Government’s tightening up on property tax

What we are seeing as a result

Property TaxThe media has certainly highlighted issues concerning housing in a wider context for the past while. With the pressures on our housing market in New Zealand in general (the lack of, affordability, overseas investment), the Government has introduced measures to try to reduce property speculation, which they foresee will reduce house prices in general.

What are these measures and how do they affect me? Bright-line test

The bright-line test was introduced on October 1, 2015 so is only in its infancy. Generally speaking (summarised here only) if you buy a house and sell it within two years from October 1, 2015 and it’s not the family home you will be taxed on any gains. Any losses are ‘quarantined’ and aren’t offset against your other income (but they can be used against any current and future bright-line gains).

Can you sell a property after two years without getting taxed?

There is no definitive answer to this question. Property, GST and income tax on property are probably the most complex issues we strike as Chartered Accountants.

Property taxation is often overlooked by people and largely comes down to your intention at the time of purchase. Typically intention at time of purchase is to rent out a property for a long period of time. Tainting: Some tax payers are already considered ‘tainted’ by IRD as due to prior activities they are considered to be a developer or property trader at the time of purchase, so can never get that elusive tax free capital gain that drives a lot of our behaviour.

Urgent IRD numbers

Any property sale now must be transacted between two IRD numbers and registered with LINZ (Land Information New Zealand). If there is no IRD number the sale will not proceed. Lawyers and real estate agents are pretty well informed now, but we are still getting a number of requests for IRD numbers a day or two out from settlement causing some unnecessary last minute dramas.

The future?

We suspect with IRD numbers now being recorded for each transaction, IRD activity will only increase. IRD may write to you, asking for an explanation if you sell a property within two years and a few months. However, time will tell on this as it’s early days. As with any law, there are subtleties that can be applied to various scenarios, so as always, consult your professional team for more specific advice.

Ben Blackler and Blair Smith are very familiar with various ownership structures relating to property and can advise you on the tax implications and how the law will be applied to your specific situation. Call to discuss on 04 555 9090 or email info@bsco.co.nz.

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Inland Revenue – What we’re seeing 2016

  • The introduction of the Bright-line test means if you buy and sell a residential house within two years from 1 October 2015 you probably have to pay income tax on any profit (limited exemptions apply). The IRD now takes a hard line and identifies properties sold within 2 years and asks for details surrounding the transaction. They even have a special form (IR833).
  • Anyone purchasing or selling a house in New Zealand now has to have a NZ bank account and IRD number, and non-residents must provide their tax identification number. This is due in part to NZ anti-money laundering legislation.
  • Last minute panic for IRD numbers – everyone now needs an IRD number to buy or sell a house, but many family trusts that own homes don’t have an IRD number. This can cause last minute panic or delayed settlement as IRD numbers can take up to a week to process.
  •  IRD now have greater knowledge sharing with other organisations such as LINZ and overseas tax identification and pension organisations to identify non-compliance of tax laws.
  • The Budget has provided $29 million of extra funding specifically to assist with ensuring compliance around
    property tax.

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IRD – What we’re seeing

Where’s My Refund? Read on to hear about some of our recent interactions with IRD about your refunds and other things.

• IRD’s ‘standard processing time’ for tax returns is officially up to ten weeks. Before this they do not need to take any actions requested by us. A promptly issued refund one year unfortunately doesn’t guarantee the same the next year.

• We recently had a refund cheque issued on plain, unmarked A4 paper. When questioned, IRD insisted the ‘cheque’ could be banked. Predictably the bank rejected it. We returned the cheque to IRD for a replacement, who then lost it.

Tax refunds are routinely put ‘under review’ without advising us. When we call IRD to follow up we are told that a ‘referral’ needs to be made to get the refund out of review with the referral itself taking 10-15 days!

• An application relating to tax arrears was submitted with very detailed information. The application went ignored and we followed up. IRD then said that the information supplied was out of date, and requested a full update of the supporting information at unnecessary time and cost.

• Where once we were able to have simple issues resolved over the telephone, we are usually told to make a request in writing, which involves extra effort.

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Before signing a lease – What to look for

If you are in business, or are about to go into business, you could be involved in taking on a lease. However, a hasty sign-up could endanger your future financial security.

Negotiating the right lease can be a significant step in your business. Signing up for rent of $1000 per week is a commitment in itself, but over a six year term it’s even more significant, totalling $312,000. If you have personally guaranteed the lease it’s a huge exposure. If your  business failed, the lease commitment could send you personally broke or you could even lose your home.

Be sure you will be able to afford the total commitment before you sign and try to avoid letting your spouse or partner sign a personal guarantee as well. If a guarantee is required and you can’t negotiate your way around it then limit it to say three, or six months’ rent.

Understanding what your lease covers is critical. Look for and work through the following:
• The term of the lease – is it for one, three, six or nine years?
• Does it have a Right of Renewal and if so when, and for how long?
• When are the rent reviews due and is there a formula around this – is it CPI (Consumer Price Index), or a market adjustment?
• What is the procedure for exercising your renewal of the lease or for negotiating the rent increase?
• Is the lease assignable – can you sell your business and pass the lease with it?
• Is it a gross or net lease – who pays the outgoings?
• Does the lease state whom has responsibility for exterior maintenance?
• Who pays for the insurance? Is it an indemnity or replacement arrangement?
• Whose responsibility is it for common areas and ground maintenance?
• Does the lease have an arbitration clause to resolve disputes?

Your investment in leasehold improvements
On a termination of the lease, the landlord may retain your fit-out, or they might invoke a make-good clause meaning the cost may be on you to remove, redecorate and return the space to its condition when you took over. This can be very onerous and can create a significant expense when you thought you were in the clear.

Tax implications of lease inducements/incentives
Often there are significant offerings made to entice a sign-up – make sure you have your chartered accountant check for any tax implications to ensure there are no surprises.

Lease suitability and your landlord
Have you considered all aspects of a particular site in terms of zoning, council planning, parking, accessibility, your competitors and neighbours? Developing a good relationship with your landlord could make resolving any issues easier.

Do your homework
There are many issues which could impact on your business, your life and your family. Don’t make the mistake of not taking sound professional advice. Consult your chartered accountant and lawyer before you commit to any lease.

Contact Ben or Blair of Blackler Smith & Co. on 04 555 9090 for an obligation free chat regarding leases, getting into business and tax structures.

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