Q

When my partner and I got together we formed a company that purchased a property for us to call our home. My family trust paid the deposit for our home which represented 55% of the purchase price three years ago. The balance of the purchase price came from our joint funds and a small mortgage, which has been paid off now. Both entities (the company and the trust) also own a rental property. Following the recommendations of our solicitor at the time we drew up an agreement that our company pays 4% interest to my trust and this loan is recorded in both sets of accounts. My accountant told me that my trust would have to pay tax on the 4% interest income and I therefore haven’t recorded any financial transactions and no money has been paid by the company to the trust. Due to the increase in value of our home the 55% that was contributed by the trust only represents 35% of today’s value of the property. I am wondering if there is a way to increase the loan from the trust to the company by making an adjustment in the financials without ending up having to pay tax on any “income”. I believe the trust should have been co-owner of our home but unfortunately it wasn’t set up that way.

A

With specific reference to your question the short answer is “no”. If a book entry is passed in the company books to increase the debt to the trust this would constitute a payment of interest that is taxable to the trust. Having gone to the trouble of establishing a formal loan agreement that is interest bearing between the trust and the company I am surprised that you are now hesitant to apply the terms of this arrangement just because there is a tax consequence. I should say also that it is very unusual to have opted for a company structure as an ownership entity for your own residence. This is problematic given companies are business entities. You have not indicated whether the company has look-through status. Claiming a main home exemption from bright-line may well be compromised by corporate ownership. That said, there is some recent commentary from IRD that may give some hope that a main home exemption may be possible if the company has LTC status and the property is then arguably held by its shareholders for tax purposes. You may need to revisit the entire arrangement and consider making structural changes pursuant to a relationship property agreement.

— Mark Withers

Maximising Land Use

Q

We have a property that we hope to sell to a developer. We want to know what we can do to show the buyer how to maximise its land use potential. Do you have any suggestions in making sure it is not undervalued when we sell it?

A

You should firstly see if there is benefit in you getting resource consent as you may be able to sell it for more with this in place. Cost this part up and then potentially look to get a valuer in who can value the different options as to how the property can be used and how to maximise its value. You may also want to touch base with a couple of local real estate agents to see if they know any developers who are looking. Depending on your property you may want to also have a chat with your neighbours as in some cases you may be able to achieve quite a bit more by selling two or more properties to a developer who then has a larger land amount to utilise rather than just selling your property on its own.

— Kris Pedersen

Leaking Roof

Q

We have rented a residential property for a year, and as soon as we moved in there were problems with a leaking roof and ceiling. During rain, water leaks from the ceiling to the floor. We have been emailing, calling and sending photos to the property manager but the owner is reluctant or refuses to undertake substantial repairs. A bucket was placed in the ceiling for 10 months but we don’t think this is acceptable. What are our options?

A

These sound like serious issues and the owner should be fixing them as soon as possible. Failure by the landlord to maintain the premises in a reasonable state of repair is a breach of section 45(1)(b) of the Residential Tenancies Act 1986 and constitutes an unlawful act. Some tenants don’t realise they are able to serve a notice on the landlord requesting that necessary maintenance is carried out (14-day notice). Given the length of time the situation has been going on for I would serve a 14-day notice on the landlord as soon as possible. Your tenancy agreement should have the address on it for serving notices (normally an email address). If the landlord hasn’t completed the repairs (or at least started them) within 14 days of you serving the notice, then you should file a Tenancy Tribunal application. If it proceeds to a tribunal hearing you should clearly outline the repairs you want carried out. Photographs are very helpful in this regard. You can also request exemplary damages from the landlord. If the adjudicator finds the landlord hasn’t maintained the property sufficiently, the landlord can be ordered to pay a fine and will most likely be ordered to carry out certain repairs and you may be awarded damages.

— Ryan Weir

Second Property Tax

Q

We purchased land and built a house to live in, it was my partner’s first home and we both used our KiwiSaver. We ended up having to move out of town for work. We purchased a house where we moved to, but couldn’t sell the house we built since it wasn’t finished and didn’t have a CCC. Now it has the CCC we want to sell it. Would we have to pay tax on this as it’s a second property? We currently have a friend living in it paying rent until we can sell it.

A

This is an interesting question, but there are some facts that need to be checked before a firm view can be given. The first key fact missing here is the date on which you entered into the agreement to purchase the property. I will presume it was prior to March 27, 2021. This date is significant because the main home definition changed on this date. For properties acquired prior to March 27, 2021, you can get the benefit of the main home exemption if you have occupied the property mainly as your home for most of the time that you have owned it. There are a series of critical details here. First, you have to occupy the property mainly as your home. This means more than half of the land needs to be applied towards use as your residence. Second, you need to do this for more than half of the time that you have owned the property. This means it will be critical to work out how long you have occupied the property for up until the point you enter into the agreement to sell it and compare that to the period of any other use. If your occupation of the property is for more than half of the total period of ownership, then you are on track to get the exemption. However, that is not the end of the analysis. It also matters whether you own the property personally or via a trust or company. There are different rules applicable to each. There can also be limitations on your ability to claim the main home exemption if you have claimed it before or if you have exhibited a regular pattern of buying and selling homes. Finally, the bright-line rule is not the only rule potentially relevant here. In summary, it is possible for you to get the benefit of the main home exemption even though you live elsewhere now, but there are a series of requirements that need to be satisfied and you should seek specialist advice to determine where you stand.

— Matthew Gilligan

GST on Rent?

Q

Does a small business renting a residential property for business pay GST on the rent?

A

The supply of residential rental accommodation in NZ is an exempt supply for GST. So because the landlord is not charging GST, there will be none to claim. If you are ever unsure whether there is GST on a supply, ask yourself one simple question … “Do I have a GST tax invoice indicating I was charged GST.” If the answer is no there will be no GST claimable unless you are acquiring a second-hand good for use in your taxable activity.

—Mark Withers

Do you have a burning property investment question you need an answer for? Whether you are just starting out in property investment, or an experienced investor, email [email protected] to have your questions answered.