Prepare For The Headwind Ahead
As the end of the financial year approaches, it’s time to take stock of what needs to be done and consider the effects on your portfolio from the changes ahead. By Stephen Tsang.
1 March 2019
Preparing For Year End
Ring-fencing rental losses: Legislation looks set to come into effect from April 1, 2019, and this means the current 2019 year will be the final year where you can offset any rental losses against your personal income. It makes sense then to bring forward, complete and pay for the work in March, for example, repairs, ground or property maintenance work.
Tax on depreciation recovery: If you have sold any properties (that you owned before 2012) this year, more than likely you would have claimed depreciation in the past. Given the current market values, it is almost certain there would have been capital gain on sale which will result in you having to pay tax on the accumulated depreciation. One way to possibly minimise the amount payable is to obtain a registered valuation that shows any capital gain is on the increase in value rather than the building.
Cashflow planning: While ring-fencing rental losses can be carried forward or offset rental profit within the portfolio, nevertheless, it will impact those investors who rely on their income tax refund each year to help fund their cash shortfall. They need to plan ahead to remedy such a cash deficit, which may include selling their properties.
‘Investors are rejoicing the ability to secure sub-4% fixed short-term lending rates, but let’s not lose sight of the fact that only seven months ago many believed interest rates were heading north’
Bright-line test: While all eyes are set on the new ring-fencing rules, we also need to be mindful not to overlook the bright-line test provisions. This affects all residential properties that were purchased from March 29, 2018 and sold within five years. There are no exclusions unless the sale was from inheritance or relationship property settlement. So even in a forced sale situation you still have to pay tax if you make a profit. As New Zealand tax residents are subject to tax on our worldwide income, it’s important to note that the bright-line test extends to overseas residential properties too.
Insulation costs: Do your properties comply with the new insulation requirement? You may wish to engage the contractors now as it has been rumoured there may not be sufficient providers to meet the July 1, 2019 deadline. And on the note of deductions, if the property lacks insulation, then it is almost certain the costs to install insulation will not be deductible but capitalised. However, if your properties only require a top up to meet the regulation then the costs may be deductible provided the same insulation material is used. If this is the case, you may wish to have this work completed before March 31.
Interest rates: While many investors are rejoicing the ability to secure sub-4% fixed short term lending rates, let’s not lose sight of the fact that only seven months ago many believed interest rates were heading north - following successive rates hikes by the Federal Reserve. Yet RBNZ is now saying the OCR could remain soft till 2020. All in all, there seems to be an obsessive pursuit for the lowest interest rate. Let’s look at the bigger picture: many banks are offering five-year fixed rates comparable to their floating rate and they are using a 7% interest rate buffer as the pressure test before approving your loan. Perhaps they know something that we don’t? If you are a long-term investor, irrespective whether you prefer certainty or volatility, it’s probably an opportune time to talk to your banker or mortgage broker about what would be a good hedging strategy for the few years ahead.
Capital gains tax (CGT): Last but not least, it’s the worst kept secret. It’s probably too early to speculate on the “what, when and how” though overseas experiences in places like US, Canada and Australia would suggest CGT did not curtail their property markets. So, if the Government still wants us to believe it is not a tax grab and still aiming to be fiscally neutral with this new tax, then why bother? If there was ever a time property investors needed advice, now is the time to read up and seek advice from reputable advisers to navigate through the barrage of conflicting news and various government intervention policies.
Stephen and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz