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 

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

16 June 2016

Nominations – Update to my News Article of 28/10/16:  Stupid 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

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