HOW TO LEGALLY MINIMISE YOUR TAXAND MAXIMISE YOUR PROFITS

Investors have an opportunity to minimise the tax payable by being

prepared and understanding some of the rules.

It is important that professional advice and assistance is obtained in

preparing your Income Tax Return if you are a property investor.

Legislation around property investment changes frequently and small

errors or the failure to claim a deduction available can make a

material difference over the period of ownership of the property.

Our strategies and tips are to assist you to legally minimise your tax

and maximise your return on investment.

Special Tax Codes

Maximising your property portfolio return includes looking after the paperwork.

Record Keeping

Depreciation of Chattels

Repairs

Travel and other Expenses

Debt Structure

Bright-Line Test

Stephen Florentine

Wellington & Lower North Island

Email sflorentine@deloitte.co.nz Phone +64 (21) 384 04010 Brandon Street, Wellington 6011

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If you’d like to speak to an accountant further about minimising your

tax, our recommendation is Stephen Florentine from Deloitte Private.

Disclaimer: This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication

Special Tax CodesIf your property portfolio is likely to generate a loss for the next year you don’t have to wait for your Tax Return to be filed and for Inland Revenue to process the refund.

A Special Tax Code uses a forecast of your earnings and

property portfolio loss to estimate your end of year net taxable

income and your PAYE is reduced so, in effect, you receive your

tax refund during the year, not at the end of the financial year.

The additional cash you receive each month can be used to

reduce debt.

If you prepare a cash book using Xero or

Excel make sure it looks correct before

providing it to your accountant. Does the

bank account balance match the bank

statement? Are there the correct number

of rent payments?

Often expenses are paid from personal

accounts or on a personal credit card.

Make a list and retain all the receipts as

often these can be forgotten.

In your folder (paper or electronic) have

all receipts in date order, all of the property

manager’s reports and statements for the

loans. If you have purchased or sold a

property include all the settlement details.

If you are organised, it saves your

accountant processing time and

reduces your fee.

Depreciation of ChattelsWhen purchasing an investment property always obtain a valuation of the chattels by a qualified valuer.

You can apply for a Special Tax Code at any time but the best time is February. This allows Inland Revenue to process the application before the new financial year commences on 1 April.

You cannot claim depreciation on your

investment property’s land or buildings

(as of April 2011).

Although the building structure and

related parts of a building are no longer

able to be depreciated there are still many

items that can be such as carpet, blinds,

heaters, hot water cylinders and fences.

Record KeepingBe organised and methodical with your record keeping.

Before April 2011, you could claim depreciation on the building structure of an investment property. If you did this, and you sell the investment property for more than its depreciated value, the depreciation you had claimed is included as taxable income in the year the property sale settles. This is a complex area, so we recommend you talk to your property accountant.

Repairs

For major repairs check with your accountant how the work is likely to be classified for tax purposes. Improvements, such as adding in a new bathroom, may not be tax deductible, but replacing an existing bathroom could be.

The tax saving from the additional deduction in the first

full year is usually enough to pay the valuation fee. The

depreciation deductions continue for several years until

the cost of the chattel has been fully claimed.

For properties that are rented fully furnished

the valuation of the chattels is essential and

can generate tax savings of thousands of dollars.

If repairs or upgrading is required then try to have

the work carried out before 31 March so that a tax

deduction can be obtained in the current year, rather

than waiting to claim at the end of the following year.

Although small expenditure won’t make a lot of

difference, a $15,000 painting contract has a tax

benefit for those on the maximum personal tax rate

of $4,950 so receiving it a year early and reducing

debt saves money.

If your builder is adding improvements and carrying

out repairs see if they will separate their invoice

into repairs and improvements so that it’s clear

what can be claimed.

Extensive repairs shortly after purchase or just

before the property is sold may not be deductible.

To obtain a deduction the repairs should be spread

over an extended period so a maintenance plan will

maximise your deductions.

Travel and other ExpensesProperty owners often “can’t be bothered” to claim expenses that they have incurred but don’t necessarily see as directly related to their property portfolio.

Frequently overlooked is the vehicle mileage claim

for visiting the property, picking up materials, meeting

prospective tenants meeting with your accountant.

Debt StructureInvestment property debt should be regularly reviewed as factors within and outside of your property portfolio can create opportunities.

If your properties are owned by a Look Through

Company there may be advances by you, as the

shareholder, to help fund the Company.

The Company could borrow and repay what you

have put into the Company enabling you to reduce

your personal mortgage (for which you don’t get a

tax deduction for the interest).

Interest rate strategies should also be reviewed with

your mortgage broker or other professional advisors.

Fixing rates, breaking fixed rates, repaying debt or

borrowing more have long term consequences and

tax implications and should be considered carefully.

Your expense claim will be calculated using a mileage

rate of 72 cents per kilometre for motor vehicles

(excluding motorcycles) or a rate published by the AA

and the maximum claim will be for 5000 km. A logbook

should be kept for at least 3 months each year (with

20% or less variance for the year’s average) as

evidence of the mileage.

If your investment property is in another city then

discuss with your accountant what you could claim as

airfares or mileage can be tax deductible.

Mobile phone charges and use of a home office could

also be claimable depending on how many properties

you own and if they’re professionally managed.

Bright-Line TestFor residential properties purchased after 1

October 2015 the two year rule, known as

the Bright-line test, applies.

In summary, if a residential property is sold

within two years of purchase then tax is payable

on any gain unless an exemption applies.

The main exemption is that the rules don’t apply

if the property is the main home of the owner.

This main home exemption does not apply to

holiday homes, even if they have never been

rented.

The rules are very complicated and even the

calculation of the two year period is complex so

if there is any risk that the rules may apply your

situation should be discussed with your property

accountant.