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Tax Implications Of Flatmates And Boarders

Tax Implications Of Flatmates And Boarders

It pays to be aware of tax obligations around both sets of stayers.

By: Sally Lindsay

2 December 2023

Q. My one-bedroom apartment in Auckland has been co-leased to a couple for the past two years. Over the weekend I received an email from my female tenant who disclosed her male partner was domestically abusing her. Previous incidents have resulted in police checks. However, no charges have been made.

While she has a new tenancy lined up and somewhere safe to stay in the interim, she is unable to finance this move and pay out the 28-day notice period at the same time. She is also concerned her partner will react violently if he finds out she is leaving and wishes to do so without disclosing the tenancy termination to him. She has always been a trustworthy tenant and my priority is ensuring her safety. What are her rights and what can I do as a landlord to help?

A. Under New Zealand regulations for residential tenancies any tenant who experiences family violence in their home is entitled to remove themselves from the tenancy. The requirement is simply a two-day written notice provided to the landlord with an approved withdrawal form from tenancy.govt.nz.

Evidence of the abuse must be supplied alongside the form. While this can include things such as Police Safety Orders and charging documents issued during the tenancy, if your tenant cannot provide evidence from the police, her best option is a statutory declaration or a supporting written statement from a prescribed person. The latter can be made in the last section of the approved withdrawal form.

As her landlord, you are able to act as a prescribed person on her behalf. Other prescribed people could include a registered medical practitioner or the tenant’s employer. A full list of prescribed people can be found on the official tenancy services website. In the absence of police-backed evidence, to remove her from the situation as fast as possible the quickest path is to make a written statement. When this notice is handed in, your withdrawing tenant will not be responsible for rent after that two-day period.

While she does not need to advise her partner she is doing this or inform him when she leaves, she must provide him with a notice of the withdrawal no later than two days after vacating the tenancy. This is because he is still under the tenancy agreement. She does not need to provide this notice to him in person, nor does she need to share evidence of violence when she makes it. The notice of withdrawal form can also be found on tenancy.govt.nz.

Please be aware, following a withdrawal due to family violence, while any remaining tenants are still liable for rent, the amount they must pay is reduced for 14 days after the notice is handed in. To determine the correct rent to request during this period, landlords need to use the formula in the Residential Tenancies Act 1986 under section 56b. To check this formula or for more information surrounding this process, please visit tenancy.govt.nz.

– Eric Hammond

Q. I have invested in a residential section with a fellow investor. Both names are on the title as tenancy in common. We are planning to build two dwellings on the section and subdivide the section into two titles. Upon council CCC and title, we would each have one dwelling and one title in our individual names. 1) Does the first transfer of names trigger the bright-line test when no money is involved. 2) Does the bright-line test start on CCC completion or is it backdated to the purchase of the property? 3) If bright-line is involved, how does the IRD calculate my profit? Will it ask for my section cost plus building cost and derive the profit from these?

A. In a situation where a partner disposed of their interest in a jointly owned property bright-line tax is payable if there is a gain on disposal to the party selling. The bright-line period is measured from the point you are registered as owner. There is an alternative solution. You could establish a partitioning agreement from the outset that records the beneficial ownership of the property as one portion each rather than the whole as tenants in common. That way on subdivision the change in title records the legal change, but the beneficial ownership remains that on one portion each. The IRD will recognise the partitioning agreement as binding on the parties as to the beneficial ownership, under this arrangement, no disposal of the land beneficially owned by either of you occurs when the legal title changes and no bright-line disposal is triggered.

- Mark Withers

Q. What are the approximate yearly costs for setting up a family trust with one personal home in the trust? I have seen a quote for more than $6,000 and an office service charge of 4 per cent. Are there other options and are trusts worth setting up now?

A. There are two layers of cost when forming a family trust. First there are the formation costs. This will include the cost of establishing the trust, any advice necessary to accompany that, and the legal costs of conveying the home into the trust (ie transferring the title). Cost for this varies depending on circumstances, but to form a trust and convey a home into it is likely to be around $4,000-$5,000 (excluding GST and service charges). There may be additional costs for any accompanying advice, wills, memorandum of wishes and other documentation, depending on the overall structure.

The second layer is the annual cost. If the trust owns nothing other than your home, you can declare it non-active with the IRD and thus not have any obligation to file tax returns. You should still maintain financial records, but you could do that yourself without engaging an accountant. That means your main annual cost would be the fee for including a professional trustee, which will likely be between $500-$750 (excluding GST). Note it is not legally mandatory to include a professional trustee, so it is not inevitable that you would incur this annual cost.

As to whether a trust is worth setting up, again that depends on the circumstances. There are a variety of reasons where setting up a trust is worthwhile. For example, where there is exposure to personal risk and a desire to protect the home from that. Trusts can also play a part in separating assets from a relationship property point of view. Trusts are often used to help ensure that inheritances are passed on to future generations in an effective manner.

Finally, there can be tax planning benefits of using a trust to hold income-producing assets due to the ability to split income to beneficiaries, although that would not be the case in relation to a trust that owns the home.

- Matthew Gilligan

Q. I am on a good salary but still being turned down on interest-only. I have made applications through a broker and my current bank. Any suggestions on what else I can do?

A. Banks are being a lot easier on rolling interest-only than they have been. You have not mentioned whether the broker said you could qualify with a different bank. This is worth reviewing. There may be options to improve your loan affordability in the eyes of your current lender, such as reducing or cancelling credit card limits or extending your loan term. If you find you have no option and the cash flow pressure is pushing you too tight, you could apply for hardship as the banks have specialist teams to examine this.

- Kris Pedersen

Q. My rental property recently had the tenant vacate, and during the final inspection I noticed a significant amount of adhesive stuck to the concrete floor in the double internal car garage. It turns out the tenant installed garage carpet without seeking my permission. They removed the carpet on leaving, claiming the adhesive left behind is just “fair wear and tear”. However, the remaining adhesive is unsightly, and it will require substantial labour to restore the floor. Is it correct to consider this fair wear and tear?

A. No, this situation does not fall under fair wear and tear. Installing garage carpet constitutes a “minor change”, and tenants cannot renovate, alter, or add significant fixtures to the property without the landlord’s consent, which should be in writing and not unreasonably withheld. Your tenant failed to request your permission for the garage carpet installation, which is a breach of the RTA (section 42). Consequently, it’s the tenant’s responsibility to restore the area to its original condition before the minor change was made. If the tenant hasn’t taken the necessary steps to reinstate the concrete floor to its pre-carpet state, you can apply to the Tenancy Tribunal for an order to cover the costs of restoring it.

- Ryan Weir