looking to buy a new section, it is worth considering Duplexes.

I think they look a little ugly, but from a financial perspective, Duplexes should allow you to get more income from the land, thereby maximising your return.

With a shared wall, the building costs should also be less.

Click here to read a recent article from Stuff that you might be interested in.

 


Do you have another accountant and wonder if you are getting the best accounting advice?

  • Are you getting the best accounting advice?
  • Are you claiming illegal expenses?
  • Are you missing major deductions?
  • Do you need to look at restructuring?


If you have another accountant who does your rental property financial statements and tax returns, we have the perfect offer for you:

We will review your financial statements and tax returns for one entity (this can be your 2016 accounts) for $100 GST inclusive.

If we can’t find a major error, or major area to improve, then it’s FREE!

(If you have multiple entities, we would first need to see what is involved, but most likely the cost would be$100-$200).

I’ll personally be looking at your financial statements, tax returns, and overall financial position.  In lots of cases I can see opportunities to legitimately save thousands in tax.  At the end of the review you will get a letter outlining any major errors or issues that I can find, or opportunities that most likely need exploring further

Please note: This is just a Review.  Therefore it does not provide solutions on how to fix the errors or issues identified and that would have to be explored or expanded on later. 

Our aim is to show you how great we are, so that you then want us looking after your accounting and tax needs.   But there is no requirement to change to us.

Want to go ahead?  Email your last year's Financial Statements and Tax Returns to This email address is being protected from spambots. You need JavaScript enabled to view it..  We will come back with:

  • An exact price if you have more than one entity
  • The extra information we require.


Kind regards
Ross Barnett

Overseas Case Studies and Examples

21 July 2017



 

 

 

 

 

OVERSEAS CASE STUDIES AND EXAMPLES

 

Joe is from the UK and has moved to New Zealand in April 2012.   

CASE STUDY ONE:

Joe has a rental in the UK.  Does he need to return the income in New Zealand?
 
The general answer is yes.  Once Joe becomes a tax resident in NZ, then he needs to return his world wide income in NZ, and pay tax on this in NZ.  If Joe is paying tax in UK on the rental profit, he will get a credit for this in his NZ tax return.  But if Joe is paying a higher tax rate in UK, then he will still only get a credit for the NZ tax due, i.e. if paying 40% tax in UK, but only 33% in NZ, then will only get a credit for 33% in NZ.
 
4 year exemption - There are some restrictions such as no Working for Families, but in general, if you have just moved to NZ for the first time, then there is a 4 year exemption on foreign income:

  • so for the first 4 years, Joe doesn't have to return the UK rental income in NZ.
  • After the 4 years, Joe will have to return the UK rental income in NZ.

 

CASE STUDY TWO:

Joe contracts back to his old employer in the UK.  They pay him his normal salary, to his UK bank account with UK withholding tax deducted.
 
It is 2013, so still within the 4 year exemption.  Does Joe need to return this income in NZ?
 
Yes, this is still taxable in NZ.  The 4 year exemption does not cover income earned for personal services.
 
Most likely in this case, there should be no tax deducted in UK, and NZ would have the sole taxing rights.  So if you have a situation like this, it is important to get the tax right at the start, otherwise you could be double taxed!
 

CASE STUDY THREE:

If you are currently receiving a monthly pension from overseas, the pension is fully taxable in NZ (Presuming you are a NZ tax resident).
 
Say it is $10,000 that you receive each month.
 
Some tax payers have changed their monthly payments to an annual payment.  So following the example above, that would give an annual payment of  $120,000 for the year.  Then the tax payers are trying to say, its a lump sum and then taxable under the schedule/ formula method, which results in less tax being payable.
 
Unfortunately, NO.  This is still a pension and not a lump sum.  So is fully taxable!

CASE STUDY FOUR:

Joe has 200,000 pounds in an offshore bank account.  There is no way NZ IRD will find out about that.  Right?
 
With relatively new information sharing between countries, it is likely that IRD will find out!  It is likely that the overseas bank will ask for a Taxpayer Identification Number (TIN), and therefore the information will be passed onto NZ IRD.
 
NZ IRD will look for:

  • Should the initial capital have been taxed?  For example, could be taxable distribution from a Non Complying Trust.
  • Should there be ongoing income that should be taxed in NZ?

CASE STUDY FIVE:

Joe has a Trust that he established in the UK while he lived there.  Is there anything that needs to be urgently done?
 
Yes - Joe has 12 months to elect for this Trust to become a complying Trust.  Otherwise it becomes a Non Complying Trust, which has a 45% tax rate on capital gains and past year income! 
 
NZ has a settlor based tax regime, so the Tax is generally based on where the Settlor is.


CASE STUDY SIX:

Joe has lived in NZ for 10 years, and it is now 2022.
 
His parents still live in the UK, and they both passed away.  Surely the overseas inheritance is tax free?
 
 There are tax implications to consider: 

  1. Joe’s parents' Estate will be considered and taxed as a Trust in NZ.  So need to consider tax obligations of Trust in NZ.  For example, has Joe become a settlor of this Trust, and therefore Case Study 5 applies?
  2. In some countries, there is no Probate and Joe would receive the assets, and therefore the income, straight away upon the death of his parents.

CASE STUDY SEVEN:

Joe has an Australian rental property.  In the 2014 year, it makes a loss of $12,000.  What could Joe do?

  • Could opt out of 4 year transitional period, so that the loss could be included in NZ tax return.  Obviously would have to carefully consider other overseas income and assets.
  • Be careful who the money is loaned from, as may have to deduct Non Resident Withholding Tax (NRWT).  Or it could be worth applying to pay Approved Issuer Levy (AIL) instead.
  • As there is capital gains tax in Australia, it is worthwhile (and a requirement) filing annual tax returns in Australia, so that the losses carry forward.  This could offset some of the capital gain when the rental is eventually sold.
  • The $12,000 loss would need to be converted to NZ dollars.  Also, some of the expenses claimed in Australia might not be deductible in New Zealand, and commonly the depreciation needs to be reviewed and updated for NZ tax laws.
  • There could be an exchange gain or loss that is taxable!  See my previous blog.


Overall I hope this blog highlights that there are a lot of tax implications related to having assets overseas, and people who move to New Zealand need to carefully consider all of these implications!

Kind regards
Ross Barnett

Is this a great way to save Tax on Overseas Pensions?

18 July 2017

 

Is this a great way to save tax on overseas pensions?

If you are currently receiving a monthly pension from overseas, the pension is fully taxable in New Zealand (presuming you are a NZ tax resident).

Say it is $10,000 that you receive each month.

Some tax payers have changed their monthly payments to an annual payment.  So, using the above example, that would mean a total of $120,000 received for the year.  The tax payers are trying to say it's a lump sum and thus taxable under the Schedule/Formula method, which would result in less tax being payable.

Unfortunately, NO.  This is still a pension and not a lump sum.  So it is fully taxable!

Kind regards

Ross Barnett

Looking to Buy a Rental? Or convert your current personal house to a rental?

14 July 2017

Are You Looking To Buy A Rental?

What do you want from rental properties?  My idea of the perfect scenario is a debt free personal house and passive income coming in from rental properties. 
 
It appears we are around the peak of the market and for most investors, it is important to focus on cash flow or long term opportunity.
 
If you buy a standard house, at standard values through a real estate agent, it is likely to cost $5,000 or more each year, after receiving tax refunds.  If Labour get in and take away the tax benefits, this cost would increase to $9,000 or $170 per week.   Is it worth gambling on a capital gain of more than $9,000 a year over the next 1-5 years?

The only times I would buy a rental that is giving a large cash loss is:

  • If there was a 'twist' available that would change the cash flow substantially.  The best example of this is a subdividable property.  To start with, the cash flow might be negative $5,000 per year or more.  But if you subdivide and sell a section (ensure you get tax advice!), this could substantially reduce the mortgage, even after paying tax.  Or, subdivide and add another rental on the back to give more rental income.
  • If you are expecting a large inheritance or cash windfall which means you can pay off any personal house debt, and also reduce the rental debt so that it is then break even or better.
  • If you have large income and can quickly pay off any personal house debt and then quickly reduce the rental debt.
  • If it is a trading property and you are buying at a signifcant discount.  NOTE:  trading is risky and you would want to ensure there is still a good profit even if things go wrong.

Otherwise, my approach is slow and steady.

  • Can you improve rent on existing rentals?  A simple renovation can often improve the rent by $40 or more per week and give a large return on investment.
  • Can you subdivide or add minor dwellings to existing rentals?
  • Only buy rentals if either:
    • The rent covers all expenses and can pay down principal over 25 years, or
    • It is subdividable and ideally with the option of building a Duplex.  You still need to buy well and do your numbers carefully!
  • Watch and wait,  and hope the market crashes a little and that there is great buying in two to three years.

So overall, when buying a rental, I'm looking at how does this rental help me achieve my personal aims and goals.  If I buy, I want a strategy of how this rental will give me passive income.  That generally means buying extremely well, subdividing or reducing a large amount of debt.  Otherwise you are left hoping or gambling on capital gain!

 

Convert Your Current Personal House to a Rental?

When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental.  Unfortunately, this is often done for emotional reasons!

If you are thinking about doing this:

1)  Is your existing house a good rental?
Is there high tenant demand in the area?  Look at population figures for the area and talk to a local property manager.
Will you be able to attract a good tenant?
Is the property easy care and low maintenance?
Is there an opportunity to add value in the future?  For example, subdivide or add a minor dwelling.

2)  What is the cash flow?
As a starting point, I would work out the Gross Yield.  This is 50 weeks rent divided by the property value *100.  For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield.

The Gross Yield gives an indication of the cash flow:
5% or under is going to be quite negative cash flow based on 100% mortgage.
7% or better should break even or be positive cash flow.
Between 5% and 7% is still likely to be negative cash flow, but a smaller, more manageable amount.

Review the income less the full expenses.  The example below shows a $8,784 loss expected each year before tax.  After tax refunds, this drops to $4,914 per year or $94.50 per week.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3)  What happens if interest rates go up?
At 6.5% interest, the loss after tax refunds increases to $9,950 per year or $191 per week.

4)  Can you afford the cash flow losses?

5)  Do you want to gamble that the property will go up more than the cash loss?

6)  Or do you have a plan to change the cash flow?

  • Minor dwelling to increase rent
  • Subdivide long term and sell section, or build second rental on section
  • Inheritance coming that can reduce the rental debt.  NOTE:  you are likely to pay off any personal debt first.


Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

I hope you have found these two topics interesting!

Kind regards
Ross Barnett 

Hamilton Population Growth vs Building Consents Updated

13 July 2017

 

Hamilton population growth vs building consents updated

I just came across the 30/6/16 population estimate for Hamilton, Waikato and Waipa. 

 

Hamilton

The report from Stats NZ shows 4,400 population growth in Hamilton for the year ended 30/6/16.

Stats NZ shows the number of building consents in Hamilton for the same period as 1,213.

If there are 2.65 people per house (previous average), then the number of new builds should house 3,214 people.

So this means for the year ended 30/6/16, the new houses consented would be short by 448 houses (1186 / 2.65).

The year ended 30/6/15 was population growth of 3,300 vs 909 houses.  Or short by 336 houses.

The number of building consents for the year ending 30/6/17 is likely to be higher than for 30/6/16 as up to May, the consent were already 1,138.

The population growth estimates are much higher than the previous projections!

 

Waikato

The report from Stats NZ shows 1,700 population growth in Waikato district for the year ended 30/6/16.

Stats NZ shows the number of building consents in Waikato District for the same period as 780.

If there are 2.65 people per house (previous average), then the number of new builds should house 2,067 people.

So this means for the year ended 30/6/16, the new houses consented would be 138 houses (367 / 2.65) more than required.

The year ended 30/6/15 was population growth of 1,100 vs 491 houses.  Over supply of 76 houses.

 

Waipa

The report from Stats NZ shows 1,200 population growth in Waipa district for the year ended 30/6/16.

Stats NZ shows the number of building consents in Waipa District for the same period as 546.

If there are 2.65 people per house (previous average), then the number of new builds should house 1,447 people.

So this means for the year ended 30/6/16, the new houses consented would be 93 houses (247 / 2.65) more than required.

The year ended 30/6/15 was population growth of 1,000 vs 382 houses.  Over supply of 5 houses.

 

Kind regards

Ross Barnett

New Meth Levels

3 July 2017

NEW METH LEVELS

Standards New Zealand has just released the NZ standard on Testing Meth.  The new level is 1.5 micrograms per 100cm2 compared to the old level of 0.5 micrograms.  Click here to view the new standards. 

As many of you know, I own a small Meth Testing company (www.GetaMethTest.co.nz) that operates in Hamilton.  Over the 12 month period to 31/5/17, we have had 94.54% of rental properties tested show no meth on screening tests.  So only 5.46% of rentals tested required the full test to show the exact Meth levels in each room!   This was based on the old guidelines, so the new standards are likely to see even less full tests required!

So this gives some really key information:

  • You shouldn’t be afraid to get your rental tested for Meth.  From our experience with hundreds of screening tests, over 94% of rental properties are fine and will come back clean.
  • Watch how your property is tested.  If the light switches are tested for example, these are quite likely to show Meth present!  But I do not believe light switches are a true indication of the whole rental property. They are similar to money. Because they are frequently touched, they are more likely to show traces of Meth.
  • Spending more on the initial screening test, so that the samples don’t need to be obtained again later, is wasting time and money in over 94% of cases

I hope you found this useful!

Ross Barnett

Why I Don't Like Standard Companies

26 June 2017

WHY I DON'T LIKE STANDARD COMPANIES.

When trying to set up the right structure, there are a few things that are looked at:

  • Asset protection and your level of risk
  • Flexibility - what is going to change over time
  • Tax minimisation - how do we save you the maximum amount of tax
  • Long term goals and strategy
  • MOST IMPORTANT - Can we keep it simple?

Unfortunately, a lot of advisors miss another key component:  What happens if you need or want to sell?

Issues with Standard Companies - Example

Tom and Jane have a personal house worth $1 million and debt of $500k.

They have a standard company that has:

  • Block of flats worth $1.5 million and debt of $1 million (purchase price $1 million)
  • New townhouse worth $550k and debt $450k
  • New 4 bedroom house worth $750k and debt $650k (recently purchased 2016 for $650k)
  • Tom and Jane have $50k shareholders current account.

Tom and Jane decide to sell the block of flats, and net of cost receive the $1.5 million.  They pay off the $1 million debt and are left with $500,000 cash!

So what should Tom and Jane do?

They want to pay off their personal house and have it debt free.  This would be pretty normal and normally a good financial move.  So, without talking to their advisor, Tom and Jane take the money out of the company and pay off their personal house.

One year later they are getting their Financial Statements done:  Do you think there will be an issue?

Yes - there is a MAJOR issue.


Tom and Jane have taken $500,000 that they are not entitled to.  An easy argument is that $50,000 is repayment of the shareholders current account (would have been nice to have a Minute), so this leaves Tom and Jane with a $450,000 overdrawn current account.

The company has to charge interest on the overdrawn shareholders current account, say six months at 5.77% (presribed by IRD) being $13,000 approximately.  The company would then have to return this $13,000 as additional income in the year and pay $3,640 in additional tax at 28%.

Some people will be thinking that's easy, there is a $500k capital gain on the sale of the block of flats.  While the capital gain is correct, a standard company has no easy way to distribute these gains to the shareholders.  It can distribute capital gains tax free upon liquidation, but that would mean having to liquidate the company.  Liquidation would be expensive and messy as the other rentals would have to be sold, which would then mean the new 4 bedroom house would be caught by the 2 year Bright-line, and there would possibly be depreciation recovery or other costs.

There are ways to fix this issue in some circumstances, but that will incur additional costs to obtain expert advice and to make the changes.  Also, some of the fixes take time, and Tom and Jane could easily pay $30,000 or more in unnecessary tax!


I hope you have found this informative.  If you do have a standard company (not an LTC or QC) that owns rental properties, it would be worth having a free 5-10 minute chat with me, followed most likely by a one hour Initial Meeting ($329 inclusive GST) to sort out your issue and give you the best advice going forward.



Kind regards
Ross Barnett 

Nominations - Update to my News Article of 28/10/16

16 June 2016

Nominations – Update to my News Article of 28/10/16Stupid Tax Law – Be very careful with Nominations!

IRD have retracted their original approach and have confirmed no sale or disposal on a nomination.

Good news!!

Kind regards

Ross Barnett

No FBT on Work Utes?? Plus vehicle options, tips & tricks

14 June 2017

 

No FBT on work Utes?  (Applies more to trades people and businesses)

In the past, IRD generally allowed 'work related vehicles' to be fully deductible, with no FBT payable.  Having the vehicle signwritten helped as well.

IRD put out PUB00249 Exposure Draft earlier this year, which stated a 'work related vehicle' must:

  • Be signwritten, prominently and permanently
  • Not be a car
  • Not be available for employees' private use, except:
    • Travel to and from home that is necessary and a condition of their employment; or
    • Other travel that arises incidentally to the business use.

They also have a good example of 'also available for private use' on page 25.

CHANGE:  If you have a true work related vehicle, such as a ute, but it is available for private use, then FBT should still be due and payable.

The key part is it only needs to be available for private use!  It doesn't actually have to be used.

SUGGESTION:  Review if your vehicle or employees' vehicles are available for private use.  If so, look at paying full FBT, or another option is to pay FBT for the weekends.  As this is a relatively new exposure draft from IRD, we can expect IRD to focus on this a bit more over the next few years.

 

Vehicle Options

1)   FBT

If a normal company owns a vehicle that is available for private use, FBT should be payable.  This cannot be used for LTC's!

Advantage:  FBT is based on cost of vehicle.  So, for a cheap vehicle that is mainly private use, you can pay a small amount of FBT, but then legitimately be able to claim 100% of GST, fuel, oil, repairs, depreciation and any other vehicle costs.

Disadvantage:  If your vehicle is very expensive, FBT can be very expensive.  Also, if you already have very high business use, then FBT only gives a small benefit up to 100% business use.

Often we put FBT through as a journal entry with a GST adjustment.  This means that FBT is not paid separately, but your income tax is slightly higher.

If you operate a normal company, that is paying FBT, make sure you put all the vehicle expenses through the business, as they are fully claimable.

FBT rate - generally this is 49.25%.

Calculation and Example:  The benefit from a motor vehicle is deemed to be 20% of the GST inclusive value.  So, if you purchased a car in a normal company for $10,000 that is available for private use, the benefit is $2,000.  FBT at 49.25% is then $985 per year.  There is also a GST adjustment to this, and the cost of FBT is deductible as an expense for Income Tax.


2)  Public Service Mileage Rate or AA Rates

Commonly used for rental properties where a small amount of mileage is used.

Need to keep track of all kilometres and then claim the mileage rate.  Generally we use AA rates as they are higher.  Their rate for a  2.5L vehicle is  92 cents per kilometre.  The IRD Public Service Mileage rate is currently 73 cents for the 2017 income tax year.

Advantage:  Gives a high claim per kilometre.  Relatively simple and easy.

Disadvantage:  Generally can only claim maximum of 5,000 kilometres, and also need to log every trip!



3)  Claim a %

Commonly used by Trusts, Partnerships or Sole Traders.  A log book is completed for three months to establish the business use.  This % lasts for three years.

For a normal company, you can do this to a degree but can't have the vehicle owned by the company.  So you miss out on depreciation and the initial GST claim.  But still could get the % of operating costs.

The business % of the initial GST is claimed, the business % of fuel, oil, etc, is claimed for GST and income tax.  The business % is claimed off the depreciation.

Advantage:  Once three months log book is done, then no more log book for 2 years 9 months.

Disadvantage:  Not so great if business use is low, as can't use FBT.  Often have to do annual GST adjustments to correct GST claimed.

If the business owns the vehicle and it is used for business purposes, but doesn't have a log book, you can claim 25% as long as the actual percentage of use is reasonable.



Kind regards
Ross Barnett 

Labour's New Policy:Levelling the playing field for first home buyers

17 May 2017

Labour's New Policy "Levelling the playing field for first home buyers"

 

 

 

 

Labour's top priority is to "restore the dream of home ownership and ensuring housing for everyone."
http://www.labour.org.nz/levelling_the_playing_field_for_first_home_buyers

As property investors, we have to be very careful about how Labour's policies could impact on us.

The big questions is:  Will Labour get in?  The latest Colmar Brunton Poll has National at 46%, but National still requires some support from smaller parties to get a majority.  Labour is only at 30%.

If Labour do get in:

  • Wellington:  I would expect Wellington to boom as historically Labour goes spending.
     
  • "The biggest users of tax loopholes are large-scale speculators" - Labour's comments are a load of rubbish.  Large-scale speculators build a lot of houses for New Zealanders.  In the first year, often these projects will make a loss, which in the majority of cases would be carried forward to offset against the next year's profit.  This isn't abusing the rules.  It is standard business/accounting practice that the costs of business offset the revenue from business.  These large-scale speculators overall pay a lot of tax and GST to the Government!

It is possible to have a profit from a completed project and have this slightly offset by the early losses in the next project.  BUT, often these will be different entities that might not be able to offset, or the losses are likely to be quite small compared to the profits, and you can only offset for so long!  So, for example, Joe Bloggs Ltd develops five townhouses, sells them all and makes a $400,000 taxable profit in the year ending 31/3/17.  In the same year, Joe Bloggs Ltd buys empty land to do the next development.  The company buys new land for $500,000, incurring $25,000 of interest and $5,000 of rates as holding costs.  The new land for $500,000 isn't deductible and doesn't offset the $400,000 profit.  ONLY the holding costs are claimable.  So Joe Bloggs Ltd would pay tax on $400,000 less $25,000 less $5,000 = $370,000.  At 28%, tax would be $103,600.
 

  • "Losses from rental property investments will be ring-fenced."  There are quite a few parts to this:
    • How long would it take for Labour to make this happen?  Perhaps at the earliest, it could be for the year ending 31/3/19?  They will have to work through the tax law with IRD, consult, and then go through the process.  I very much doubt this would be by 31/3/18, especially with Christmas holidays.  So, if IRD really wanted to push this through, they could make it apply for the 31/3/19 year, but it is probably more likely to be for the 31/3/20 year.
    • Then phased in over five years.  So, if you had a rental making a loss of say $10,000:
      • 31/3/20 you would lose 20% of the loss, and at 33% have $660 less refund.
      • 31/3/21 you would lose 40% of the loss, and at 33% have $1,320 less refund
      • 31/3/22 you would lose 60% of the loss, and at 33% have $1,980 less refund
      • 31/3/23 you would lose 80% of the loss, and at 33% have $2,640 less refund
      • 31/3/24 you would lose 100% of the loss, and at 33% have $3,300 less refund.

SUGGESTION:  If you have a rental portfolio that is losing cash (not so worried if loss is just depreciation), then you should be having a five year plan to turn this loss into a profit or at least neutral.  Otherwise you really are just gambling on capital gains, which might or might not come.  There is no need to panic and sell in a rush!

    • Who will the ring-fencing hurt?  It will hurt the smaller investors who are making tax losses from rental investments and offsetting these against their personal income.  Most larger investors are making profits (especially if rental is their only income).   So will not be affected by ring-fencing.
    • Will ring-fencing make rents go up?  Property investors always threaten this, but my guess would be 'no'.  When building depreciation was taken away, rents didn't really go up as a result.  Rents are generally supply and demand driven - if there is a shortage of rentals, then rents go up.  So, indirectly ring-fencing may result in less property investors, therefore less rentals, which might result in rents going up.  Also, a lot of property investors are not negatively geared, so the changes won't affect them.
    • $150 million additional tax:  Ring-fencing of property losses long term is just a timing issue.  You can still claim the same losses, it just might take you a few more years to claim them.  That means for the first few years, Labour might get some additional tax.  However, as the properties start to turn positive or sell and sujbect to the Bright-line test, Labour will get less tax as the investors can use up their ring-fenced losses from earlier years.  In the ideal world, over say 20 years, Labour shouldn't get an extra cent in tax!

 

  • Labour plan to build 100,000 high quality, affordable homes over 10 years, with 50% in Auckland.
    • This would be 5,000 houses in Auckland each year.  From my  February 2017 blog, Auckland needs approximately 14,000 new houses a year but is only building 10,000.  So, if Labour could build the 5,000 extra., that would help the immediate problem and balance the books.  But what about the huge shortage that currently exists?  The 50,000 extra Auckland houses over 10 years wouldn't help with the current shortage, and in 10 years time, there is likely to still be a large shortage.  Therefore, even with the extra houses, I can't see Auckland house prices going down due to sheer demand.
    • In the last 12 months (April 2016 to March 2017), there were 30,000 new house consents.  If we take away Auckland, that would be 20,000.  If Labour is going to build 5,000 extra houses per year, that is a huge increase (20%).  This number of new houses could have a major impact on the demand by tenants (rents) and demand by buyers (house prices).
    • Outside of Auckland, this could be a real game changer!  Imagine 900 new houses in the Waikato in a year.  But it's not a one-off, it's every year for 10 years.  So 9,000 new houses.  At 2.65 people per house, that is 24,000 extra people that could be housed.  Between 2006 and 2013 Census (7 years), the Waikato population only grew by 22,815!
  • Ban foreign speculators from buying existing homes:  I'm not sure how they will differentiate between foreign speculators and foreign investors, but this is still likely to reduce the number of buyers, so could cause house prices to go down or not rise as much.
  • Bright-line test moved to five years:  I personally don't think this is a bad thing.  It just means you have to be very certain that it is a long term hold.  If the rental is sold within five years, you pay tax on the capital gain.  If you were an investor with multiple properties and you had to sell, then you would try to sell something you have had longer than five years.


The Labour Party policies are also likely to change over the next few months, and might be quite different if they are actually implemented!

Kind regards
Ross Barnett 

 

Little Loan Problem

5 May 2017

 LITTLE LOAN PROBLEM



 

 

 

 

 

At the moment we seem to be seeing more and more investors with loans in the wrong entity.  For example, the Company owns an investment property, but the loan is in the personal name.
 
In a worst case scenario, this could lead to the interest not being deductible.  In most cases, it leads to more work being required and creates a greater chance of an error or this issue being missed. 
 
With the example above, the individuals have borrowed money.  If this money is used to gain income, then the interest is deductible.  So we would normally claim the interest in the personal name, and then charge the Company the same interest.  Ideally the Company would pay the individual interest, and then the individual would pay the bank.  The Company would then be allowed the interest deduction if this money was used to buy the investment property.
 
Sound complicated?  I suggest taking this opportunity to just double check whether your loans are in the right entity.  And, if necessary, to discuss them with me and your mortgage broker to get them right.
 
Another common example can be that the borrowing is in a Trust, but the investment property is in a Company.  From my last newsletter (Can You Better Protect Yourself? - 1 May 2017),  this can also create an asset protection issue!
 
I’m excited to be doing the T42 off road marathon tomorrow, and hope you have a less painful weekend planned.

Kind regards
Ross Barnett 

Can You Better Protect Yourself?

1 May 2017

Can You Better Protect Yourself?

Case Study 1

Jo and Jack have a personal house in Mayfair St worth $1.5 million, no debt, and in JJ Trust.
 
They decide to get into property trading and development, operating through a Company.  Their banker suggests it is easiest to borrow funds in the Trust name secured over Mayfair St, so the Company buys Kent St for $400,000, plus has a $300,000 overdraft facility, all secured over Mayfair St and the Debt in the Trust.

A). The development goes horribly wrong.  The property market has crashed and there are leaky complications with the property and development.  The Company now owes $600k on a partially renovated property, plus $100k to subcontractors.  The Company decides to sell the property in a rush, to minimise potential loss.  Unfortunately it is only worth $500k.  Plus GST is owing on the sale of $65k.
 
I'm not a solvency or liquidation expert, but most likely the $65k GST debt would have first priority, so IRD would get paid first. Only $435k left now.  Then there are two unsecured creditors, the $600k the Trust has loaned, plus the $100k creditors.  But only $435k to pay $700k.  Most likely a liquidation would be forced, then liquidator fees would be taken that can easily amount to $50k.  The remaining $385k would most likely be paid out, with each unsecured creditor getting 55 cents in the dollar back.
 
So overall the Trust would get $330,000 of its $600,000 back, thus still owing the bank $270,000!
 

B). What if the Company takes out the loan, but it is secured solely over the personal, Mayfair St property?   This would most likely give the same outcome as A)
 

So what could be done to improve this?

  • If the bank took security of the trading property at Kent St.  From the sale, the bank would then get the $500,000 (presuming not mortgagee sale).  This means the Trust would only owe $100,000 to the bank, which is a $170,000 improvement on A)!
  • If the Trust had done a formal loan agreement and General Security Agreement (GSA) before the money was advanced to the Company, then the Trust would most likely have priority and get its loan back before GST or any other unsecured creditors. Again, this would mean the Trust would only owe $100,000 to the bank.

It is ESSENTIAL that you get legal advice before loaning between entities, and that you protect for the worst case.  Unfortunately, business and property development does go bad, so it is worth spending $500 to $1,000 to set it up correctly.  It is also ESSENTIAL that this is done before any money changes hands!  Sometimes the structures that banks suggest, and is easier from a finance perspective, are not in your best long term interests.


Case Study 2

Mike and Kelly have done well in life.  They have a personal home worth $1 million with $50,000 debt.  They have a rental portfolio in a company with $750,000 equity.
 
Their lawyer has recently suggested a family Trust be set up to protect their family home.  The Trust has been set up and the family home transferred into the Trust.
 
So everything is now safe and protected in the Trust?  Right?  
 
This is just a step in the process and you need to look further:

  • Should Mike and Kelly gift any amounts the Trust owe them?  In the past you could gift $27,000 per year each without paying Gift Duty.  Gift Duty has been abolished a number of years ago, so now you can gift the full amount in one go.  But, this can affect future rest home subsidies!  To have asset protection, the full amount really needs to be gifted.  If you choose not to gift the whole amount, lawyers can add some clever clauses into your loan documents to help give some protection.
     
  • Should the shares in the rental property be transferred to the Trust, and then this value gifted too?  This would provide further asset protection, but ensure you receive tax advice around any transfer of shares, as this can be complicated and there are many tax catches.
     
  • If Mike and Kelly have a current account with the Company (very likely), this could be assigned to the Trust, and then gifted.
     
  • If Mike and Kelly have life insurance policies, should these be owned by the Trust, so that any proceeds go directly to the Trust?

It is important to consider all major current and future assets.  Are there any other major assets that are worth protecting?


Case Study 3

Lisa and Jordan have a business operated through a company and a rental property business operated through a different company.  The business makes good profit.  The Rental Company breaks even, but they aim to pay down loans over the next two years.
 
Money is transferred from the Business Company to the Rental Company to pay down the loans - What is the major issue here?
 
Well, if the business goes bust, then the Rental Company would have to repay the advances. This can amount to hundreds of thousands over a long period.
 
How can it be improved?  
 
Generally it is better for the profits and therefore money, to flow down to the owner and then be advanced to the Rental Company.  These advances could be from a Trust long term, with formal loan agreements and General Security Agreements in place.  It is also important to make sure the profits have flown currently to the owner and this may require the need for dividends to move retained profits to the owner legitimately. 
 





 

 

 

 



Kind regards
Ross Barnett 

Simple Things to Remember for Year End 31 March 2017

 

 

 

 

 

 

 

 

Dear Client

With another 31st March rolling around, I thought it was a great time to remind you of the year end items you should be thinking about.
 
 
Rental and Business
Saturday is a great time to print bank and loan information from internet banking, so that you have proof of the 31/3/17 balances to give us with your accounting information.

Keep any documents, such as annual loan summaries or property manager statements.


Rental
Have you purchased a new rental in the 2017 year (1/4/16 to 31/3/17)?  If so, is it worth getting a chattels valuation done and you can check out www.valuit.co.nz, or give me a quick email or phone call.  If the property was purchased with newish chattels like carpet, dishwasher, heat pumps, curtains and stove, then most likely it will be worthwhile.  Whereas, if the property has low value or no chattels, then it won’t be worth it.  If you have done a major renovation and replaced all of the chattels, then we can use the cost price of each item and a valuation isn’t needed.
 

Business

  • More for Business but can apply to some rentals – Do you have bad debts?  This is customers who owe you money and there is no chance of recovering the debt.  If so, these should be written off as at 31/3/17.
  • Do you have stock and have you done a stocktake?  This is done at cost and excluding GST.
  • Do you have work in progress?  If so, it is great to bill as much of this as possible in March, and then we require a list of your unbilled work in progress at 31/3/17.  This is done at cost and excluding GST.
     
  • Debtors and Creditors:  Hopefully you have Xero or another system of tracking which customers owe you and what suppliers you owe.  But if you don’t, you need to keep a record of these as at 31/3/17.
  • Do you have cash on hand?  If so, we need the amount as at 31/3/17 to be included with your other financial information.


Our Annual Questionaires will change on our website from 2016 to 2017 on 1 April 2017.  You can access these here.
 
But remember, we would prefer you to wait until you have all the information before sending these into us.
 
 
Kind regards
Ross Barnett

Interest Only? Or Principal and Interest?

21 March 2017

INTEREST ONLY?  OR PRINCIPAL AND INTEREST?


This is a question that gets asked again and again in property circles, with a few different opinions.

In my opinion, the reason to own rental properties long term is to receive passive income.  Unfortunately, a lot of rentals run at a cash loss due to high interest costs.  But if the loan is slowly repaid and the interest costs slowly decreased, the rental can change to being positive cash flow and providing passive income.  This is a very safe method of becoming cash flow positive as you are not reliant on rent increases or lower interest rates.

So the main reason I go Principal and Interest (P&I) is to long term hold a debt free rental property providing passive income.

 

 

But ....... the "tax benefits"

A lot of experts and investors will argue "it's better to be on interest only, and to repay your personal home first, where there are no tax benefits".  In a very simple sense, this is true.  But:

  1. Is a tax refund really that great?  For high income property investors, you are paying $3 to the bank to get $1 back in tax benefit.  So really you are losing $2!  Wouldn't it be better to not pay the $3!
  2. How much tax are you really saving?  Based on a $500,000 rental, 36 year term and 5% interest rate, I compared P&I with Interest Only over the first five years.  In simple terms, you would be paying $2,684 per month on P&I versus $2,083 on Interest Only.  An extra $601 per month.  Over five years you have repaid $36,000 approximately, plus saved $4,400 in interest (as you are paying interest on a lower loan).  At 33% tax rate, this would have saved $1,462 in tax or $292 per year approximately over the five years.  Is it really worth it?
  3. What would happen to the money if you weren't P&I?  Most people find that money comes in, and the same money goes out.  If you increase the amount coming in, it still disappears.  If you increase the amount going out, you manage your money a little better and still survive.  So, paying Principal forces you to be a bit smarter with your money, and if you weren't doing Principal repayments, you would probably find this money just disappears on something else.

The second reason I like P&I is because it builds a buffer without relying on capital gains.  If you buy a rental for $500,000, pay P&I for five years, then you should only owe $460,000 approximately.  So, if in a worst case scenario you were forced to sell, after commission and other costs, hopefully you could repay the $460,000 loan.  Whereas, in a flat market, with interest only, the net sale proceeds might be less than the loan!

Where Interest Only can be appropriate

If you don’t have the cashflow to pay P&I , then you really have no option.  You are effectively gambling that long term the property will go up in value and be more than your loan.
 
I hope you found this useful and that it has given you something further to consider.

Kind regards
Ross Barnett 

Bright-Line - Tricky Issues and Update

6 March 2017

BRIGHT-LINE - TRICKY ISSUES AND UPDATE

 

 

 

 

 

 

 

 

Here are some important points around the Bright-Line Test that you need to be aware of:


Measuring the Bright-line Time Period:

  • Effective from 1 October 2015.  So, if Sale and Purchase Agreement dated before that, then Bright-Line doesn't apply.
  • Date of Acquisition = Normally Settlement.
  • Date of Disposal = Sale & Purchase Agreement date.

Must be residential land: There is some criteria around this:

  • Includes overseas residential land!  But should also get foreign tax credit if gain taxed overseas already.
  • Includes B&B's and AirBNB properties.

Off The Plan Sales:

  • Purchase = date of Sale & Purchase Ageement.
  • Sale =  date of Sale & Purchase Agreement.

Subdivided Land:

  • Date of Acquisition = registration of undivided land, i.e. when the whole property is purchased.
  • Date of Disposal = Sale & Purchase Agreement for sale of section.
  • NOTE:  Likely to be taxable under other tax provisions.

Leasehold to Freehold:

  • Date of Acquisition = date lease granted Gift.
  • Date of Disposal = date of registration

Compulsory Acquisition:

  • Date of Disposal = date of compulsory acquisition

Mortgagee Sale:

  • Date of Disposal = date of disposal by mortgagee.

Nominations: 

  • Nomination is disposal of land for Bright-Line rules
  • No association person relief
  • THIS IS A RISKY AREA!  For more information, click here to view my newsletter of 28/10/16.

Main Home Exclusion:

  • Can be Trust
  • Must be predominately main home, so more than 50% of time used as main home.  If vacant and renovated for more time than used as a personal house, then not main home.
  • Main Home Exclusion can only be used twice in 2 year period.
  • Doesn't apply if there is a pattern of buying and selling personal home.
  • Holiday ok if short term.  Longer time, depends on exact circumstances and as long as you don't set up another home, it should be ok.
  • Subdivide main house.  Generally section sale would also have main home exclusion but would suggest getting full advice on this to double check.


Main home looking at buying and selling for a profit:

  • If intention is to renovate and sell for profit, then taxable under other income tax sections.
  • Main home exclusion would not apply.
  • So be very careful with what your intention is and how this is documented!

Main Home intended to renovate and sell:

Gain is taxable.

Main Home, intended to live in and renovate.  But then later decide to sell:

Gain not taxable and exclusion for main home should apply (as long as no pattern of buying and selling, and still meet home exclusion provisions).


Relationship Property Transfers:

  • Generally excluded and transfers deemed to be at cost.

Inherited Property:

  • Generally excluded.

Change of Trustee:

  • If only a change of Trustee, then stays with original registration date.

Residential Land Withholding Tax (RLWT):

  • Applies from 1 July 2016.
  • Only for Offshore RLWT person who disposes of land subject to Bright-line rule.
  • Only relates to New Zealand land.
  • Obligation on conveyancer at settlement and to account to IRD.
  • If taxed under other tax provisions, but within 2 years, there will still be RLWT if vendor is an "Offshore RLWT" person.
  • There are three RLWT methods.


I hope this summary of the main points is helpful.

Kind regards
Ross Barnett 

2017 Annual Questionnaire Availability

3 March 2017

A reminder that the end of the financial year is fast approaching.  Our 2017 Annual Checklist Questionnaires will be available on our website (www.cswaikato.co.nz) from 1 April 2017. 
 
Email instructions and links to access the 2017 Questionnaires online will be sent to you during the week beginning 13 March.
 
The email is to give you the instructions and links only.  The 2017 Questionnaires will not be available to be completed until after 1.4.17.
 
If you have not received an email by 20 March, please contact us on (07) 839 2801.
 
Important note for businesses:  Don’t forget to do your stock take as at 31/3/17.


Hamilton Property Boom

24 February 2017

 

HAMILTON PROPERTY BOOM

 

The Hamilton property values have jumped over the last two years, as shown in the graph below. 

Hamilton median sale price at January 2017 is slightly above the NZ median for the first time since 1998.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prediction:  No one has a crystal ball, so my prediction is just a guess, the same as yours.  My prediction based on historic trends is the yellow line, and that Hamilton median sale price will stay pretty flat for the next 7 years.  This is similar to the last flat period from 2007 to 2014.  Obviously the prices could drop or go up, and this is just my prediction.
 
Apart from Auckland, I see the rest of New Zealand to be in a similar position to Hamilton and near the peak of the market.  Maybe some of the smaller towns delayed slightly.   From recent real estate firm's auction results, it is noticeable that a lot of houses are not selling at auction.
 
Keys from past cycles:

  • Don’t sell in a flat period, as you are likely to lose out.
  • If you buy now, make sure the figures work for you and so that you can hold it for at least 7-8 years to get through the possible flat cycle.  This is where a lot of property investors go wrong.  They jump into the property game too late and without a plan, then get sick of monthly cash losses and sick of tenants, then sell 2-3 years later for a $50,000 loss.

 There are still property opportunities out there, but I think you need to add value by buying extremely well, or subdividing, or smart renovations, so that you have some initial equity and positive cashflow.

Kind regards
Ross Barnett

Population Growth vs Number of Houses Being Built

20 February 2017

Population Growth vs Number of Houses Being Built


 

 

 

 

 

In our January 2016 Blog, we looked at these stats.  I have now updated them for the last year.

Hamilton

  • From the 2006 to 2013 census, the population grew 12,024 to 141,612.  This is an increase of approximately 1,700 per year.
  • HCC 10 year plan 2015 to 2025 "projected to grow from 153,000 in 2016 to 174,000 in 2025", or 2,100 to 2,300 approximately per year.
  • Statistics NZ show 1,179 new dwellings from January 2016 to December 2016.
  • From our January 2016 Blog, average 2.65 people per house.
  • New dwellings can house 3,124 new people in the year.

From this information, Hamilton is building more houses than it requires by around 350 houses or to accommodate 924 people.  This could be catching up a shortage.  I would, therefore, be cautious buying in Hamilton and make sure the figures really work.  It will be interesting to watch rental statistics over the next year to see if there are excess rentals!

Need 830 new houses per year  Vs  Building 1,179

Waikato

  • From the 2006 to 2013 Census, the population grew 22,815 to 403,638.  This is an increase of approximately 3,300 per year.
  • Statistics NZ showed 2.3% growth to June 2016 or 10,000 approximately per year.
  • Statistics NZ show 3,552 new dwellings from January 2016 to December 2016.  November 2014 to October 2015 was 2,756, so 796 more than around a year before.
  • From our January 2016 Blog, average 2.65 people per house.
  • New dwellings can house 11,903 new people in the year.

From this information, Waikato is building pretty much the perfect number of houses.

Need 3,585 new houses per year  Vs  Building 3,552

 

Tauranga

  • From the 2006 to 2013 Census, the population grew 10,905 to 114,789.  This is an icnrease of approximately 1,600 per year.
  • Tauranga City 10 year plan 2015 to 2025, 579 growth 2018-2023, or 1,900 approximately per year.
  • Statistics NZ show 1,695 new dwellings from January 2016 to December 2016.
  • From our January 2016 Blog, average 2.6 people per house.
  • New dwellings can house 4,407 new people in the year.

From this information, Tauranga is building more houses than it requires by around 950 houses.  I would, therefore, be very cautious buying in Tauranga and make sure the figures really work.  It will be interesting to watch rental statistics over the next year to see if there are excess rentals!

Need 732 new houses per year  Vs  Building 1,695

BOP new dwellings, 2,520 from January 2016 to December 2016.  November 2014 to October 2015 was 1,734, so 786 more than around a year before.

Auckland

  • From the 2006 to 2013 census, the population grew 110,589 to 1,415,550.  This is an increase of approximately 16,000 per year.
  • Statistics NZ showed 2.8% growth to June 2016 or 41,860 approximately per year.
  • Statistics NZ show 9,930 new dwellings from January 2016 to December 2016.  November 2014 to October 2015 was 8,935, so 995 more than around a year before.
  • From our January 2016 Blog, average 3 people per house.
  • New dwellings can house 29,790 new people in the year.

From this information, Auckland is not building enough houses to keep up with demand, and is approximately 4,000 houses short in one year!  This is similar to the stats a year ago, and Auckland seems to be getting further and further behind.

Need 13,953 new houses per year  Vs  Building 9,930


When you look at this information overall, it is concerning that Hamilton, Waikato, and Tauranga seem to be building considerably more houses than required.  This could create a large over supply and a possible 'bust'.

It appears that a lot of the lift in property prices in Hamilton, Waikato, and Tauranga is due to greed and the ripple effect, rather than being based on the true fundamentals of supply and demand.

Auckland, on the other hand, has a well-documented shortage, and over the last year the housing shortage has gotten worse by 4,000 houses.  If immigration stays high and the Auckland population continues to grow, then I still cannot see Auckland house prices crashing.  While there might be a flat period or blip, economics suggest that Auckland house prices will continue to rise.

Kind regards
Ross Barnett 

Great News for Landlords!

10 February 2017

 

GREAT NEWS FOR LANDLORDS!

This is a news article published on 9/02/17 in the Manawatu Standard:


FOXTON LANDLORD APPEALS NEW TENANCY RULES AND WINS  by Catherine Harris

The Foxton house was so badly soiled that the carpets had to be replaced.



A manawatu landlord has won what could be a precedent-setting case against his tenant who was let off a big bill for damaging his property.

David Russ of Tekoa Trust took his case to court after the Tenancy Tribunal ruled last year that his tenant, Amanda Stewart, was not liable for damage caused by her dogs urinating throughout the Foxton house she rented.

The tribunal based its decision on the landmark "Osaki" court case, in which tenants who accidentally set fire to their rental house did not have to pay for the damage.

Landlords around the country became concerned that if they had insurance, the tenant would not have to pay even in cases of carelessness.

However, the Palmerston North District Court has overturned the tribunal's decision and ordered Stewart to pay about $3790 in carpet replacement costs, court costs and lost rent.

Judge David Smith said he was "of the view" that the tribunal adjudicator was wrong for concluding the damage was unintentional.

Not only had the tenant breached a no-dog clause in her tenancy agreement, but she had continued to let them in after perhaps a couple of accidents.

Fairfax Media was unable to contact Stewart, who did not attend the case.

Russ said he was "pretty happy with the outcome.  Common sense has prevailed."  He said there was a big difference between damage based on a pot fire and damage which was allowed to happen.  "People have to be responsible for their actions."

Tenancy expert Scotney Williams of tenancy.co.nz said the appeal case would help both landlords and tenants by clarifying the meaning of unintentional damage.  "The decision being a district court decision creates binding precedent at the Tenancy Tribunal for similar cases", he said.  He said the District Court used a passage from the Brookers Summary Offence, a legal text book, to support its decision.

"Conduct will be intentional when it is deliberate, and not accidental, and [resulting damage] will be intentional if the defendant meant to cause it or {probably) knew it was going to result," the court order said regarding the reference.

Building and Construction Minister Nick Smith has proposed to change the current law so a tenant would be liable for damage of up to four weeks of rent or, if it was more, the landlord's insurance excess.

The law change is currently going through consultation.



Kind regards
Ross Barnett 

Recap of Commercial Property - major deductions missed!

Happy New Year everyone.  This is an old newsletter I wrote in 2015 which I thought I would use again, as it is very important if you own commercial property.

COMMERCIAL PROPERTY - major deductions missed!

I was shocked a few weeks ago with the level of advice given by another accounting firm recently to a commercial property investor.  Unfortunately most accountants don't specialise in property and miss some major deductions that can save thousands in tax for the investor.

In this example, a client had purchased a motel and the building alone was $1.9 million.  The accountant hadn't recommended a chattels valuation, and with no more building depreciation from 1/04/11, they had claimed $0 depreciation.  This is appalling!

  • One option is:  Under commercial rules you can actually still depreciate up to 15% of the buildings adjusted book value at 2% straight line depreciation. 
  • Or, a much better option, we became involved and recommended that Valuit complete a chattels valuation.  This has resulted in total chattels of $393,251, which will be depreciated long term.  For the first 11 months this resulted in $32,517 depreciation and saved $10,730.61 tax at 33%!  The cost was only $1,525.  The future depreciation will be $360,734 and over the next 10 years approximately, this will save a further $119,000 in tax.

While talking to the valuer, he mentioned a childcare centre he had recently valued and the depreciation was $50,000 for the first year!  If taxed at 33%, this would mean a $16,500 tax saving!

So please, if you have a commercial property or a residential rental with high value chattels, talk to me about chattels depreciation!  Or look at www.valuit.co.nz

Kind regards
Ross Barnett

Christmas Wishes and Trading Hours

We wish you a very Merry Christmas, and a safe and relaxing holiday break.

We are all looking forward to a well earned break over Christmas and New Year.  A reminder that our office will be closing for the Christmas period.

CHRISTMAS TRADING HOURS

Our Office is closing on Friday, 23 December 2016 at 12 noon.
We will reopen on Monday, 9 January 2017 at 8.00 am.



 



PROVISIONAL TAX AND GST

GST and the second provisional tax payment are due on 15 January 2017.  We will be sending out provisional tax notices before Christmas.   If you have any questions, please give Karen a call on (07) 839 2801 when our office re-opens on 9 January 2017.






 

 

 

 

 

 

 

Kind regards
Ross and the Team at Coombe Smith

You're Missing Out If You Haven't Had a Chattels Valuation Done!

2 December 2016

 

You're missing out if you haven't had a chattels valuation done!

Did you know that you can still depreciate carpet, curtains, stoves, heat pumps, dishwashers and other chattels?  From 1/04/11 there is no building depreciation, so depreciating chattels has become even more important.  For commercial property owners there are even more deductions available!
 

I've looked back at a few clients who had chattels valuations done by Valuit a few years ago:

  • Client 1:  Owned three properties for a number of years.  $79,001 total chattels depreciation claimed = approximately $26,000 tax saved.  Cost around $400 *3, so $1,200 total cost to save $26,000.  2167% return on investment.
  • Client 2: Owned one property for a number of years and recently sold.
    • $30,969 chattels depreciation claimed, saving $10,219.77 in tax.
    • Equivalent building depreciation would have been approximately $7,000, but this would have been recovered on sale, where as the chattels have actually reduced in value, so no recovery.
  • Client 3: Very simple commercial building fit out.  $52,102 chattels depreciation claimed = approximately $17,000 tax saved.

Over the last few years I've noticed a lot of property investors haven't had these done and have missed out on thousands in tax refunds.  For new purchases, you need to get a valuation done before the first tax return is filed and ideally at the start.  If you have already filed, it gets a bit trickier:

  • IRD don't like investors changing from just building to chattels split out but that doesn't mean they are right. 
  • If it has just been one year, maybe two, then it is possible to get a valuation that reflects the purchase values, then to calculate the opening book values and start depreciating.  You will have some 'black hole' depreciation but at least you get some going forward.
  • Over two years, you can swear and curse at your old advisers but that's about it.


Cost vs Benefit
 
Valuit charge $400 + disbursements +GST to complete a chattels valuation for a Single Tenancy Dwelling.

The benefit of the valuation depends a lot on the property you own.  If it is a brand new property, then there will be a large amount of chattels and it will make sense to get a valuation completed. 

But if the property is old, run down and only with a small number of low value chattels, then it probably won’t be worth getting a valuation done. 

In the middle is the grey area, where it really depends on the specific property.  If you are unsure, we suggest you either give me a ring, view Valuit’s website or talk to Valuit.

For example $10,000 of carpet:

  • If there is no chattels valuation (or separate cost), then it is included in building with no depreciation.
  • If there is a chattels valuation, then it is depreciable at 25% which is $2,500 per year.  In the first year this would give a $750 tax saving if the owner is on the 30% tax rate.  This would easily pay for itself in the first year!


Terry le Grove is the Waikato representative for Valuit.  He will let you know, at no cost to you, if it is not worthwhile doing a valuation.  So it is worth discussing this with him.  His contact details are:

Terry le Grove, Property Depreciation Specialist
Valuit
Freephone 0508 482 583
Mobile 027 296 0827
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website at www.valuit.co.nz


If you haven't depreciated your chattels,  email  This email address is being protected from spambots. You need JavaScript enabled to view it.  to see if there is something we can do for you.

  
Kind regards
Ross Barnett 

 
 
 
 

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