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Reno Rules For Tenants

If a landlord is doing renovations that require a tenant to move out, do they have to pay for accommodation?

By: Property Investor Team

31 January 2020


Our rental property has a sleepout that is not compliant, so we are making it compliant.

The current tenant will have to move out for approximately three weeks while renovations are completed (firewall, electrical work, insulation, plastering and painting). There is no room in the main house for the tenant to go.

What are our obligations to the tenant? She will have to move all her belongings out for those three weeks. The electrical work in there currently failed inspection so it will be classified as urgent once council has approved the renovations.

We will not charge her rent during the renovations but are we expected to pay for her accommodation while she is not in the sleepout?


During a tenancy, if a landlord has plans to renovate the property they must get the tenant’s agreement in writing. If the property needs to be vacated for building work to occur, a landlord must also come to an agreement in writing with the tenant regarding alternative accommodation or a rent reduction removal for that set period.

As the tenant’s ability to live in the premises will be impacted during this time, both the tenant and landlord need to consider how big the impact is when discussing the arrangement. The landlord is not expected to pay for the tenant’s alternative accommodation unless this is part of the agreement. However, a rent reduction or removal should be considered if you will not be providing alternative accommodation during this period.

Once the period has ended or the work has finished, the rent goes back to the original amount. This is not a rent increase and notice doesn’t need to be provided. It’s worth noting any changes in regard to rent reductions or alternative accommodation are variances to the tenancy agreement and also need to be recorded. - Jennifer Sykes

Efficient Debt Structure


I have a large chunk of cash, enough to pay off my owneroccupier mortgage. My only concern is that this is not our “forever home”. We hope to buy a new house soon that will be! When we do our current owner-occupier will be kept as a rental.

But I do not want a mortgage-free investment property and a big mortgage on our new owner-occupier. Ideally, I would like a 100% mortgage on my investment and all my equity in my owner-occupier. I’m not overly keen on selling it to a company or putting it in a trust. Do I have other options? If so, what are they?

You want to use your cash to provide the greatest possible return. Thus, unless you have a use for it that will give you an after-tax return better than the interest you save paying off your owner-occupied mortgage, you should use the money to reduce that mortgage.

You have correctly identified that you will end up with an inefficient debt structure from a tax perspective if you buy a new home and retain the current home as a rental, having repaid the mortgage. You say you are reluctant to move the existing home into a trust or company.

Unfortunately, the only way you will be able to get a tax-effective outcome is to do so. Invariably you are much better off transferring a home that is about to become a rental into a company. This allows you to maximise the amount of deductible interest.

Note there are tax consequences that need to be checked before you proceed, particularly pertaining to the bright-line rule. In summary, the only way to get the optimal tax structure when you convert your home to rental use is to transfer it into a new entity, likely a company.

When the time comes, you should seek advice to ensure that no adverse tax consequences arise due to any specifics that I am unaware of and because we are
talking about a future event which may occur when the law is different. - Matthew Gilligan

Funding Trading


My wife and I have been investing in property for several years. We mainly buy and hold and have a couple of properties in Auckland. We are now interested in part time property trading to increase cash flow. What’s the best way to fund trading? Bank lender or non-bank lender?

Are non-bank lender interest rates are significantly higher than bank special rates? We are both working with combined income of over $200,000.

I need to know more about your position and plans to be able to advise correctly. You have a good combined income so there is a strong chance you may be able to bank fund.

However, with a tighter bank market, we are non-bank funding a lot more traders
these days. Non-bank costs vary greatly depending on your position, the percentage of deposit you can put into a deal and how long you are wanting the funds for. You will also find difference in costs often if you are looking to do a basic cosmetic renovation versus more of an actual construction/development project. If we can assist further please don’t hesitate to get in touch. - Kris Pedersen

Management Fees Liability


As a landlord am I legally obliged to inform the tenant that I have a property manager in place and they are liable for these fees? Neither me nor my property manager mentioned to my tenant that we were going to bill them management fees which are not reflected in the Agreement to Lease (ATL) and operating expenditure costs (OPEX) figures agreed. We billed the tenant the extra fees as the OPEX washup. The management fees increase the OPEX by $4,500 per year.

The management fees were not crossed out on the ATL. The tenant is objecting to paying these fees as they were not made aware of them from the start and have not budgeted for them. To make matters worse for me, my property manager has not sent them a single invoice nor statement for the whole year.

Did my property manager have an obligation to inform them of their services and fees at the beginning?

The purpose of an ATL is to record an understanding that you have with a tenant. If your property manager handled the negotiations on your behalf you need to establish whether the property manager was aware of your intention to charge management fees.

It is reasonable to expect that management fees are charged to a property owner for the service provided, not to the tenant. I would regard them as a cost to the owner, not as part of normal operating expenditures. It seems that the property manager has understood that the fees are not chargeable to the tenant, as he has not passed on these charges before.

You mention that the management fees are “not crossed out” in the ATL. Was this by intention or error?

You may have difficulty in claiming some charges a year later when you have not mentioned them previously. - Bernard Parker

GST Quandary


We are in the process of trying to buy a house and some land privately. The vendor is being difficult, going back on verbal agreements and changing his mind constantly.

The issue is mainly with the GST. The vendor doesn’t want to pay the GST. However, we don’t see there being any benefit for us to become GST registered.

The land is very overgrown and will costs us tens of thousands of dollars to get it to a farmable state. The house is in an unliveable state. Is there a way we can avoid paying GST on this?

Could it be sold as a going concern? A local farmer leases the land very cheaply.

There’s lots of issues here. Firstly, section 5(15) GST Act requires a supply that includes a dwelling to be treated as a separate supply. So step one is to consider the value of the house and curtilage and determine if the supply of this portion of the property is exempt, (ie: not part of the vendor’s taxable activity). You are only required to register if your turnover from the activity is over $60,000. If it is under, registration is voluntary.

If you register, the supply of the land in the taxable activity must be zero-rated for GST, subject to you providing certain purchaser warranties concerning your use of the property.

This is what the vendor wants, a zerorated supply that leaves him without an output tax liability and has you catching the hot GST potato.

If you refuse to register he is left with the GST liability of 15% of the supply of the land in the taxable activity. If he negotiates, plus GST, you obviously need to have the house and curtilage split agreed to determine how much GST you will end up paying. If you negotiate “inclusive of GST” you simply settle the contract price and he pays GST on the taxable supply.

At the end of the day it just comes down to price, but it’s vital that all parties understand the GST implications or somebody ends up with an expensive 15% ice-cream headache.

Step one is everybody getting clear on the GST facts and the basis on which the contract will be negotiated. Until this is agreed you can’t even talk price because what each of you does with respect to GST impacts the other.

Tread carefully and get expert tax advice before signing the agreement. Make sure all the GST warranties in schedule one of the standard agreement are answered. - Mark Withers ■

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