Q

I am considering buying a boarding house. If fully occupied it would generate more than $60,000 net per annum. If I purchased it would I need to become GST registered? The contract requests a purchase price inclusive of GST. If I am not currently GST registered and the current owner is not GST registered, then is the property zero rated? If I sold later would I need to pay GST on the sale? I also own other rental properties. Would this impact these at all in terms of tax and my status?

A

Addressing each of your queries in turn: If the anticipated gross turnover is more than $60,000 per annum, then yes, the owner of this property has to be GST registered. If this is the case, you would buy the property as a GST registered purchaser. If the vendor is not GST registered, then there is no GST from their perspective on the sale price, but as a GST registered purchaser you can make what is known as a second-hand goods GST claim. Zero rated transactions arise when both parties are GST registered.

You have to be careful in these circumstances that the vendor is what they say they are (ie not registered). You do not want to agree to a price anticipating a GST claim because they represent themselves as not being registered, and then subsequently discover that they are registered.

Yes, future sale would be subject to GST. However, whether the GST rate on sale is 15% or 0% depends on whether you sell to a non-registered party or a registered party. Being GST registered in respect of this property will not affect other property you own that is rented on a residential basis.

While I hope the above helps, I suggest you get advice prior to making an offer, given the potentially severe consequences of getting the application of GST wrong.

- Matthew Gilligan

Land Development Tax Query

Q

It seems recent investor taxing changes are favouring developing new builds. Our place has been owner-occupied for 20 years. It is on a corner site of 770m2 in a desirable area and could fit three to five new homes. We are looking to either 1) sell to a developer as is, 2) be involved in a group build, retaining a property as an investment when complete or 3) attempt to develop the entire site ourselves and selling the lot or potentially retaining one. We are interested in broadly the tax implications of each option.

A

That’s a very big topic, so I will just cover some key things and recommend you meet an accountant to discuss.

1. Construction of new investment dwellings will be “new builds” where interest will be deductible. Bright-line will not be an issue unless the land is transferred to a new entity. If it is, five-year bright-line will trigger.
2. If you develop to sell, you will need to be GST registered. If the land is restructured there will be no GST claim as there is a second-hand good restriction that prevents an input tax claim where land has been acquired from an associate.
3. Structuring is more complex if you intend to keep and rent some and sell some. This is because section CB15 taxes any disposal gains made by associates of a developer if the land sold was ever held on revenue account by the developer. So careful partitioning of the beneficial ownership of the land is required at the beginning of the project to ensure the rentals that will be retained were never “stock” of the development entity.

- Mark Withers

Best Place To Buy New

Q

I am a first time investor. I have just been pre-approved for $840,000 for my first investment property. I am using equity in my existing home. I am looking for the best place/area/city to buy a new build that is cash positive or an existing property with a good rental return. I’m looking at new builds as I’m aware tax wise I will have less to pay at the end of the tax year.

A

There are many factors to take into consideration when looking at where and what you should purchase. We have noted many new investors heading towards new builds recently as they are generally purchasing properties which are compliant already plus the tax benefits you have already mentioned.

Smaller regions often have better cashflow, however you may not experience the same gains over time that you do in the larger cities. Often on paper lower socio-economic areas may achieve greater returns as well but you may experience higher vacancy levels and costs which can adversely affect your actual net return.

"I have noted recently a number of investors who are keeping an eye on the Christchurch market and there are numerous comments about it being undervalued at present. If you decide to go down this route make sure you do decent due diligence on this though."

- Kris Pedersen

Troublesome Tenants

Q

I am a homeowner with tenants living next door. For years we have had problems with the tenants. Since Easter we are now being hounded with the pounding of basketballs. I have contacted the owners and property manager who ignore the problem. All she will say is the tenants have the right to live on their property. In the Residential Tenancies Act it states that the tenants must not disturb the neighbours. Surely with this noise they are making they are in breach of their tenancy agreement?

A

To a certain extent the property manager is correct that the tenants have “the right to live on their property” but at the same time they should behave in a way that doesn’t interfere with the peace of neighbouring properties.

Section 40(2)(c) of the Residential Tenancies Act 1986 states; “The tenant shall not – cause or permit any interference with the reasonable peace, comfort, or privacy of any of the landlord’s other tenants in the use of the premises occupied by those other tenants, or with the reasonable peace, comfort, or privacy of any other person residing in the neighbourhood.”

It seems like the neighbouring tenants may be in breach of this section. Perhaps you could approach the tenants that are making the noise in the first instance.

If that doesn’t work, then I would suggest that you again approach the property manager and point out that the tenants seem to be breaching section 40(2)(c) of the Act. The property manager should at the very least speak to the tenants but if he/she feels it necessary the tenants can be served with a 14-day notice requiring them to stop annoying the neighbours.

If it can be proved that the tenants are intentionally making the noise to “harass” you then it’s possible that their actions amount to an unlawful act pursuant to section 40(3A)(d) of the Residential Tenancies Act 1986 in which case exemplary damages can be awarded.

- Ryan Weir