Ring-Fencing of Rental Losses

The proposed loss ring- fencing rules will mean that speculators and investors with residential properties will no longer be able to offset tax losses from those properties against other income for example, salary, wages or business income to reduce their tax liability. The losses can be used in future years when the properties are making profits or if the person is taxed on the sale of land.

Under the current New Zealand tax setting, tax is applied on a person’s net income. We do not ring- fence income and losses from particular activities or investments. This means that there is generally no restriction on losses from one source reducing income from another source.

Investment housing is currently taxed under the same rules that apply to investments. This means that rents are income and interest and other expenses are deductible. Capital gains on sale of the property are not taxed unless the property is on revenue account ( for example, land dealer or developer)
 
Aim of the proposed changes

The introduction of loss ring –fencing rules is aimed at levelling the playing field between property speculators/investors and home buyers. Currently, investor’s particularly high geared investors have part of the costs of servicing mortgages subsidised by the reduced tax on their other income sources helping them to outbid owner occupiers for properties. Rules that ring fence residential property losses so they cannot reduce tax on other income , and is intended to help reduce this advantage and unfairness.

Types of properties subject to the rules 

It is proposed that the loss- ring fencing will apply to residential land.
The rules will not apply on a person’s main home, a property that is subject to mixed assets rule for example a bach that is sometimes used privately and sometimes rented out and land that is on revenue account because it is held in a land related business.

Portfolio basis

It is suggested that the loss ring fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental against rental income from other properties calculating their overall profit or loss across their potfolio.

Using ring fenced losses

Under the suggested changes, a person’s ring fenced residential rental or other losses from one year could be offset against their:

1. Residential rental income for future years and
2. Taxable income on the sale of any residential land.
   
   

Timing of the introduction of the rules
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It is proposed that the loss ring fencing rules will apply from April 1, 2019 next year.

The Government has launched proposals for offshore suppliers of low-value goods to New Zealand consumers to collect and return GST on those goods. The Government is to close a loophole that gives offshore companies an advantage by not requiring them to collect GST on all goods sold to local consumers.

From 1 October 2019:
Offshore suppliers would be required to register, collect, and return New Zealand GST on goods valued at or below $400 supplied to New Zealand consumers.
 
The rules would apply when the good is outside New Zealand at the time of supply and is delivered to a New Zealand address.

Offshore suppliers would be required to register when their total supplies of goods and services to New Zealand exceed $60,000 in a 12-month period. In certain circumstances, marketplaces and re-deliverers may also be required to register.
Tariffs and border cost recovery charges would be removed from goods valued at or below $400.
 
The current processes for collecting GST and other duty at the border by Customs will continue to apply for goods valued over $400.
The current border processes for managing risks in relation to imported goods, including biosecurity assessment, will remain in place.

The legislation introduced last year was designed to simplify and integrate tax processes with day-to-day business. The result is a new option for managing provisional tax through accounting software, the ‘Accounting Income Method’ (AIM), which will be available to start on April 17, 2018.

What is AIM ( Accounting Income Method)?

Accounting Income Method is a new provisional tax option for small businesses with annual turnover under $5 million.

How does it work?

MYOB, Reckon or Xero calculates the payment by using the information in your accounting software.  The system will calculate provisional tax if your business is making profit. The calculation will include basic tax adjustments for depreciation, Shareholder Salary, Private Use expenditure, Debtors and Creditors, Provisions, Trading Stock and Prior Year Losses.

Two key benefits of Accounting Income Method

1. No exposure to Use of Money interest if you pay what your software tell you to.
2. No Penalties , if you take reasonable care with your record keeping.

What are the other benefits of Accounting Income Method?

1. Refunds are available throughout the year and can be transferred to other tax account ( e.g GST or PAYE)
2. Refunds will be automatic and quick so ensure to enter your correct bank account information.
   

Use AIM if your business turnover is 5 million, growing and the sales are unpredictable or fluctuating.

Partnerships, Maori Authorities, Superannuation funds, Trusts and Portfolio Investment entities.

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