Welcome to the March issue of Withers Tsang & Co Newsletter. We hope you will find the information useful. To assist you with the year end preparation, the mailing house is posting the 2010 Year End Questionnaires to you. PDF versions are also available for download from our website - www.wt.co.nz
Please contact us if you have any questions on any matters discussed in this newsletter.
T: 3768860
E: reception@wt.co.nz
- Leaving New Zealand in the next 12 months?
- Bad Debts
- Creditors
- Prepaid Expenditure
- Sale of assets or rental property
- Purchasing fixed assets or rental property
- Writing off Fixed Assets
- Wages & Leave Accrual
- Trading Stock
- Work in progress
- Donations
- Leaky Buildings
- NOPA
- Determining if a repair cost is capital
- Determining if repair costs are deductible
- Break Fee - Deductibility Issues
- Using a Registered Valuer
- Moving into your rental property
- Open letter to The National Party
- A cash flow budget
- Your KPI's for the year
- Strategic Planning
- Accounting Software
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WT tips to prepare for 2010 Year End
| Leaving New Zealand in the next 12 months | If you have LAQC company and you intend to leave NZ in the next 12 months, then the company could lose its LAQC status. Please ring us urgently for an appointment to evaluate your options. |
| Bad Debt | As you have to pay income tax on your Debtors, you should review any bad debt situation. Write off any debt which is outstanding for a period of time and concerted effort was put into recovering it.
Note:
- Bad debts have to be physically written off
- You can still pursue the debtor even though the debt has been written off and considered bad.
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| Creditors | You can claim deduction based on invoices issued prior to year end even though you only make payments after balance date. Consider pre-ordering postage; courier bags; stationery and computer consumables before balance date. |
| Prepaid Expenditure | You can claim prepaid expenditure: Some examples are:
Advertising - up to 6 months after balance date and not more than $12,000 in total
Travel - taken within 6 months after balance date but not exceeding $12,000
Insurance - up to a maximum of 12 months but not exceeding $12,000
Rent - up to maximum of 6 months but not exceeding $23,000.
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| Sale of assets or rental property | Consider postponing sale of asset or property (unless you are expecting a loss on sale) till after balance date to defer any possible depreciation recovery. |
| Purchasing fixed assets or rental property | Consider buying new business asset or property in March 2010 to claim a full month's depreciation and possibly GST. |
| Writing off Fixed Assets | You can write off any obsolete assets that are not in working order (note: obsolete assets have to be physically disposed). You can also write off any assets that cost less than $500 (GST exclusive) |
| Wages & Leave Accrual | Employers can claim deduction on holiday pay, bonus and long service leave payments if they are pay within 63 days after balance date |
| Donations | From 2008/2009, companies (and individuals) can claim a deduction on donation made to a charitable organisation registered with the Charities Commission. The maximum amount claimable is limited to the amount of its net income before tax, calculated before taking into account the deductions. |
| Trading Stock | Trading stock on hand must be valued at the lower of cost or realisable value. If you have any obsolete stock, please make sure these are written off and physically disposed before balance date |
| Work In Progress | All work in progress at year end is taxable. Please ensure these are recorded at cost and write off any "non chargeable" work. |
WT .....on Property
Leaky Building
It was reported in NZ Herald recently that according to an expert panel, estimated 89,000 homes could be affected by leaky building problem and 90% of all apartments, townhouse and units built between 1992 and 2005 could leak badly in the next 15 years, all costing billions of dollars to fix.
If you own an investment property with leaky building issue, generally, you will be in the opinion that all repair costs are just simply, repair and maintenance, tax deductible in the year the expense was incurred. But is this the correct treatment when it comes to filing your tax return? It may not be as straight forward as you think.
Determining if a repair cost is capital
Whether it requires the expense to be capitalised and depreciated over time or repair and maintenance depends heavily on the facts.
Generally, expense incurred in deriving assessable income (revenue nature) is deductible whilst expense incurred relating to income earning structure (capital nature) is not.
Ask yourself these questions:
- When was the leaky building issue discovered?
- Have I suffered a loss of rental income?
- Is the damage caused primarily to the building structure?
- Is the expenditure incurred to replace defective parts of the asset or to replace substantially the whole asset?
Determining if repair costs are deductible
This is a complex issue. It is important that we take the correct tax treatment as IRD can impose penalties if we adopt the incorrect tax position. It is worth noting as well that you may lose out on depreciation claim should you choose to capitalise the expense since the Government is likely to disallowed depreciation claim on building for investment properties in the future.
As far as we are aware, IRD has not issued any guideline and there is no case law or IRD ruling currently available. However, we have successfully argued the expense as repair and maintenance and obtained tax deductions on a number of occasions through IRD using Notice of Proposed Adjustment (NOPA).
NOPA
This is a process designed to help resolve issues between you and IRD. This process requires full disclosure of all facts and evidence to IRD and the matters can be resolved without being penalised if IRD disagree with the tax position you have taken on the repair and maintenance expense. There are fees involved for us to prepare the NOPA and there is no guarantee that IRD will accept your tax position taken. Please contact us if you or anyone you know are affected by leaky building issues. We will try to help in every way possible.
Break Fee - Deductibility Issues
In the last two years, many of our clients have refinanced a fixed rate term loan to take advantage of lower interest rates. There has been a lot of commentary from media and various tax experts and IRD about the deductibility of break fees.
Recently, IRD has made two public rulings to determine the deductibility of the fee. These provisions are:
- Deductibility of break fee paid by a landlord on early repayment of loan to exit early from a fixed interest rate loan
- Deductibility of break fee paid by a landlord to vary the interest rate of an existing fixed interest
Early Repayment of Loan
Where a break fee is paid to terminate an existing loan either upon sale of property or simply changing banks, a full deduction of the fee is allowed in the year the cost is incurred. Bank Loans are a financial arrangement. Early termination is also the end of the existing financial arrangement. The general criteria of the deduction are that the loan was borrowed to purchase property for deriving rental income.
Variation of Interest Rate
Where a break fee is paid simply to change the rate of an existing loan, deductibility is based on whether or not you are a cash basis person. New legislation effective from 1 April 2009 has widened the definition of cash basis person to include companies and trusts that are within the cash basis threshold. Previously it was limited to natural persons. A cash basis person is able to claim a full deduction of the fee in the year the cost in incurred.
If you do not qualify as a cash basis person, the deduction of the break fee is spread over the remaining term of the loan. If you are considering refinancing and there is a break fee payable, ensure that your bank terminates the existing loan and starts a new one. This will allow a full deduction under early repayment provision. The general deductibility criteria will apply to the deduction, that the loan was borrowed to purchase property used in deriving rental income.
Thinking of selling your rental property?
The recommendations of the Tax Working Group have made a lot of property investors nervous. Some people may want to sell their rental property before the May budget and avoid any uncertainties.
Before you put your property on the market give us a call as we may save you money and hassles!
For example:
Date of settlement
Do you know that it make a difference if your property sale settles on 1 April 2010 rather than 31 March 2010? Difference is 31 March 2010 falls on the last day of the 2010 tax year and 1 April 2010 belongs to the 2011 tax year. If depreciation has to be recovered upon the sale, settling the sale on 1 April 2010 instead of 31 March 2010 will mean you are deferring the depreciation recovery to the 2011 tax year. This can make significant difference on your tax planning.
Using a registered valuer
Getting a proper valuation on your property not only gives you an indication of your property's worth, it may achieve a better outcome on the depreciation recovery as well. To process a sale the value of Land, Building and Chattels (if any) will need to be separately identified in order to calculate whether depreciation recovery has occurred for the building portion and chattels. Often land value has increased and the value of building may not have caught up at the same pace. A valuation report that shows a lower building value may reduce the amount of depreciation recovery.
Moving into your rental property
If you stop renting your property and move into it for private use, we must treat this situation in the same away as if you had sold the property at market value. If the market value is higher than the book value of the building, depreciation recovery occurs but is assessable on the first day of the next income tax year.
OPEN LETTER TO THE NATIONAL PARTY
WHY RENTAL PROPERTY TAX LOSSES SHOULD NOT BE RING FENCED
Following is a list of bullet points detailing the economic reasons why we believe this should be avoided as a tax reform measure.
- National has already promised in its housing policy at the last election that it will not introduce capital gains tax and will not ring fence tax losses. The housing policy paper from the last election ruled out ring fencing with the following statement:
"National will make sure renting out is not too tough for the thousands of ‘mum and dad’ property investors who provide houses for almost a third of our population. To avoid forcing up rents or a massive withdrawal of much needed rental accommodation, we will:
- Ensure that the cost of property damage is not passed on to the landlord when they have no control over the day-to-day activity in a house or over who visits.
- Retain the status quo on capital gains tax.
- Retain deduction provisions for those whose rental property investment runs at a loss, as these provisions are also available to a number of other investment types."
To ring fence these losses now would be a complete breach of this promise from the last election.
- It is fundamentally inappropriate to look to change the tax system to promote "fairness to all taxpayers" if that change introduces new unfairness’s. As the housing policy states, the ability to offset losses against other income types is available to many other classes of investment, farming and forestry to name just two. To ring fence property losses but not other forms of loss would clearly be unfair to property investors who have chosen this investment class.
- If depreciation of buildings is removed from the calculation of the property investors taxable income what is left is the true economic reality of this investment. To deny a deduction of a loss that is truly economic is to simply deny that taxpayers economic reality. Our system currently adopts a "weighing the bag" principle when calculating the magnitude of a taxpayer’s income. To deny a loss in making this calculation would be a departure from a long held principal that has been a cornerstone of maintaining fairness in the tax system at some level.
- The tax working group did not recommend ring fencing
- The supplementary stabilization instrument report from treasury to the previous government when it was contemplating ways to dampen enthusiasm for property investment without further increasing interest rates considered ring fencing among other measures but did not recommend ring fencing but instead recommended more enforcement of existing tax law. The extra enforcement measures have already yielded significant tax revenues.
- In John Key’s speech at the opening of parliament he ruled out introducing land taxes and deemed rate of return to tax property. He sited the reality that these taxes would hit taxpayers who didn’t have means to pay these new taxes other than to increase rents. It seems to us that the reasons he sited to rule out these taxing regimes equally apply to ring fencing tax losses
- Ring Fencing, in a limited form has already be tested and rejected in NZ in the form of the specified loss regime that restricted a deductible tax loss to $10000. The regime created distortions in the tax system that was undesirable and the regime was universally hated by taxpayers and ultimately rejected as ineffective, unfair and cumbersome. It would be unfortunate if we could not take lessons from our own historic forays into this type of tax regime and learn from those mistakes.
- Ring fencing is a timing issue. If today’s loss must be carried forward and can only be offset against tomorrows rental profit the extra tax collected from the regime now is the same tax that won’t be collected in the future when investments become profitable.
- Property investor's cash flows are usually worse than their losses indicated because they are also burdened with principal payments on mortgages. This means their ability to fund higher tax payments are already impaired by their banking covenants.
- Many investors in recent times have faced much higher interest rates than those that they "signed up for" when they acquired their property assets. Higher interest rates create higher tax losses. Individual taxpayers have no ability to influence the rise and fall of interest rates so it would seem unfair to disallow losses caused by a high interest rate climate when these factors are beyond the taxpayer's control.
- The "Tax Hole" from investment property sited by the government may have been determined using flawed data. Some observations on the tax hole indicate it was identified in a year when interest rates were at their peak. It also ignored the fact that in the preceding 30 years property investors had been net tax payers. The hole also ignores the tax take on the recovery of depreciation that investors will face as they sell properties that have previously had depreciation deductions claimed on them. The data used to identify "the hole" probably also does not include tax revenue collected from rents that hit tax returns in the form of business income, trust income distributions and dividends from companies. Profits from property companies also often flow into the tax base in the form of salaries declared from net rents to working shareholders. All these issues indicate that the identification of any "Tax hole" from the sector is likely to be fundamentally flawed in reality.
- The introduction of ring fencing would also send a shock wave through the property sector at a time when the market is fragile at best. Even now, the threat of ring fencing has eliminated investment buyer enquiry and stalled our fragile market recovery. It must be remembered that all small business borrowing is intrinsically linked to property values as banks will not lend on business values. Any shock to the value of property would therefore have a detrimental effect on small businesses ability to raise capital at a time when credit markets are already constrained.
- The economic gap between the cost of owning and the cost of renting a home is currently significant. Ring fencing would close this gap by lowering property values and increasing rents. Lowering property values now during a fragile recovery from recession could be disastrous and increasing rents makes it progressively more difficult for first home buyers to save deposits to buy homes, especially if banks begin requiring larger deposits if values begin to fall as their security ratios are impaired.
- It is fair to say that most taxpayers with a leveraged property investment are middle New Zealanders who are already the largest contributors to the tax base. The vast majority of these people are trying to simply make provision for their own futures and are determined not to rely on the government. These people did not support National to then have their tax losses ring fenced.
WT .....on Business
CASH IS KING / Good plans shape good decisions
As the new financial year is about to start ensure that all your financial management tools are in place. Three of the most important ones are
- A cash flow budget
- Your KPI’s for the year
- Strategic Planning
Cashflow Budget
As a business owner you need to know what the year is going to look like financially. How much profit you may make, when you will be making your profit and when your income and expenses are likely to occur. You need to identify how much you are likely to need for capital purchases throughout the year. This might be replacements or new plant or equipment required because of business growth or change. Most businesses have capital expenditure requirements but many don’t plan for them. You need to forecast the timing of money flowing in and out of the business. Make sure you include things like tax payments, loan repayments and dividends. And, plan around the cycles that can occur. If you are going to be tight for cash at some time in the year, talk to your bank early.
KPI’s (Key Performance Indicators)
"If you can’t measure it, you can’t manage it". Do you know the KPI’s for your business? Is your business running as planned? Have you set some goals for your business? You need around six KPI's to start off with. These should be the key influencers of your business’s operating performance and should be capable of being easily tracked and managed. The challenge for businesses now is ensuring that lost business is kept to a minimum. There is a strong focus on where the dollars are going right now. Business owners' need KPI's to micro manage their business.
Strategic Planning
Whether your business is booming or not before the start of any financial year, it is critical to plan and put goals in place. Strategic Planning goes hand in hand with Cashflow forecasting and setting KPI’s. If you don’t set goals for your business, you don’t have a yard stick to measure against.
There might be important decisions critical to the survival of you business. These may include,
- Looking at new premises
- Acquiring further capital for the business.
- Taking on or laying off staff.
- Relocation and negotiating of lease.
- Changing staff to commission basis rather then salary and wage.
- Looking at insurance for your business.
- Considering diversifying or new products to compete in the current market.
- Considering new policies for client e.g., deposit in advance or terms of payments.
If you require WT to assist you in planning for the coming year or if you are thinking of going into business, please contact Mark Withers (mark@wt.co.nz) or Stephen Tsang (stephen@wt.co.nz) or Carole Pedder (carolep@wt.co.nz) for further assistance.
Accounting Software
Withers Tsang is an Approved MYOB training centre and authorised dealer for XERO accounting software. We have fully trained MYOB & XERO certified consultants to assist with your needs.
XERO
Xero is the world’s easiest accounting system. Xero offers you:
- State of art banking, the automated bank feeds will save you hours of wasteful data entry.
- Is accessible from any internet connection from anywhere in the world.
- Integrated Invoicing - means no need to search around for information, you can enter your invoices quickly and efficiently.
- Real time reports - means up to date information on a click of a button to help you with business decisions
- Unlimited user logins - means your accountants and business partners can access information where ever each of you are.
- No hassle of backing up data.
- Online accounting system that works beautifully anywhere anytime.
Contact Amit Patel (amitp@wt.co.nz) or Diego Roa (diegor@wt.co.nz) now so we can start helping you with the future instead of just signing off on the past.
Approved MYOB Trainer & Reseller
Tired of finding out how profitable your business is a year late? With MYOB you can keep track of your profitability daily/weekly/monthly. As approved MYOB Trainers and Resellers Withers Tsang has the knowledge to fit you with the product that best suits your needs and can help you to use it efficiently and effectively.
If you want to:
- Manage your cash flow more effectively
- Prepare monthly, bi-monthly, 6 monthly budgets
- Set targets to make your business more efficient
- Analyse your financial data more regularly
If you’re thinking of computerising, changing to MYOB software or have any MYOB questions, please contact Nick Ashfield (nicka@wt.co.nz) or Nicola Alexander (nicolaa@wt.co.nz) or David Han (davidh@wt.co.nz) for further assistance.
WT .....on Tax
Provisional Tax and Use of Money Interest (UOMI)
Short paid provisional tax can trigger extra use of money charges. Good planning can avoid this. Provisional Tax is imposed on "companies" and "trusts" when their end of year tax bill exceeds $2,500 whereas provisional tax only applies to an "individual" taxpayer when his/her end of year tax bill exceeds $50,000 (effective 31 March 2010 year).
Inland Revenue requires Provisional Tax to be paid in 3 equal instalments throughout the tax year. For example, ABC Ltd sold a rental property in February 2010 (i.e. 2010 tax year) and has to return $50,000 depreciation recovery. Under the present tax rate at 30%, the expected end of year tax bill is $15,000. Since the end of year tax bill exceeds $2,500 and hence provisional tax applies to ABC Ltd for the 2010 tax year, IRD expects ABC Ltd to pay three equal payment of $5,000 on 28 August 2009, 15 January 2010 and 7 May 2010.
Outcome: ABC Limited did not sell the property until February 2010. Not realising its provisional tax obligations, it would not have paid any tax in August 2009 and January 2010. Inland Revenue will charge UOMI on the outstanding tax payable effectively from August 2009 onwards.
Suggestion: Talk to us if you intend to sell your property, we will come up with options for you. Planning is the key to avoiding these charges.
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