Johnston Associates Chartered Accountants

Masterminding Brighter Tomorrows

Tax

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Ring-fencing of residential rental losses

Draft legislation has been introduced to restrict the way losses from residential investment properties can be used for tax purposes. It is possible the draft legislation will change as it works its way through the Parliamentary process, but its objective will remain.

That objective is to prevent rental losses being offset against other types of income to reduce the investor’s overall tax payable. The changes will take effect from the start of the 2020 income year – ie 1 April 2019 for most taxpayers.

We will be watching the progress of this draft legislation with interest. We expect the resulting law changes will have substantial implications for investors whose rental activities continue to generate losses, or whose future intentions – for example, changed debt or financing arrangements, acquisition of additional properties or planned repairs and maintenance expenditures – may result in negative rental returns in any given year. In a worst-case scenario the proposals have the potential to prevent residential rental losses from ever being used.

There are essentially three things an investor should do before these rules come into force on 1st April 2019:

Firstly, review the maintenance requirements on your buildings. If you are budgeting for repair work in the future that would be costly enough to create a loss in your portfolio, it may be sensible to consider undertaking this work in what remains of the 2019 tax year. You have only four months left to generate deductions that won’t be subject to ring fencing.

Secondly, if you are an investor with other business interests, consider booking a consultation to discuss the possibility of moving debts in your property entities to trading businesses. For example, you may have a trading company where you can refinance a shareholder loan account or you may have imputed retained earnings that have been reinvested in the business to date. Money could be borrowed in the business and used to pay out a dividend from retained earnings to shareholders who in turn use these funds to reduce debts in the property portfolio. The resulting interest costs in the business are deductible without being ring fenced and the property portfolio’s position is improved.

Thirdly, If you do have a loss making residential property portfolio, consider booking an appointment to examine the opportunity cost of retaining low yielding properties. If a property can be sold where more interest is saved through debt reduction than the lost rental income from the property the overall portfolio becomes more profitable, and now, more tax effective.

If you would like to know more about how these changes might affect you personally, please contact us for further information.

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The Fringe Issue

Given the importance of keeping your PAYE and GST record-keeping and payments in order, it might be tempting to think that Fringe Benefit Tax, or FBT, is a relatively minor thing. But don’t be fooled. In 2017, Inland Revenue created a dedicated audit team to focus on this issue.

One of the team’s aims is to ensure employers have the right business structures and documentation in place. And it turns out that many don’t.

If this sounds like you, now’s a good time to put things right. Regardless of whether you’re acting correctly or not around FBT, a lack of proper records leaves you in a weak position and liable to negotiated settlements (that is, having to pay more than you expected) or, worse, serious penalties.

Most FBT revolves around company vehicles, so let’s look at what IRD expect from you if you provide one to any of your staff:

• The employee’s job description and employment contract
• The company policy on motor vehicles
• Any private use restriction letter in place, signed by the Directors and the employee
• Documentation that shows regular checks on the vehicle to ensure it’s not being used for private matters
• The employee’s performance review notes confirming they’re sticking to company policies.

FBT…so, what can you do?

For an SME owner, that’s quite a daunting list, and a good reason to talk to your accountant. An expert, independent set of eyes will help you determine what you need to do in all cases, what you don’t need to do, and also how to go about doing it (including creating proper documentation).

The value of expert advice is heightened by some of the finer points of FBT legislation. For example, did you know that if an employee takes a vehicle home one evening and returns to work with it the next morning, the laws says it’s been available for private use on two days?

Did you know that IRD expects you to check that employees are adhering to restricted use policies at least once every quarter?

Did you know that just because a vehicle has your company logo on it, that doesn’t automatically make it a work-related vehicle, which then means it doesn’t automatically become exempt from the usual requirements of FBT?

Did you know there is also a new option for some companies that have one or two vehicles to elect to use the motor vehicle expenditure rules rather than pay FBT in certain circumstances?

If you didn’t know all those things, take a bow – you’re in great company! FBT is complex, to say the least.

The good news is that IRD also recognises this and will work closely with you to help you comply. The best approach is to get professional advice (that’s us) and, where appropriate, go to IRD for a written opinion on any matters that aren’t crystal clear. That way, even if IRD disagrees with your FBT return, they’ll see that you’ve taken reasonable care to get things right and may not impose penalties.

So, when are you liable for FBT?

Any time you provide non-cash benefits to your staff – which means the list is potentially endless. In practice, however, most non-cash benefits fall into one of these categories:

• Insurance premiums
• Motor vehicles
• Subsidised transport
• Staff vouchers
• Offsite carparks

Contact us today with any question you have regarding FBT – we’ll be very happy to help.

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New Director of Tax further strengthens Johnston Associates South

Leading Accounting and Business Advisory firm Johnston Associates South is pleased to announce the appointment of Mark Davies as our Director of Tax, firmly positioning the firm as the region’s leading tax advisers.

Mark brings over 28 years specialist tax experience to our team, starting his career with IRD before moving into roles as a tax specialist for Big Four and regional firms. His experience is broad, covering numerous areas but more recently Mark has focussed on advising family businesses of all shapes and sizes, taxation of migrants and new residents, primary industries, and managing IRD disputes.

“I’m excited to join the Johnston Associates South team and focus on delivering high-quality tax solutions to clients, and extending our service availability to all of our region’s businesses. We believe the tax team we have created is able to provide a level of genuinely local expertise and service not available elsewhere in our region – that’s really exciting in terms of the benefits we can provide to our clients. Combined with Johnston Associates South’s proven expertise around accounting and business development we are in a very strong position for the future”.

Mark joins Katrina Scorrar and Kelvin Scoble on the Johnston Associates South tax team.

Johnston Associates South celebrates its 10th anniversary this year and is proud to be the fastest growing accountancy and business advisory firm in the Top of the South with offices in Nelson, Blenheim and Havelock.

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Provisional tax changes explained

We are fielding a few queries about the provisional tax changes that apply from the 2018 tax year onwards.
Below is a summary of the new rules for taxpayers who use the standard method to calculate their payments.

Smaller taxpayers (including companies and trusts)

Inland Revenue (IRD) has changed what it calls the ‘safe harbour’ provision.

If:

  • Your actual income tax liability for the year is less than $60,000; and
  • You paid the tax amount required as per the standard method at your three provisional tax dates.

Then:

  • You will not be charged IRD interest if you did not pay enough provisional tax, provided you pay the final balance by your terminal tax date.

The safe harbour threshold was previously $50,000 and applied to individuals only.

Medium and larger taxpayers

The second change affects medium and larger taxpayers.

If:

  • Your actual income tax liability is $60,000 or more; and
  • You paid provisional tax for that year based on the standard method.

Then:

  • You won’t be charged IRD interest if you paid the amounts of tax due as per the standard method at your first and second instalments, even if your actual liability is higher.
  • The final balance will be due at your third provisional tax date. IRD interest applies on any underpayment or overpayment of tax from the third provisional tax date.

Capping the liability at the first and second instalments provides certainty, particularly if your income is volatile or seasonal.

Having the final balance due at the third provisional tax instalment is sensible because you should have a good estimation of your actual liability by then.

For more information please contact our tax experts.

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End Of Tax Year Checklist

The end of the tax year is on 31 March 2018. Here are a number of ways you can straighten things up in advance:

Think about. …Deductions

Bad Debts
Write bad debts off in your debtor ledger before balance date so you can claim a deduction. Make sure your records show you have taken reasonable steps to recover the debt prior to write-off. Note the details so we can check the GST adjustments.

Employee Expenses
You can claim deductions for holiday pay, bonuses, redundancy payments, long service leave etc., if you commit to them before year end and pay them within 63 days of balance date. Check holiday pay has been calculated correctly.

Expenses
Can you pre-pay expenses such as stationery, postage and courier charges before 31 March? You may be able to claim for them. Check with us. There are limits to how far some prepaid expenses are claimable, such as on rent, insurance, plant and equipment maintenance contracts, travel and accommodation.

Fixed Assets
Are you still using all of them? Can some be written off?

Repairs/Maintenance
Complete planned maintenance or repairs before year end for a tax deduction. Ask us if you aren’t sure whether the expenditure is classified as repairs and maintenance (which would be deductible) or as a capital expense (which wouldn’t).

Stocktake
Dispose of obsolete stock by year end or write it down to its net realisable value (the lesser of cost or market value). If your stock is worth less than $10,000 and turnover for the year less than $1.3m, you won’t need to include your stock movement for tax purposes.

Vehicles
Don’t forget to note your odometer reading at year end. If you keep logbooks noting business and personal use, mileage and costs, ensure these are all in order.

Think about.…Income

Credit Notes
Look for credit notes issued to customers after balance date but related to sales made prior to balance date. Note these so you can reduce your taxable income for the current year.

Increased Income
Is this year’s income a lot higher than last year’s? If so let us know. It might be a good idea to consider making a voluntary provisional tax payment.

Losses
Did your group of companies have losses in 2017? Groups of companies may offset profits and losses against each other if you make loss offset elections and subvention payments by 31 March. We can help you with this.

Retentions
Check contracts for the terms on retentions owing. Have you invoiced retentions but they are not payable until work is complete in a subsequent tax year? They won’t count as assessable income for this year. However, If they are payable this year they are assessable income. Note retentions you have invoiced which are not receivable until the next tax year.

If you have any questions or concerns regarding your end of tax year preparation then don’t hesitate to contact us – we are here to help.

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Several ways taxpayers can get caught out

Taxpayers who earn income from various sources may get caught short if they don’t plan ahead. This could come about in various ways:

• Airbnb
• Overseas investment
• Shares in an overseas company

AIRBNB INCOME

If you rent rooms or homes through Airbnb, you may not realise that the IRD considers you to be a landlord. Your rental income must be included in a tax return.

If you’re unsure of your tax obligations please consider speaking to one of our tax experts.

OVERSEAS RENTAL PROPERTY

You must declare any rental income you get from properties overseas. You can claim deductions for rental-related expenses, and you may also be able to claim a credit for tax paid in the other country on that income.

Complexities can arise when loans and mortgages are held overseas. Call us if this applies to you.

OVERSEAS TRUSTS

Under New Zealand law, trust matters are settlor-based. This means New Zealand tax treatment of the trust depends on where the settlor of the trust lives. As a trust does not have a legal personality, there is no concept of residency for trusts. However, a trust is recognised as a taxpayer, so New Zealand generally verifies the residency of the trustee to determine which income of the trust is subject to New Zealand tax.

IF YOU OWN SHARES IN A FOREIGN COMPANY

You will have to pay tax in New Zealand on foreign share dividends unless:
• You are a transitional resident, or
• The shares are subject to the foreign investment fund or controlled foreign company rules.

Dividends paid by overseas companies to transitional residents or non-New Zealand tax residents are not taxable in New Zealand for the transitional period.

The rules surrounding Foreign Investment Funds and Controlled Foreign Companies are complex and you should get professional advice on the taxation of offshore investments, whether from us or your financial advisor.

OVERSEAS-ISSUED CREDIT/DEBIT CARD

Having an offshore credit or debit card may or may not trigger New Zealand tax obligations. Note, though, that even if foreign withholding tax has been deducted on foreign income, that does not necessarily mean the income is no longer taxable in New Zealand.

It can be tricky to work out your tax position. Call us if you’re not sure, we’re here to help.