Category: Taxation

Oct 11

Tax On Rentals – What You Need To Think About

Owning rental property is an addiction here in New Zealand. Just about everyone I know has a rental property. Some even rent or flat share in more “desirable” locations than they could afford to buy in but have one or two rentals in other suburbs.

Yet with all these rental properties, the government sees very little tax revenue because of the level of negative gearing put in place. Whether you own the rental property through a trust, a company (usually an LAQC – Loss Attributing Qualifying Company) or even just as an individual, the gearing most people go for is the costs associated with that property barely cover the mortgage and rates, and then the depreciation on buildings and the like can be applied to other PAYE based income.

At face level, I see no reason to worry about this, it is within the letter of the law. However, as Wespac recently found out, the letter of the law is not sufficient protection. (Westpac loses massive tax case on all counts)

This should alarm mum and dad property investors. Some will say the IRD won’t worry about these people. They are not banks. They are not rich corporations. To this I say, the rental property industry is a $200 billion industry. It is only a matter of time that the effort put into the banks will then be applied very seriously to this industry.

If you are a small property investor, now is the time to look at how you have structured it, but more importantly why. The questions you need to be thinking about is what was your intent. The big banks that recently lost all made financial transactions that were following the letter of the law, but gave them huge advantages in reduced tax to pay. This ended up falling into the realm of tax avoidance.

Now, look at your specific situation, have you structured your situation to follow the letter of the law, but are following pretty close to the wind? If so, it will only take IRD one or two cases before they can then apply a blanket judgment on all similar cases.

Will you be caught? That’s what you really need to think about. I’m no tax lawyer or accountant, but I can see a world of hurt coming for rental property investors. I’m just glad I won’t be one of them!

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Posted in New Zealand, Taxation

Jun 26

Kiwis tax debt soars to $4b – may double in five years

Tax. It’s a word that often instills emotion. Particularly if you are speaking to a small business owner.

There are two distinct camps here in New Zealand. Well three if you include those that just don’t give a damn about anything.

The first is that New Zealand is technically a low taxed country. This camp argues that by OECD standards, New Zealand tax rates are relatively low, especially compared to “socialist” countries such as Spain.

The other camp basically says based on our overall economic situation, New Zealand is highly taxed and our tax system is overcomplex.

So, lets take this a little deeper. It has been acknowledged that tax debt is increasing rapidly. In fact, officials have now acknowledged that Inland Revenue can not keep up. They are at breaking point, and only cases that meet certain criteria are now being dealt with.

This highlights the second camps primary opinion of New Zealand’s tax system. It is too complex. It is simply costing too much for businesses and the Inland Revenue to remain compliant. Essentially “dead money”. The government has several options here. Considering the prediction is an $8 billion tax debt by 2014, the government really does need to do something.

Camp one, who feel New Zealand is relatively balanced as far as taxation are leaning towards more punitive penalties to force people to be more compliant. Anecdotal evidence shows New Zealand already has one of the most punitive taxation compliance systems in the OECD, disproportionate to the actual “non-compliance” crime. And it must be taken into account that in New Zealand, the buck stops with the taxpayer, even if they pay professionals to look after their tax position. Inland Revenue do not care that your tax lawyer or accountant made a mistake, you as the taxpayer, are culpable for any errors. Not exactly endearing to “voluntary compliance”.

Now, we have the other camp, which I freely admit I am biased towards.

The second camp, largely made up of front line business people rather than bureaucrats or academics, are adamant that a simpler, flatter and less punitive regime will not only increase the overall tax take, but reduce government spending in the area of both tax management and treasury duties.

Their argument basically says treat tax as a flat cost, equal for all entities regardless of income, and make “expenses” counted against income black and white rather than the gray mish-mash it currently is.

So which is right? Flatter, simpler taxation that would be easier for IRD to manage/monitor or a more punitive system that punishes those who break the rules?

As a nation, the next five years are pretty critical. Will the current government have the balls to actually make a decision about the New Zealand taxation system? Only time will tell.

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Posted in New Zealand, Taxation