Q

Our property manager has allowed our tenant to break a fixed term tenancy without ensuring that they will continue to pay the rent until a replacement tenant is signed up and paying rent. REINZ advised that we should try to resolve the situation by talking to the property management company’s director. But this is the same person who is our property manager.

We have emailed and phoned her and visited her office to ask for a copy of the paperwork involved. We have also asked her to compensate us in some way for loss of income, which to date is $2,750 less the management fee.

Initially, she assured us that rent would be paid until a new tenant was found. However, the tenant stopped paying rent, saying he believed he had been told a new tenant had been found and he was leaving early to accommodate this tenant. And, in fact, the tenant left because he had bought another property so hardship was not a reason. Our options seem to be either the Disputes Tribunal or the Tenancy Tribunal. Please advise.

A

Purchasing another property is not grounds of hardship that would allow the Tenancy Tribunal to terminate a tenancy. The tenant is responsible for rent for the duration of the tenancy. This responsibility is removed when a replacement tenant starts paying rent (not when the outgoing tenant “believes” that a replacement tenant has been found). It would seem that the outgoing tenant left early to live in his new house, not to accommodate a replacement tenant.

I suggest that this provides a clear case of the outgoing tenant’s liability for rent, because he owes $2,750 arrears. It will be for him to convince the Tribunal that he had proof of a new tenant taking on his liability. If the Tribunal rules in favour of the tenant, then the next step would be to claim the lost rent from the property manager. She has failed to enforce the tenancy contract that she was managing on your behalf, thereby causing the $2,750 loss of rent. - Bernard Parker

Bright-Line Liability?

Q

My look-through company (LTC) purchased a two-bedroom unit in May 2015. It has been rented out ever since. If the company was to sell this unit today, with the intention of re-investing all of the proceeds into another larger rental property, would the company be liable to pay the bright-line capital gains tax? And if so, is the bright-line test pro-rata in any way? For example, would it be a minor tax as the time owned has been for four and a half years? Or do I really need to wait until May 2020 to be exempt from this tax?

A

The bright-line test was introduced initially with a two-year count for property under offer after October 1, 2015. The count moved to five years for property acquired after March 29, 2018. So in your case, it seems you acquired your property before the law was introduced. In any event you have held it more than two years so the bright-line test would not apply.

Had it applied, the count starts from the date the title was registered and runs to the date you entered a contract to sell. There is no pro-rata. A disposal gain is fully taxable at your marginal income tax rate. So much for there being no capital gains tax on residential property. - Mark Withers

Enforcing Arrears Payment

Q

My tenants stopped paying rent. I received a ruling from the Tenancy Tribunal and a trespass and eviction was served. But they had shot through anyway leaving the house trashed: all internal doors kicked in, carpet ripped up, etc. It will cost at least $15,000 to make good.

But my insurer won’t pay as they say I didn’t have a specific landlord clause for wilful damage. I had to track the tenants via Facebook so the court could order a payment plan hearing for the rent arrears. So much for the Tribunal. Now I am told that I need to get a lawyer to take them to the Small Claims Court.

But I will probably never see anything anyway. What is the point? How is this policed? If they do get a judgement against them they are never going to pay because these people just don’t give a damn.

As I understand it, one of them has an unrelated police warrant out for him. Any suggestions?

A

When a case results in a Tenancy Tribunal outcome, yet one party is having trouble contacting the other party to enforce the order, the Ministry of Justice might be able to help. The role of the Tribunal is to help resolve any issues between a tenant and a landlord under the Residential Tenancies Act, and that includes issues such as rent arrears and damages to property.

A Tribunal order is legally binding, but the Tribunal is not the body that enforces the order. If you applied for the order, you can try to enforce it through the court system under the Ministry of Justice. If the other person (the debtor) has been ordered to pay you but they haven’t, the court might be able to help you get money. This does require you to manage the process yourself or seek additional legal advice as has already been suggested. If you require more information on enforcement actions available to you, we recommend you contact the Ministry of Justice. - Jennifer Sykes

‘You can’t use your KiwiSaver to buy an investment property but it’s interesting to note that recently the Retirement Commissioner suggested that this rule should be changed’

GST Considerations

Q

We have never before considered GST when purchasing and selling residential rental properties. We had three properties and two have been sold (outside the bright-line period). The one we still hold is a gold mine. We have a building consent granted to build a six-unit apartment building on the site (and six separate unit titles will be created).

But we just realised there may be some benefit if we choose to register for GST now:

We could claim back GST for what we have spent so far in getting consents approved (separate invoices and records were well kept over the years).

We could claim GST for the purchase of this property and we could later claim GST for the building cost and any cost of the subdivision.

We do not have to return GST to IRD because we are going to hold and rent out the apartments.

We will consider engaging a professional to handle our tax issues as it seems too complex for us from now on.

A

There is a relatively straightforward answer here in that if you are constructing these new apartments to rent them out residentially, then you are carrying on an exempt activity for GST purposes. This means you are not entitled to be GST registered, cannot claim GST on expenses and ultimately will not pay GST on sale. As you have pointed out in point three, GST does not get charged on residential rental.

The quid pro quo to this is that you cannot claim GST in relation to expenses incurred in carrying on such an activity. While this produces a short-term disadvantage for you, you will be better off in the long term. You have described the property as a “gold-mine” which I assume means you expect the end value to far exceed the cost of acquiring the land and building.

Therefore, even if we put aside the fact that you are legally not entitled to be GST registered, you are in fact better off not being GST registered (a significant downside of being GST registered is that 13% of any margin you create ends up being lost when GST is ultimately paid on sale).

You are clearly a rental investor who is in the game for the long term, a strategy that I would certainly encourage. I would not compromise your tax status as a property investor (as opposed to a developer who develops for sale) by attempting to introduce this property into the GST net. I agree wholeheartedly about getting professional help – a misstep with regard to GST can be extraordinarily expensive. - Matthew Gilligan

Getting Into Investing

Q

I am interested in getting into property investment. But I am just starting out and don’t know much about it. I don’t own any property yet. Can I use my Kiwisaver to buy an investment property? If not, what is your advice on how to get into investing - or get ready to get into investing? (I live in Hamilton and earn $45,000.)

A

Unfortunately, at this stage, you can’t use your KiwiSaver to buy an investment property but it’s interesting to note that recently the Retirement Commissioner suggested that this rule should be changed. - Kris Pedersen