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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 

Update about Meth Contamination and the New Levels

25 November 2016

Here is a great update from NZ Property Investors Federation about Meth contamination and the new levels:

 

Andrew King updates members on meth contamination:

The much anticipated report on acceptable levels of meth contamination was released recently by the Ministry of Health.

The main finding of the report is that the current levels of acceptable meth contamination are to be amended. The new recommendations are that levels where meth has been manufactured will remain at 0.5 micrograms per 100cm2.

However where meth has just been used in a property, the level has been increased to 1.5 micrograms per 100cm2 if the property has carpet, or 2 micrograms per 100cm2 if the property doesn't have carpet.

This is good news for everyone. To put these levels into perspective, the current level of 0.5 micrograms per 100cm2 is the equivalent of a piece of meth the size of a grain of salt, divided by 1,000. It is microscopic and at a level that cannot effect even the most vulnerable.

Despite this, many thousands of dollars must be spent in order to get the level of meth in a property down to this level.

Meth cleaning companies have been chastised for the cost they charge. However it is extremely difficult for them to get a property below this level. In addition to the fact that many more properties will no longer being classified as contaminated, increasing the acceptable level where meth has been used should make the cleaner’s job easier.

There has been some confusion as to when these new recommendations should apply. Technically, each local authority needs to individually adopt these new recommendations, which could see different levels applying around the country.

However meth cleaning companies appear to be applying these new levels for new work they are taking on. They have encountered problems with customers who are half way through or just completed a cleanup under the previous recommendations. However the work was completed under the rules of the day and although it is understandable that these owners do not want to pay for a higher level of cleaning, it is unreasonable for these companies not to be paid for the work they have done.

The good news for these property owners is that rechecks after a property has been cleaned will likely be at the new recommended levels. This means that some will have a better chance of passing.

Standards NZ will be releasing its draft meth standard soon for public consultation.
http://www.nzpif.org.nz/news/view/58334


Kind regards
Ross Barnett 

Caution, Interest Rates and 13% Gross Yield

10 November 2016

 

CAUTION,  INTEREST RATES AND 13% GROSS YIELD

 

How do you buy a good property, in a good area, and get 13% Gross Yield?

Last night, the Waikato Property Investors meeting focused on 'maximising what you have'.  So, rather than buying a new rental with a poor return, you might be able to subdivide, build a minor dwelling, or build a duplex.  It was all about focusing on your current rentals and trying to maximise the return.


My favourite example, given by one of the speakers last night, is renovations.  The example was a renovation of a one bedroom unit for $20,000.  New kitchen, carpet, toilet, laundry tub, etc.  After the renovation the rent was increased by $50 per week, and the speaker thought it could really go up $60 per week.

So that is around $2,500 extra rent per year, or a 13% return or gross yield on the $20,000!  If you borrowed the $20,000 at current interest rates, it would cost around $900 per year, so would improve the rental's annual cash flow by approximately $1,600 per year.

The speaker also thought the $20,000 renovation would improve the value by $50,000!

So a simple renovation can give a great gross yield, improve cash flow, and create an equity gain.

 

Interest Rates

ASB recently increased their 3, 4 and 5 year rates.

BNZ just followed and increased their 3 year rate.

So while the OCR goes down, it seems the long term rates are going up.

No one has a crystal ball, and with all the uncertainty at the moment, I think we are all guessing.  One option is to spread your loans into some short term and some long term.  This means you win either way, rather than gambling on one outcome.

If you haven't already, I suggest you review your interest rate risk and strategy.

 

Caution

No one knows exactly what will happen with the property market.  Some people say it will crash.  Some say that it will go flat and yet others say that it will continue to boom. 

In my opinion, it is not a time to gamble and take a big risk.  If you are buying a new rental, I feel that you need there to be good cash flow or a large equity increase available through a twist.

With interest rates being so low, I feel that investors should be taking advantage of this and paying down debt.


Kind regards
Ross Barnett 

Stupid Tax Law - Be Very Careful With Nominations!

28 October 2016

STUPID TAX LAW - BE VERY CAREFUL WITH NOMINATIONS!

Consider this:  You buy a section off the plans for your personal home.  You put your personal name or nominee on the agreement as you need to discuss with your advisors which entity to put the section under.  You then nominate your Family Trust.  Surely there can't be any tax issues?  It's going to be your personal home too!

Well, there could be unexpected tax consequences.  If you are buying a residential property, and then nominating another entity, you need to consider the 2 year Bright-line test.

We are finding this situation is coming up quite often and we think the rules around this are a joke!

Bob signs a Sale and Purchase Agreement to buy a section for $200,000 in January 2016 to build his personal family home.

In October 2016, Bob has now established a Family Trust.  Bob nominates the Family Trust as the purchaser.  The market has jumped in value and the section is worth $300,000 at this time (October 2016).  Title is then available in January 2017, when Bob's Family Trust settles on the property.

  • IRD treat the nomination as a sale.  So for the 2 year Bright-line Test - purchased January 2016 and sold October 2016, which is within two years.
  • You might be thinking 'No worries, there is personal home exemption'.  WRONG.  This is just a section, so isn't Bob's personal home yet, so NO EXEMPTION.
  • Or, 'Surely there is something in the rules to allow for related party transfers like this'.  WRONG.  There is no allowance in the Bright-line Test for related party transfers (this is an area where you have to be particularly careful!).


SUGGESTIONS:

If you are looking at purchasing a property, ideally put the correct purchaser on the Sale and Purchase Agreement to start with.

If this isn't possible, then as soon as you are able to nominate the correct entity, get proof of the values (and keep this), and if there is no change in value, nominate the new party.

If there has been an increase in value, then you might have to wait until you can transfer the property into the correct entity without being taxed by the Bright-line Test (either after two years or once personal home test satisfied - it is worth checking this timing with an expert!).

See relevant excerpt below from IRD Tax Information Bulletin.

Kind regards
Ross Barnett


 

 



Simple Information for a Friday - 2 year Bright-line Rules

21 October 2016

Simple Information for a Friday - 2 year Bright-line Rules

 

If you are forced to sell a property, it is important to understand the five basic parts of the 2 year Bright-line rules.

1.  Only affects property purchased after 1/10/15:  Joe King signs a sale and purchase agreement to buy 241 Joke St on 15/9/15.  His intention is long term hold and he has no history of trading or association with trading.  Unfortunately, on 21/10/16 Joe is forced to sell the rental due to redundancy.

  • Even though the property has been owned for under two years, the Bright-line rules do not apply as the agreement was before 1/10/15.
  • As the property was intended as a long term hold property, other tax rules do not apply.

 

2.  Acquisition date for the Bright-line rules is the date the title is registered.

 

3.  Disposal date is the date of an agreement to dispose of the land:  Joe King signs the purchase agreement on 1/10/15 to buy a second rental, which settles on 30/10/15.  His intention is long term hold and he has no history of trading or association with trading.  Unfortunately, due to redundancy, he is forced to sell.  Two examples:

  1. Joe enters an agreement to sell on the 30/10/18, three years after purchase - Not taxable under Bright-line rules as over two years.
  2. Joe enters an agreement to sell on the 20/10/17, but settles on 20/11/17.  We look at the date title is registered (30/10/15) and date the agreement is signed 20/10/17, so this is within two years and therefore taxable under the Bright-line rules.

 

4.  Personal house exclusion.  Must be predominately used as main home, and can only use the personal home exclusion twice in two years.  So George King:

  • Buys first personal house that settles 1/11/15.  Sells 30/11/16.
  • Buys second personal house 15/11/16.  Sells 15/3/17.
  • Buys third personal house 20/2/17.

The sale of the first and second house would not be taxed by the Bright-line rules, as George gets the personal house exclusion.

If George entered into an agreement to sell the third personal house before 1/11/17, then any gain on this third personal house would be taxable.

IRD would also look at a pattern.  If George continued to buy and sell a large number of personal houses, even though he might not be taxable under the Bright-line test, IRD would look to tax under other tax rules.

 

5.  Normal tax rules apply:  If a rental property is purchased with the intention of selling for a profit, then the gains are taxable.  It doesn't matter if held for 1 month, 3 years or 30 years.  The gains will always be taxable.

 

Enjoy your weekend.

Kind regards
Ross Barnett 

 

 

Reducing Depreciation Recovery - Recap!

13 October 2016

 

Reducing Depreciation Recovery - Recap!

Quite a few property investors are thinking about selling, so I thought it was very timely to send through this article I wrote in 2013 on reducing depreciation recovery.   At the moment we have a few investors who are selling their properties to developers, and the developer are then demolishing or selling the existing building.  In this situation the building is worthless or worth a small sale value like $20,000.   So if you are selling to a developer, find out what they will be doing with the building, and then have a chat to me.  Most likely we would add a clause in the sale and purchase agreement to confirm the building value, and therefore stop any recovery!



Original Article published 23 November 2013:

Should you just accept that you will have to recover all the building depreciation you have previously claimed? ……… NO

In many cases, the building depreciation recovered is only a fraction of the total claimed and there are a number of ways to minimise it.


What is Depreciation Recovery?

In the past, property investors have been able to claim Building Depreciation.  An investor may have purchased an investment property for $350,000 of which $200,000 is land, $125,000 is building and $25,000 is chattels like carpets and curtains that have been valued by a Valuit Chattels valuation.  Most investors would have claimed 3% or 4% diminishing value depreciation on the $125,000 (or around $3,500 to $5,000) per year.  They also would have depreciated the chattels at their respective depreciation rates.  So over 5 years the investor may have claimed $20,000 of building depreciation, bringing the book value of the building down to $105,000.

In the past, the IRD has given a deduction for the reduction in value of the building.  If the building hasn’t been reducing in value, has increased in value, or has reduced at a lesser rate, then the property investor has been over-claiming building depreciation.  They have been claiming a deduction which is perfectly legal and allowable, but that isn’t really occurring in their circumstances.

When the building is sold, an investor who has been over-claiming this deduction, will then have to pay all or a part of it back again, which is depreciation recovery.

  • Depreciation Recovery generally only applies to buildings.
  • Chattels generally reduce in value at similar levels to IRD rates.  Therefore, when the investment property is sold, there is no recovery.  A chattels valuation could be obtained at date of sale to prove this.


Carrying on using the example given above, if the investment property is now sold 5 years later for $500,000.  The chattels might be worth $10,000, the building $190,000 and the land $300,000.  The building book value is only $105,000, so the $20,000 building depreciation claimed over the 5 years will be recovered and become taxable income.  From $125,000 to $190,000 is a $65,000 capital gain, which is currently non taxable in New Zealand.  In this example, the difference between the real building value $190,000 and the book value $105,000 is large, so there would be full depreciation recovery with no chance of reducing.  If the values are a lot closer, then there are a number of opportunities to reduce this.


How to reduce Building Depreciation Recovery?

1) Make sure your accountant or the person calculating the recovery knows what they are doing.  I have recently seen an example where an accountancy firm showed a recovery of $16,700 approximately when the recovered amount should have been $5,600 maximum.  This is a difference of $11,100 taxable income, or at the 33% tax rate $3,663 extra tax paid for no reason. This is a great reason to use a real ‘property accountant’, someone who specialises in and understands property.

2) A starting point to establishing the building value is normally the rates valuation.  From the rates information, work out what percentage is building and then apply this to the sale figure (less deductions!).  If this figure is over your building book value, then there will be building depreciation recovery (presuming you have claimed building depreciation in the past).

3) If the rates figure and the book value are similar, you could look at writing a clause in the contract.  The parties agree the building value is $XXXXX.

a.  Example – The building cost $125,000 and closing book value is now $105,000 so $20,000 building depreciation claimed.  The sale value is $300,000 and based on the rates valuation the building should be worth $112,500.  The parties could write a clause in the contract, “The parties agree that the building value is $105,000”.  As long as the two parties are not related, then this is the sale price.

b. You should not be too aggressive with this approach and the building value needs to be reasonable.


4) Any legal fees for the sale will be claimable under the new legal fees deduction rules.

5) Any commission or other costs incurred for the sale need to be deducted from the sale price, before the building value is calculated.

6) If you are confident the building value is close to the closing book value, then you could obtain a registered valuation to prove this.  We frequently do this for clients, as the rating valuations are not always realistic or are out of date.  Recently a client saved over $20,000 in depreciation recovery, or over $7,000 in tax at the 33% tax rate, just by obtaining two valuations for less than a cost of $500.

Overall, don’t just accept a depreciation recovery.  Think it over, ( “Has my gain come through land or building?” and “Has my building really decreased slightly in value?”), justifying any previous depreciation claims, and meaning there should be little or no depreciation recovery.

Kind regards
Ross Barnett 

 

Lessons from the Last Boom/Peak, plus Hamilton Boom

4 October 2016

 

LESSONS FROM THE LAST BOOM/PEAK, PLUS HAMILTON BOOM


I last looked at the Hamilton median sales price in November 2015.  Below is a graph that shows the huge increase over the last 18 months:
 

  • March 2015     $350,000
  • October 2015  $435,000 -  $85,000 increase or 24% in 8 months.
  • August 2016    $493,750 -  $143,750 increase or 41% in 17 months


(Click here to view full graph on Lodge Real Estate website.)

 

 

 

 

 

 

 

 

 

 

Don't get carried away with the media and the property market!

It can come down!  Buying on or near the top of the market has added risk!

  • There is no buffer if the market comes back a little.
  • Your interest costs are higher as you have paid more.


Example 1 – Built in 2007/2008
Cost $520,000
Losing $8,000 per year
Had to sell 2014
Sold $425,000
 
TOTAL LOSS = $150,000 approx!
 
 
Example 2 – Purchased new late 2008
Cost $335,000
Losing $9,000 per year
Had to sell early 2015
Sold $300,000
 
TOTAL LOSS = $98,000



I recommend being very careful if buying at the moment.  Make sure you have a clear strategy and a buffer for extra costs or if interest rates go up. 
 
I would personally only buy if the property was cash flow neutral or better, or if I had a short term strategy to turn it positive.
 
Otherwise you are gambling on prices going up – They may do, or they could go down too!



CASH FLOW IS KING!!!
 

For both of the above examples where property investors lost money, the properties were very negative and costing a lot of cash each year.

While we always hope everything goes well, if things go badly and you get sick, or lose a job, then funding negative rentals can be very hard!
 
If you are buying long term rentals at the moment, I feel you need to be buying a property that is neutral at worst, or else negative at the moment but you have a short term plan to convert this loss into a profit.  By subdividing, or adding a minor dwelling, for example, or paying down large amounts on the mortgage.


 
COMPLETE PROJECTS
 
I hear all the time, that “we can add a minor dwelling later to improve cashflow”, or “we can subdivide this long term and sell the section to improve cashflow”, or similar comments that there is a project that can be completed to improve cashflow.
 
After the last boom in late 2007, the banks changed their lending criteria and made it a lot harder for investors to borrow.  Therefore, a lot of investors who had these possible projects, could no longer get the finance to do them.  So rather than having a house, with a minor dwelling making cash each year, they were left with a negative rental that was dragging them down.
 
If you have possible projects that can improve your cashflow, I suggest you try to finish them now.


INTEREST RATES – Don’t put all your eggs in one basket!
 
No one has a crystal ball, and no one knows what will happen with interest rates.  Everyone is guessing.
 
Therefore, I generally suggest using a spreading approach and have some loans short term, some medium, and some long.  The idea is to ‘not’ have all your loans coming up for renewal at the same time, otherwise if rates change all your loans could be affected.
 
With a spreading approach to interest rates, you win whether rates go up or down!


BUYING OPPORTUNITY
 
When the market peaked in late 2007, there were quite a few buyers who had stretched themselves too far.  As property prices failed to go up over the next year or so, these buyers became more under pressure as they were putting in cash each week to top up their negative cashflow properties, but not getting the capital gains they needed.  Last boom it seemed to take 2-4 years for these buyers to get further and further in trouble, and then finally to sell when they were desperate. 
 
Therefore, there was great buying around 2009 to 2011, when there were quite a few desperate vendors in the market.
 
If you think the market will crash, or even go flat for a number of years as it did 2007 to 2014
(Rest of New Zealand excluding Auckland), then a good strategy can be to wait for 2-4 years after the boom and try to find some bargains.
 
I hope you found this useful
 
Kind regards
Ross Barnett

Are You Getting These 3 Rentals Basics Right?

9 September 2016

ARE YOU GETTING THESE 3 RENTALS BASICS RIGHT?

Many of you would have heard me talk about interest rates and strategies to reduce mortgage risk.  With interest being a property investor's major cost, this is a critical area to review and discuss.


Here is a link to a recent article in the NZ Herald that suggests interest rates could go up.  This is probably the first hint I have seen that interest rates could go the other way, as most people and experts seem to think that interest rates will still go down.  There are arguments to support interest rates going up and down, and really no one has a 'crystal ball'.  In August, the OCR went down 0.25 to 2%, but this had no effect on fixed interest rates, and there was only a tiny movement in floating rates.

My opinion:  I can't see fixed interest rates going much lower, as evidenced by the recent OCR change having no or minimal effect.

Can interest rates go up?  YES - the New Zealand housing market is booming, so our overall borrowing is going up and up.  This money needs to come from somewhere, and a lot of our New Zealand banks' borrowing is from overseas.  Therefore, if the cost of borrowing from overseas goes up, then our interest rates would rise.

OVERALL - THERE IS NO CERTAIN ANSWER AND ONLY TIME WILL TELL.

So, my approach is to spread mortgages and terms.  I like the old saying "don't put all your eggs in one basket".  An example of $920,000 borrowing might be:

  • $20,000 revolving credit that you aim to pay off over next 12 months
  • $300,000 fixed for 1 year, at around 4.25%
  • $300,000 fixed for 3 years, at around 4.3%
  • $300,000 fixed for 5 years, at around 4.8%

Under this approach, if interest rates go up, you have some long term protection for 3 and 5 years.  If interest rates go down, some of the loan comes up in 1 year so that you can take advantage of the lower rates.  Either way, you WIN!

 

NEW LANDLORD RESPONSIBILITIES

SMOKE ALARMS

From 1 July 2016, landlords are required to have working smoke alarms installed in all their residential rental homes. 
Any replacement alarms installed after 1 July 2016 need to have long life batteries and a photoelectric sensor. 
Hardwired smoke alarms are also permitted. 
Tenants will be responsible for replacing batteries in the smoke alarms and informing landlords of any defects. 
Click here  for more information.



INSULATION

Landlords are responsible for ensuring that insulation is installed in their rental homes and that it meets the Residential Tenancies Act requirements
All landlords are required to provide a statement on the tenancy agreement about the location, type and condition of insulation in the home for any new tenancy from 1 July 2016. 
Installing conductive foil insulation is now banned.  
Failure to comply with the regulations is an unlawful act and the landlord may be liable for a financial penalty of up to $4,000. 
For most rentals, they must have ceiling and under floor insulation installed up to standard by 1 July  2019.
For more information,  click here.


Kind regards
Ross Barnett

 

Could You Save 44% on Insurance and Get Better Cover?

19 August 2016

Could You Save 44% on Insurance and Get Better Cover?

Insurance costs have obviously increased a lot over the last few years and insurance cover is in the media a lot at the moment as some insurance companies only cover up to $25,000 for Meth damage or remediation.
 
Waikato Property Investors Association has recently taken on a new insurance sponsor who specialises in Rental Property Insurance, Initio.  (For more information:   https://rentalpropertyinsurancenz.co.nz/)
 
Below is a comparison between my current insurance on a rental property with NZI vs a quote from Initio.  I have tried to compare apples with apples as much as possible!
 

Big differences

  • Initio is cheaper.  $664.62 less or 44% savings!
  • Initio has a lower excess.  $250 less
  • Initio has unlimited Meth Damage
  • Initio has higher landlords contents and Public Liability cover.

 
 
Full comparison and information

Current insurance with NZI: Initio
1960's house Same house 1960's
212m2 house 212m2 house
Estimated Sum Insured $435,500 Estimated Sum Insured $435,500
Landlords Contents $10,000 Landlords Contents $20,000
Excess $750 plus extra $150 if rental, so total of $900 Excess $650
Loss of Rent $20,000 Loss of Rent $20,000
Landlords protection (which I think includes Meth $25,000) Deliberate Damage $25,000
Meth - Unlimited cover
Public Liability $1 million Public Liability $2 million
Total Cost $1,505.04 GST inclusive Total Cost $840.42 GST inclusive


Kind regards
Ross Barnett

Simple Meth Testing Information to Keep Your Rental Safe!

8 August 2016

Simple Meth Testing Information to Keep Your Rental Safe!

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. 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.

     
  2. Get a Meth screening test done for under $200. 
     
    • 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. We are finding that screening tests are about 20% positive.  So 80% will be negative with nothing else required to do.

     
  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 will 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!


I have recently set up Get A Meth Test Ltd, a small Meth Test company that specialises in helping landlords with testing.  Our team has been trained by industry leading InScience Ltd, and only does testing, not remedial work.

During August and September 2016, we are offering a special rate of $150 + GST for Meth screening tests.

  Click here or call Get A Meth Test on 027 514 0514 for more information.



Kind regards
Ross Barnett

House Prices, NZ Dollar, about to burst?

22 July 2016

 

House prices, NZ dollar, about to burst?

This is a quote from David Hisco, CEO of ANZ New Zealand, taken from an article in the NZ Herald on 20/7/16:

"In the quick snack media world we live, sadly many are making decisions based on the last headline or quote rather than research and facts. Here is a fact: property markets can and do go backwards."


I found this article very interesting, so have a look ...

http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11678081

So many people are saying the property market is risky, so it's just a matter of being careful!


Kind regards
Ross Barnett

40% deposit required for Property Investors

19 June 2016

40% deposit required for Property Investors

Wow! I'm amazed that the Reserve Bank has finally done something!

From 1/9/16 property investors will require a 40% deposit. Also the Reserve Bank wants banks to start applying this new policy straight away.

This is going to make property investing very hard for new investors, as they will either need a large cash deposit, or else great equity in their existing personal home.

Past scenario (non Auckland)

Personal house worth $600,000, say current debt of $400,000 - Bank would lend up to 80% or $480,000, so $80,000 available

Could buy an investment property for $400,000 with 100% debt - Bank would lend 80% or $320,000 plus use the $80,000 from personal house.

Total assets $1 million and total debt $800,000, so at 80% Loan to Value Ratio (LVR)

Current scenario banks are likely to adopt from today

Personal house worth $600,000, say current debt of $400,000 - Bank would lend up to 80% or $480,000, so $80,000 available

Could buy an investment property for $200,000 with 100% debt - Bank would lend 60% or $120,000 plus use the $80,000 from personal house.

Total assets $800,000 and total debt $600,000, so at 75% Loan to Value Ratio (LVR) overall

So in this example, the investors buying power would have halved!

Existing investors will also find these rules tough, even if they are in a good position!

Established long term hold investor

Number of properties worth $3 million

50% LVR being $1.5 million of debt - very good and safe LVR

Want to buy a new rental for $800,000 with 100% debt.

This would move the LVR on the rentals to 60.5%, so without a personal house being included, this probably wouldn't be possible!

Debt to Income restrictions - "Wheeler also said work was also progressing on debt-to-income restrictions"

Non bank lenders - There are still non bank lenders available who are not restricted by the Reserve Bank rules, so if you are looking at buying it might be worth talking to your mortgage broker about this option.

Ross

Holiday Homes and GST Risk

15 July 2016

 

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

New Smoke Detector Requirements For Landlords

28 June 2016

NEW SMOKE DETECTOR REQUIREMENTS FOR LANDLORDS

New smoke detector regulatory requirements come into force as from Friday, 1 July 2016 as part of the changes to the Residential Tenancy Act (RTA) aiming to reduce fire-related injuries and deaths in rental accommodation.  Here are the main points that you need to know as a landlord:

  • There must be a minimum of ONE working smoke alarm within 3 metres of each bedroom door, and in a sleep out, self-contained caravan, or similar, there must be a minimum of ONE working smoke alarm.
  • The landlord is responsible for making sure the smoke alarms are in working order at the beginning of every new tenancy.
  • The tenant is responsible for replacing batteries (if required) during their tenancy. 
  • In multi-story units there must be ONE smoke alarm on each level within the household unit.
  • Where there are NO EXISTING smoke alarms, long life photoelectric smoke alarms are now required (from 1/7/16).
  • When existing smoke alarms are replaced, they must be replaced with long life photoelectric smoke alarms (from 1/7/16).
  • Hard wired smoke alarms are also acceptable.
  • All smoke alarms must be replaced in accordance with the manufacturer's recommended replacement date stated on the alarm.
  • All new and replacement smoke alarms in rental properties are to be installed in accordance with placement requirements provided in the manufacturer's instructions.   Click here to view illustrations from New Zealand Standard 4514 provide a simple guide on where to place alarms. You can also find helpful information on the NZ Fire Service’s website.
  • When smoke alarms are installed or replaced, landlords need to ensure the alarms purchased comply with the manufacturing standard:  Australian Standard AS3786:1993; or equivalent international standard: UL217 (USA), ULCS531 (Canada), BS5446: Part 1 (United Kingdom), BS EN 14604 (United Kingdom) or ISO12239 (International). (This should be displayed prominently on the packaging.)


Note:  It is an unlawful act for tenants to cause or permit any interference with, or to render inoperative, any means of escape from fire - which includes smoke alarms.  The maximum fine for this offence is $3,000.

These regulations don't override any additional compliance requirements for smoke alarms in other legislation, e.g. multi-unit residential complexes, student accommodation, or boarding houses.

Click here to view the full information on the MBEI website.


We have secured another small supply of long life photoelectric smoke alarms through the New Zealand Property Investors Federation.


SPECIAL OFFER FOR COOMBE SMITH CLIENTS ONLY

ST-620 Thermoptek Smoke Alarms

Smoke alarms save lives.

Here is an exciting opportunity to be proactive, look after your tenants and save money at the same time.  As these smoke alarms have a 10 year life span, the savings are ongoing.

Thermoptek is a photoelectric type that also includes thermal enhancement, providing fast reaction to both slow smouldering and fast flaming fires in a single alarm. It has a large central reset button that makes it easy to reset.  They are recommended by the NZ Fire Service and the NZ Property Investors Federation. 


 
For information about installing the fire alarms, click here


 

The special price for Coombe Smith clients is $27 per unit (Cash or Eftpos) or $27.75 if purchased by Credit Card.  (Pick up required.)
These alarms retail elsewhere for $44.95! 

 
We have limited supplies, so you will need to be in quick!

Phone us on (07) 839 2801 and ask for Mareese or This email address is being protected from spambots. You need JavaScript enabled to view it..


Kind regards
Ross Barnett

IRD SCAM ALERT

22 June 2016

 

IRD SCAM

We received the following alert from IRD today:

Over the past two weeks Inland Revenue has received reports of a telephone phishing scam from several hundred customers around New Zealand.

The scam calls have been made to landlines and mobile phones, with messages being left on voicemail if the calls haven’t been answered.

The callers state that they are from the Inland Revenue Department and the following scenarios have been reported, that the customer:

  • is wanted for historic tax evasion or tax avoidance
  • has a red flag on their file
  • is in debt

and they or their lawyer must return the call as soon as possible. Some customers have been told to make a payment via Western Union within 30 minutes, or risk arrest.

They are often told to ring a Wellington number – (04) 830 2441 – and recommended to speak to a “Kenneth Matthews”, “James Matthews” or “Kevin Sousa” to arrange an immediate payment so as to avoid serious repercussions.

Customers have reported the callers as having “foreign sounding” accents, with many different accents reported. Sometimes the caller is female. The callers are very confident and convincing, and we have received anecdotal reports that some customers have been taken in and paid significant sums of money to the scammers.

Some customers have called the number referred to above and reported the background as sounding like a Contact Centre environment with multiple accents.  These customers have also reported the callers as becoming angry and aggressive when challenged.

We would like to remind all Tax Agents that Inland Revenue staff would not leave messages like these for your clients.

If your clients receive a suspicious email, SMS scam message or a fraudulent call, please email This email address is being protected from spambots. You need JavaScript enabled to view it. and include:

  • the email received, or
  • the number that the text message or phone number (CallerID) originated from (if not blocked)
  • any names and call-back numbers given by the text sender or phone caller
  • details about the scam including:
    • the amount of tax refund quoted
    • the reference number
    • the information requested, and
    • any other relevant information.

Inland Revenue sent out a media release last week warning customers about the scam and this has been reported in several local publications.


Kind regards
Ross Barnett

Do you want to buy and sell properties for profit?

17 June 2016

This is an old newsletter I wrote in August 2013 about property trading, but we are finding a lot of people are looking at trading at the moment, so I thought it might be of interest to you.


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
Principal



 

Scary Tenancy Tribunal Decisions on Meth!

1 June 2016

 

Here is some important information about Meth Testing and recent cases from a NZ Property Investors Federation website article posted 26 May 2016:


Consequences for Landlords when P is found on their properties

Two recent Tenancy Tribunal cases have increased the risk levels for landlords where P is found in their properties.

The first case involved a rental property where the owner and the property manager didn't know that the previous occupants had smoked P in the property. It was a neighbour who told the tenant that they should get the property checked for meth.

The tenants paid for an inspection and the reading came back at 0.53 micrograms per 100cm2. The Ministry of Health currently recommends that following a meth lab cleanup, levels should not exceed 0.5 micrograms per 100cm2 to be acceptable for reoccupation. To provide some context, a property used as a meth lab may have concentrations of 300 micrograms per 100cm2.

The tenant immediately gave notice and left on 5 December 2015, just three weeks after the tenancy had begun.

The landlord obtained his own test on 5 January, which showed residual levels of P considerably below the MOH guidelines. This test found that the highest concentration level was in the kitchen, and was only 0.17 micrograms per 100cm2. The other seven test areas were considerably lower than this.

There have been reports of testing companies adding up the levels found in different areas of a property, which can overstate the level of residual P in a property. It appears that the first testing company did this.

The tenant took the landlord to the Tenancy Tribunal to end the fixed term tenancy and the return of the bond plus refund of the $569.25 letting fee they paid, $199 cost for the Meth Test and $315 to remove their possessions.

The adjudicator awarded all of this to the tenant. When the lost rent is factored into this, the landlord is considerably out of pocket.

The adjudicator said that landlords had a responsibility to provide a property in a reasonably clean state. Although it was found that the property was actually well below the MOH guidelines, the adjudicator found that "a property with any level of methamphetamine" is unclean.

He ruled "That the landlord belatedly obtaining a contrary result does not relieve the landlord, in my view, from liability for the situation that rose a month earlier.Accordingly I find that the landlord is in breach for failing to provide a property that was habitable."

The adjudicator acknowledged that "the effect of this decision may be onerous on landlords in that a landlord who does not have a property tested for methamphetamine contamination prior to renting, risks financial consequences, irrespective of whether or not the landlord had cause to suspect that the property was contaminated".

This case raises many points. There clearly needs to be standards put in place for the testing of meth. Adding together all amounts of residual meth found in a property clearly overstates the level.

It appears that a tenant who wants to break a fixed term tenancy can merely smoke some P in the property to achieve their aim.

The case also places a high cost on all landlords and all rental properties if they are required to undertake independent meth tests before and after a tenancy has begun.

There also needs to be some independent and rational investigation into what is a reasonable level of P in a property below which it can be viewed as reasonably clean. The MOH guidelines state that after cleaning a property used for meth cooking, it is habitable if the level is not greater than 0.5 micrograms per 100cm2. Surely this should be the level that demonstrates that a property is reasonably clean.

The second case is even more concerning as the financial cost was high. Although the levels of residual meth were not presented, the adjudicator made a similar finding to the first case that the property was uninhabitable. However the award that was made was quite different.

The tenants had occupied the rental property from August to November 2015 and claimed all the rent they had paid over that time,$7,275 to be returned. The tenants also claimed $4,025 for disposing of possessions they claimed were contaminated and storage costs for other items amounting to $890.

The adjudicator did not award that all the rent money should be returned to the tenant, acknowledging that they did get over three months of accommodation. However he did state that it was not the accommodation they "bargained for", and ruled that $3,500 should be returned to the tenant.

The cost for disposing of some possessions was also upheld, but not the storage. So in total, the landlord was required to pay the tenant a total of $7,525.

The NZPIF will be discussing the issue of meth contamination with the Principal Tenancy Adjudicator. We are also having discussions with MBIE about how the issue of meth can be handled so that tenants are protected but the risks to landlords are also mitigated.

Standards New Zealand is looking at how meth testers and cleaners can and should be regulated and we have applied to be part of the committee devising these standards.

It may be that best practice for landlords will be to test for meth at the beginning and end of tenancies. Apart from confirming when a property was and wasn't free of any residual meth, this could persuade tenants not to smoke meth in the property.

If this is to occur then we will be advocating that self testing can be undertaken to keep costs down and will be looking at options to lower the cost of self test kits for members.

(reference http://www.nzpif.org.nz/news/view/57925)

Kind regards
Ross Barnett

Watch Out for Exchange Gains if you have loans overseas & Free Stuff

13 May 2016

 

If you have loans overseas, you need to watch out for exchange gains.  Have a read of this example:

Joe Bloggs lives in NZ, so is a NZ tax resident.
 
He owns a rental property in the UK.   The original loan 200,000 pounds.
 
The exchange rate when the rental was purchased around 10 years ago was 3 times.  So the loan in NZD was $600,000
 
Joe is eligible for Cash Basis, so only needs to account for any exchange gain or loss when the property is sold.
 
Now in 2016, Joe sells the property.  The loan is still 200,000 pounds, but now as the NZD stronger at 2 times, the loan is only $400,000 NZD.
 
So unfortunately Joe has made an exchange gain of $200,000 which is taxable!



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

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

Kind regards

Ross Barnett


Best Insurance Tip and Hamilton Market Update

6 May 2016

BEST INSURANCE TIP

Robyn Marsters, Managing Director of Quality Rental Management www.qrm.co.nz, suggested that all landlords review their 'Meth' cover in their insurance.  A lot of property managers are starting to test for 'Meth' between tenancies, and there are a lot of positive results.  It is best to review your insurance before any 'Meth' test is done to ensure you have cover against potential damage.  I also suggest you ring your Insurance Company or Broker today to ensure you are insured from this risk.


HAMILTON UPDATE

Obviously the Hamilton market is booming at the moment.  Here is some interesting information:
 

  1. From 1/2/15 to 31/1/16 there have been 3,081 new dwelling consents in the Waikato.  From a blog I did back in January, that equates to 2.65 people per dwelling on average.  So, Waikato is building enough new dwellings for just over 8,000 extra people over the last year. (http://www.stats.govt.nz/browse_for_stats/industry_sectors/Construction/BuildingConsentsIssued_HOTPJan16.aspx)
  1. The median sale price of Hamilton in March 2015 was $350,000.  A year later the Hamilton median has jumped to $472,000.  That is an increase of 35%.  The graph on the Lodge Real Estate website shows how flat the Hamilton market has been from 2008 to 2015, then with a huge spike over the last nine months. (http://www.lodge.co.nz/Residential/Residential-Property-Overview)
  1.  I have picked a few recent auction sales, and shown their last purchase date, amount, CV and recent auction sale price.
Property Last purchase date Amount CV Auction Sale Price
March/April 2016
% above CV
Flagstaff March 2014 $515,000 600,000 $645,000 7.5
Bader October 2006 $260,000 285,000 $350,000 23
Pukete December 1995 $200,000 460,000 $500,000 9
Dinsdale June 2003 $179,000 375,000 $402,000 7
Deanwell October 1993 $80,000 340,000 $372,000 9.4

 

4.  With the large growth in Hamilton, the Hamilton median sale price is still a long way behind the NZ median, when historically it has caught up.  So, as at January 2016 (the graph is completed in January each year),  the Hamilton median was below $400,000, whereas NZ was at $450,000. (http://www.cswaikato.co.nz/services-property-accountants-hamilton/useful-information-accounting-hamilton)


INDICATION / PREDICTION
This graph and trend could indicate that Hamilton will continue to catch up and experience strong growth over the next year.  This is similar to what a lot of property professionals are indicating.  Obviously there is no crystal ball and this is just reading the historical data.  It doesn’t mean or guarantee that Hamilton will continue to boom.
 
 

  1. Number of listings for sale – When I searched www.realestate.co.nz there were 510 listings in Hamilton.  Normally there is closer to 1,000 houses for sale.   So there is a shortage of properties for sale in Hamilton.  With large demand and low supply, the laws of economics suggest that house prices will rise.  Note: A lot of Hamilton real estate firms don’t list on Trademe, so it’s a great idea to look on the real estate site.  You will also note that a lot of properties are going to Auction, as the agents and vendors try to maximise the sale price.
  1. Population growth – It is very difficult to get information on the update of population growth.
  1. From my blog in January, the last Census information showed an increase in population of 3,300 per year, and an expectation of around 4,000 (1.1% growth) growth from 2014 onwards.
  2. Hamilton City Council (from a 2015 report) expect the Hamilton population to increase from 153,000 in 2015 to 174,000 in 2025.  This works out to around a 1.3% growth or close to 2,000 per year, which would be in line with the Waikato growth expectations.

 
INDICATION / PREDICTION
Looking at the new dwelling information at the top of this blog, which can house 8,000 new people, versus the growth of around 4,000 people into the Waikato, this data shows that too many new houses are being built to be sustainable.  So this would indicate a bust or slow period is coming at some point.  It is very hard to predict when.
 
 

  1. Interest rates – The OCR dropped  down to 2.25% on 10/3/16.  The next announcement is on 9/6/16.  This link is to a graph which shows how low the OCR is compared to earlier years.  If you select ‘MAX’, you can compare back to before 1986.  The Reserve Bank report in March 2016 predicts flat interest rates for the next year or two.  But, from presentations I have been to, the Reserve Bank often get it wrong!

 
RISK
If interest rates go up, what will the effect be on house buyers?  A rise in interest costs could put extreme pressure on many buyers who have stretched too far.  This could force more sales, which then leads to more supply than demand, and means house prices could quickly flatten or drop.
 
 

  1. Auckland and the media – Some of the increase in Hamilton is due to Auckland buyers and the general media constantly writing about price increases.  If the Auckland market slows or turns, this trend could quickly follow in Hamilton.  A turn in the Auckland market could also happen as a result of government, Reserve Bank or council changes.  A land tax on foreign buyers could also cause a change.

 
So it is important to keep an eye on what is happening in Auckland!


Kind regards

Ross Barnett 

XERO TIP - Great if you manage your own properties or are years behind with your accounting.

18 April 2016

xero logoXero gives an easy way of invoicing your tenant every period (eg. weekly).  It then matches the rent payments you have received and can identify any missed payments.  So, by doing the 'repeating invoice' process in Xero, which takes 5 or 10 minutes, you can easily identify that Joe Bloggs has underpaid $1,400 of rent over the 12 months 1/4/15 to 31/3/16!

Watch out for our short video demonstration over the next two weeks!

The instruction example given below is for a new Xero user, but the 'repeating invoice' feature is also great for existing Xero users who are managing their own properties.

Xero has a great 'help' feature, so it has instructions on how to do each of these points as well!

How to add a 'repeating invoice' in Xero

Go to Accounts menu, then Sales
Click on Repeating in middle screen (next to invoices)
New Repeating Invoice

So, you might be doing your 2016 financial statements.  You could sign up for Xero now.  Download the bank transactions from 1/04/15, then use the Repeating Invoice in Xero and fill in the relevant details, eg.

  • Repeat every week
  • Invoice Date, starting 1/04/15
  • Warning Box appears - Xero gives you a warning that all these invoices will be generated but not sent (great!)
  • Due on invoice date
  • Code to rent and also Track to property
  • See screenshot [Demo Company NZ] at bottom of this email.
  • Tick Approve, once happy.


Add Bank Account:
Then once done, a Green box comes up "[XXX NAME] Bank Account added.   [XXXX NAME] Get started by Manually importing your bank transactions".

Click Manually Importing your bank transactions.

You can now import your bank transactions from 1/04/15 to when Xero starts.  So this will bring in all the 2016 information!

For this, your screen should look something like this:

xero img1

Click OK if the transactions match, i.e. 1/04/15 rent invoice is obviously the 1/04/15 rent payment.



Once all done, you can then look under Reports/Accounts Receivable.  My example shows that an amount of $1,400 is still owing by Joe Bloggs.

xero img2

Next go to Accounts, Sales, and Send Statements.  Run a report for Joe Bloggs from 1/04/15 to 31/03/16.  This gives the details of the under and missed payments.  You could then chase your tenant for $1,400 if need be.

 

xero img3

I hope you find these tips helpful.

What does the new Health & Safety at Work Act 2015 mean to landlords?

Are you a landlord? Here is some information from New Zealand Property Investors Federation about your obligations under the new Health & Safety Act.

 

Tuesday, Apr 05, 2016

What does the new Health and Safety at Work Act 2015 mean to landlords?

 

The Health and Safety at Work Act 2015 (the Act) came into effect this week. It is a complicated piece of legislation as it has to apply to many different circumstances throughout the country.

The NZPIF has contacted WorkSafe New Zealand to clarify how rental property owners may be affected.

WorkSafe explained  that the new laws were primarily aimed at reducing the number of serious accidents and deaths in workplaces. Prosecutions are for serious breaches or repeated offences.

As most serious accidents happen in high risk work environments, rental property owners will only be marginally affected. However it is still extremely important to know what your requirements are as a rental owner.

As a rental property owner, you are in the business of operating a rental property. A central part of the new Act is that the Person Conducting a Business or Undertaking (known as a PCBU) will have the primary health and safety duty under the new law. As the owner of the rental property, you are the PCBU and have a primary duty of care. WorkSafe said that, "A PCBU has a duty to ensure health and safety ‘so far as is reasonably practicable’. It’s about what the PCBU can reasonably do to manage health and safety".

Some people have thought that this means you are ultimately responsible for everything that happens on the property, but this is not the case. As a PCBU you are only responsible for elements of health and safety that you have, or should have, control or influence over. This responsibility extends to yourself, your tenant, anyone you engage to work on the rental or any member of the public that may come into the property. This does not mean that you are responsible for everything that happens to tenants while they are occupying your rental property – what they do on a day-to-day basis in the comfort of the home they rent from you remains their business. Your responsibility is only in respect of the things you influence and control as the landlord/ property owner – like the building repair or maintenance work you get done. Home occupiers are exempt from the PCBU requirements of the Act, which means tenants are exempt but rental property owners are not.

Tenants being exempt from the Act as an occupier is quite important. It means that if a tenant takes it upon themselves to carry out some repairs on the property and a serious incident occurs, you as the owner will not be liable under the new Act.

Another example is employing a tradesperson to work on your rental. The company doing the trade work is also a PCBU. They share the primary duty for health and safety with you as property owner.

Usually the contractor will have more specialist skills and expertise about the job at hand than you do, and they may also be employed by another PCBU that has duties towards them as well  – so you are not expected to become an expert yourself or try and manage everything for that worker.  You just need to focus on what you influence and control, and play your part.

For example, you might need to inform a tradesperson that there is a dog on the premises and arrange with the tenant to keep the dog contained. This is to protect the tradesperson’s safety and is your responsibility.

As the rental property PCBU you also have a responsibility to ensure that the person you employ is competent and qualified to undertake the work you have employed them to do. The Act says that you need to take reasonable steps in this regard, so if you choose a tradesperson who is a member of a trade organisation or you have used them many times before, then it is reasonable to expect that they are competent and qualified. You do not need to have them sign an agreement to confirm this in writing.

The new Act doesn't mean that you’re not able to do any work on your rental properties yourself, but you still need to think about the health and safety risks involved and take action to manage these as appropriate.  There are going to be some minor or routine tasks that can be done by just about anyone taking basic precautions (such as touching up paintwork), whereas others are clearly a job for the specialists (like restricted electrical work or asbestos removal).  Trying to do everything yourself thinking you can avoid obligations under the Act would be a mistake.

Some Meth or P detection companies have been advising that rental property owners may be at risk of breaching the new Act if they do not screen for meth between tenancies. WorkSafe have told us that this is not the case unless you had a belief that the property was contaminated.

If you had a belief that P had been manufactured in your rental property then you would have an obligation to investigate this and react accordingly to protect the health and safety of anyone  who goes into the property.

So the new regulations are not as scary as you may have heard. However they do clarify that you need to consider aspects of health and safety in your rental property that are under your control.

Reference:
http://www.nzpif.org.nz/news/view/57831

Simple Things to Remember for Year End 31 March

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 

IRD recently put out PUB00260, INCOME TAX - Land Acquired for a Purpose or with an Intention of Disposal

4 March 2016

IRD recently put out PUB 00260 , INCOME TAX – LAND ACQUIRED FOR A PURPOSE OR WITH AN INTENTION OF DISPOSAL.
 
The whole document is available on the IRD website under Public consultation, or at http://www.ird.govt.nz/public-consultation/
 
Example 5 is quite interesting and worth a read if you are a long term hold investor.  The key part is to be very specific with your intention and not to have a set sale time!
 
Example 5 – More than one purpose or intention
54. Chris purchased a property in August 2012. The property was marketed as being an attractive investment – ideal as a rental property, and expected to have “great annual capital growth”. Chris decided to buy the property to rent it out for three to five years, by which stage he hoped to be able to realise a capital gain on the property. Chris has paid tax on the rental income. He sold the property in October 2015 for a sizeable profit.

55. The 2-year “bright-line” rule does not apply to the sale of the property, because it was acquired before 1 October 2015. Even if the property had been acquired on or after 1 October 2015, the 2-year “bright-line” rule would not apply because the property was not sold within two years of being acquired. Therefore, in those circumstances it would still be necessary to consider s CB 6.

56. An amount that a person derives on the disposal of land will be income under s CB 6 if they acquired the land for a purpose or with an intention of disposing of it. A purpose or intention of disposing of the land does not need to be the only purpose or intention the person had when they acquired the land. It also does not need to be their dominant or main purpose or intention. It is enough if disposal is one of their purposes or intentions.

57. Chris was attracted to invest in the property in question because it was expected to have great annual capital growth, and could be rented out in the meantime. He purchased the property with the purpose of renting it out in the short-medium term and then selling it to realise the expected capital gain.

58. It does not matter that Chris acquired the property for more than one purpose, and disposal was only one of those purposes. When he acquired the property, Chris had a firm purpose of disposing of it in three to five years to hopefully make a capital gain.

59. Neither the residential exclusion (s CB 16) nor the business exclusion (s CB 19) apply in respect of the property, because Chris did not live in it or carry on a business from it.

60. The proceeds on the sale of the property are therefore income to Chris under s CB 6.

61. It is not relevant that the rental income was subject to tax – the Act taxes rental income as well as the proceeds on the sale of the property.

62. Chris can get a deduction against the sale proceeds for the amount he paid to acquire the property and for any capital improvements he made to the property. In each year he owned the property he will also have been allowed to deduct the interest on the money he borrowed to purchase the property, the cost of insurance on the property, and the cost of any repairs and maintenance on the property that were not capital in nature.
  
Kind regards
Ross Barnett
Branch Manager
Coombe Smith Chartered Accountants
Hamilton Branch
 
Normal Office Hours: Monday - Friday, 8am - 4pm

Phone: (07) 839 2801
Fax: (07) 839 2802 
Level 1, 851 Victoria St,
PO Box 9317, Hamilton 3240
www.cswaikato.co.nz

 
This may be a 'Tax Advice Document' subject to non-disclosure rights under the Tax Administration Act 1994. You should not disclose the contents to any party without first obtaining professional advice. Disclosure may void the non-disclosure right. This electronic mail message together with any attachments is confidential. If you are not the intended recipient please email us immediately and destroy the email. You may not copy, disclose or use the contents in any way. The contents and attachments, may contain views or opinions that are those of the sender and not necessarily the views or opinions of Coombe Smith Hamilton LP. Coombe Smith Hamilton LP accepts no responsibility for changes made to this e-mail or to any attachments after transmission from Coombe Smith Hamilton LP. Thank you.
 

How to Have More Luck With Your Property Investing

26 February 2016

This article was written last year by Graeme Fowler, well-known property guru.  Graeme has kindly allowed me to share it with you.

How To Have More Luck With Your Property Investing

People will often say to me, you were lucky that you got in at a good time when you started your investing, you couldn't do that now.  Or, it was lucky you found some good agents to help you find properties when you started, there's too much competition from other investors now.

Roger Hamilton uses a word analogy with the work "Luck", mostly with operating a business and comparing it to a game of soccer (football).
I've used it below in a similar way to show you how it works if you are a property investor and want to become luckier!

LOCATION
In the game of football, you may think someone like Christian Ronaldo or Lionel Messi is lucky in the way the ball is passed to them, and all they have to do is kick it past the goal keeper to get a goal.  And they get paid millions of dollars each year to do that.  You might think, well I could kick the ball past them too, it looks so easy - why not me?

The first letter stands for location which means being in the right place at the right time.

The same applies in real estate:  Where are you located when all the deals are happening?  Are you out working in a job or a business, or are you doing work around your properties because you think you're saving money?

So location is very important.  You need to be in a location and available to act quickly when you need to.



UNDERSTANDING
With football, the players must understand why they are there.  What is their purpose, or intention for being in the right location?  They need to understand that their purpose is to get as many goals as they can.

In real estate, you also need to have an understanding of what you want to achieve.  What are your financial goals, what plan are you following, and what are your rules for investment?  You need to have a good understanding of what you are doing, and why you are doing it.



CONNECTIONS
You can be standing in the right place and also understand why you are there in the game of soccer, but you might turn around and nobody is there, or wonder why nobody is passing you the ball.  That is where connections are very important.  You need to have a good team of people around you that will pass you the ball so that you can score the goals.

You must have good connections in real estate investing too, a good team of people you can rely on in many areas.  These people will let you know about the potential deals, whether it's real estate sales people or other investors passing you deals.  You may also have various trades-people available to do maintenance on your properties that needs doing from time to time.  This would include plumbers, builders, painters, electricians, carpet/lino layers, etc.  If you don't manage your own properties, you will need to have good property managers to find you tenants, do inspections, and make sure the rent gets paid on time.  You will also have people to handle the legal side of things for you when buying and selling properties, also an accountant to do your accounts at the end of each financial year.

All of these are very important people who you will form part of your team, or your connections.


KNOWLEDGE
This is where you must know the rules of the game. In soccer, you must know what you can and can’t do to stay on the field of play. You must have an in-depth knowledge of the game itself.

In real estate, you must also have knowledge in many areas.

Firstly, the city you are investing in. What streets should you avoid buying in, are there any suburbs you should stay away from?
You’ll also need to know what the market-value of properties are in your area, properties that are similar to ones you want to buy. If you don’t have an in-depth knowledge of the market, how will you know if you are getting a good deal or not?

Do you know how to negotiate well as a buyer and a seller?

How do you structure your offers when buying property, what do you do if you are bidding at an auction?

There are other things you should be knowledgeable about as well, things like what are your banks’ lending criteria, what yield do you need from your rental properties when buying, what are the current bank interest rates for borrowing, keeping good records for your accountant, what it will cost if you need to do maintenance or renovations on a property when buying, all sorts of things you will need to have good knowledge of.


YOU
You may have all of the above and yet still not succeed. In the game of football, if nobody on your team likes or respects you, they may not even want you to score any goals, so will keep the ball to themself.

You will need to be a good team player and know that most of the time - you need them more than they need you.
Investing in real estate can be the same, how do other people see you?
Do you have a good reputation in the eyes of these people?
Why should they do business with you?

Your reputation and integrity are very important and can be the make or break of your success.
When you say you’re going to do something, do you do it? Or do you have a reason or excuse why you didn’t follow through? Some people think - saying you’re going to do something, then not doing it, plus a good excuse - is the same as actually doing it.

You need to be able to relate to others, and they relate to you.
Are you approachable when people ask something of you, or do you not have any time for anybody apart from yourself?

Do you get easily distracted from your goals or your plan?
Can you stick within your rules for investing, or break them because things seem boring to you?
Will you keep going when the going gets tough and it would be so much easier to quit?

Do you have good money management skills?
Can you oversee your entire operation to make sure everything is operating and performing as it should be?
Think of yourself as a stock on the share-market.
Would other people invest in you if you were a stock they could buy?
Would they see value in you, and see the long term prospects?
Or would they want to buy now and then sell again in a short space of time because they see too much long term risk in you?

All of these are important things to look at for yourself.

If you look at each of these:

Location’,
Understanding’,
Connections’,
Knowledge’ and
You’,

the ‘You’ is the most important, and brings it all together.

You could be perfect in all other areas and get this wrong – and it could cost you everything you’ve worked for.
So it’s important to make sure you’re someone that people want to do business with and can relate to.

If you take a look at each of these five things in detail, then rate yourself honestly from 1 to 10 for each.  You may give yourself a low rating in some and a high rating in others. By doing this, you will immediately see what you need to do in order to improve your own rating in each area.

When you can honestly say to yourself that you are 9 or above in each of the L.U.C.K.Y. areas, then you will find that you do indeed become luckier in the eyes of not only others, but yourself as well.

However luck really had nothing to do with it at all :)
Graeme Fowler



I hope you enjoyed the article.  There are some great tips in there to consider when investing that will help you to be successful.

Kind regards
Ross Barnett



 
 
 
 

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