BENEFITS
OF INVESTING IN RENTAL PROPERTY IN NEW ZEALAND
 |
capital appreciation ( not guaranted but occurs more than not)
| no capital gains tax
| no interest clawback
| no stamp duty on residential property
| no limit on losses available
| favourable depreciation rates. It should be noted though that depreciation should be declared back as depreciation recovered income when the property ceases to be a rental property or is subsequenly sold at a value higher than cost
| stable government policies
| allows easy entry into the Investment Property owning field
| provides a service which has a high demand
| is the best security for lenders
| it is easy to spread your risk over several properties with several points of income
| it provides instant and consistent cash flow
| it protects the value of your investment (hedge against inflation) assuming property values increase at rates equal to or higher than inflation
| it provides an asset that is easily tradeable
| it is not time consuming
|
many taxpayers derive more satisfaction and feel more comfortable with an investment which is bricks and mortar and which they can see, touch and take pride in as opposed an investment with a certificate. |
TAX ADVANTAGES OF RENTAL PROPERTY
|
only rental earned is treated as assessable
|
capital gain (the excess of sale price over original cost) is not treated as income |
|
can claim all costs involved
| the opportunity to keep the property in good repair and claim these costs throughout the years which may improve the resale value
| no interest clawback when the property ceases to be a rental property
|
if there is a loss (i.e. expenses higher than assessable income) this can be deducted against other income earned by the taxpayer which will reduce the income tax liability |
EXPENSES CLAIMABLE ON RENTAL REAL ESTATE
|
rates
| insurance
| interest on borowings
| borrowing costs
| loan repayment insurance
| agent's comission
| management fees
| repairs
| cleaning
| gardening
| depreciation
| advertising
| telephone
| stationery/ postage
| hire charges
| pest control
| body corporate fees
| accounting fees
| business deductions
| electricity
| bank charges
| heating and cooling
| mower fuel
| rubbish disposal costs
| motor vehicle
|
any other relevant costs |
McLean
and Co prepare
Property Investment Financial Statements for a number of clients. Please
make contact with
us if we can assist you in this regard.
INDEPENDENT CONTRACTOR OR EMPLOYEE?
There is a trend to take staff on as independent contractors for a number of reasons:
-
avoiding the need to pay ACC Levies by the employer
-
can be laid off quickly if not required
-
ideal to get persons with expertise for specific projects
-
saving the need to deduct PAYE and pay it to IRD
A distinction must be drawn between an employee and an independent contractor. Payments to an employee constitute payments of salary or wages which are subject to the PAYE system. An independent contractor, on the other hand, is taxed on the basis that he or she is carrying out a business
In determining whether a person is an independent contractor or an employee, it becomes for tax purposes a question of fact or law. IRD and the courts have developed several tests for distinguishing between an employee and a contractor:
-
Control- the employer's right to control the method of doing the work i.e. the employer's right to choose, pay, control or dismiss the employee.
-
Organisation or integration- is the type of work or the way it is done the same as work performed by other staff who are employees? Is the work an integral part of the employers business?
-
Independence- does the worker supply all the necessary tools? Does he or she work from home? Is he or she free to work for other people as well?
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Intention- how are the payments for the work made? Did the worker carry out the same activity as a self employed person (or as an employee) in the past
-
Economic reality- is the worker genuinely in business on his or her own account.
Generally:
-
Contractors are not paid holiday pay or sick pay and, with some exceptions (mainly commission sales agents) they are responsible for paying their own ACC levies
-
contractors are not usually provided with fringe benefits such as company cars and health insurance- these are their own responsibilities
-
contractors are usually registered for GST and provide GST invoices
-
it is possible to control the work performed by a contractor, but not the manner in which it is done
-
a contractor may employ staff or subcontract work
-
a contractor supplies his own tools of trade
-
a contractor is able to work for more than one person, although in practice there may be exceptions to this
-
a written contract for service should exist
WITHHOLDING PAYMENT TAX DEDUCTION RATES
Withholding Tax should be taken off persons in the following types of business activity business at the following rates, unless they have obtained a Certificate of Exemption from the Inland Revenue Department and provided this to the business to which they are contracted or employed by. Withholding tax on payments made on or after 1 April 1988 must be calculated on a GST exclusive basis when the payment is made to a person who is registered for GST and the payer holds a tax invoice issued by the payee. The rates are:
Non
Resident Contractors:
(Applications for exemption should be applied for to Inland Revenue Department) |
15% |
| Non
Resident Entertainers visiting New Zealand
(Please note that Non Resident Entertainers taking part in a cultural programme sponsored by a government or promoted by an overseas non-profit cultural organisation, and Non Resident Sportspeople officially representing an overseas national sports body may be entitled to exemption from tax- applications for exemption should be applied for to Inland Revenue Department) |
20% |
| Participation by New Zealand residents in professional sporting events (other than horse racing or trotting) | 20% |
| Participation
by non residents in professional sporting events of any nature
(see not above re exempt sportspeople) |
20% |
| Planting, sowing, or gathering potatoes or vegetables | 15% |
Proceeds
from sales of:
|
25% |
| Shearing Contracts | 15% |
| Share fishers on contract for the supply of labour only | 20% |
| Sphagnum moss (not retail sales) | 25% |
| Street Road Cleaning | 15% |
| Theatrical, musical, stage, concert, radio or television performances by entertainers resident in New Zealand | 20% |
LOSS
ATTRIBUTING QUALIFYING COMPANIES
Loss Attributing Qualifying Companies must be qualifying companies and can pass their losses through to their shareholders in proportion to their effective interest in the company i.e a loss is attributed to its shareholders. Each shareholder is deemed to incur a loss equal to the company's net loss for that year multiplied by the shareholder's effective interest in the company for that year. The amount of any net loss attributed to each shareholder is treated as if it was a loss incurred by the shareholder in deriving his or her gross income for the year. Consequently, the loss will either be allowed as a deduction from annual gross income or carried forward.
A company can be a loss attributing company where certain criteria are met:
-
The company must be a qualifying company
-
All shares in the company must carry the same rights as each other share in the company
-
A notice in writing electing that the company be a loss attributing qualifying company must be received by IRD.
MEDICAL AND HEALTH EXPENSES NOT
DEDUCTIBLE
The IRD's view is that expenditure
incurred to remedy injury or disability to the human body is expenditure of a
private or domestic nature, even if the expenditure is to enable the taxpayer
to resume earning income by having his or her health restored.
Such expenditure is not incurred in the course of deriving gross income, nor
is it an overhead or functioning cost in a taxpayer's business.
Instead, it is a health maintenance cost for the taxpayer as a human being.
If we can assist further, please email McLean and Co as follows: