Why ring fencing rental losses are being introduced

Auckland residential market has been hot topic for several years. It has been going in only one direction upwards. The Government has been trying to make changes in tax policies since 2010. Firstly, they abolished LAQC, and depreciation on building, then introduced bright line test. Currently the bright line test has been extended to 5 years from April 2018 onwards, and Ring fencing of rental losses are being introduced from April 2019.

What is 63-day rule

A person is allowed a deduction for the amount spent on employing people. Payment related to employment could be in the form of wage and salary or payment of leaves. Section EA 4 says payment must be made within 63 days after the end of the income year. Any payment not made within 63 days after the of the income year, becomes income of the person for tax purposes. It means deduction is not allowed for the unpaid portion.

Financial Hardship

In the recent tax case of Singh v The commissioner of Inland Revenue [2017] NZCA 506, the court of appeal held the Commissioner can ignore sections 176, 177, 177c of the Tax Administration Act 1994 when pursuing bankruptcy due to non-payment of tax.

Each person has a different lifestyle. To maintain a good lifestyle lot of financial planners, go with $100k a year for a couple, means $50k for one person. However, this has been a very traditional approach this approach is suited for industrial age era not for modern time (information age)

Traditional approach is you work till 65, keep making small savings in your retirement funds. By the time you retire you should have about $500k in your investments. These investments will give you a yield of about 5%, so you will get about $25k a year. You will also be eligible for Super, may be one investment property so roughly you will get about $50k a year.

RWT on dividends between companies

With amendments being made to sections RE 2(5), this now limits the definition of “resident passive income”. This section excludes fully imputed dividends paid to a corporate shareholder if the paying company chooses to exclude the dividend from the definition.

This will allow a company to opt out of withholding RWT on a fully imputed dividend paid to another company.

The above amendments were needed because of company tax rate being lowered from 33% to 28%. Dividends were effectively overtaxed by the amount of RWT withheld.

You need to be careful when deciding between employee or contractor. The mistake of paying someone as a contractor if they really fall under the category of an employee can be very expensive. This can be a trap that can cause you serious problems later.

What is RWT (resident withholding tax)

It is a tax deducted on dividend before making a payment to the shareholder. For example, if company made a profit of $100 before tax, $28 would be income tax. Net profit after tax $72 will be a liability payable to shareholders. A payment of $72 will be made to the shareholders, the name of this payment is dividend.  The IRD is interested in collecting tax from this payment, with current highest tax rate being 33%, further 5% of deduction is imposed on the company. Hence, $5 will be deducted and paid to the IRD, this is called RWT.

What are the new rules of RWT on Dividend payments for closely held small companies.

The changes on Dividend and RWT are outlined in Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill.

The bill received royal assent on 30-03-2017. This Act came in to force on the same date, and in practice from 01-04-2017 income year.

Exemption of RWT deduction on Dividend Payment between companies

1.Utilise technologies:

Modern techs can save your time and give you edge over other competitors. Use of Facebook, LinkedIn, Google+ will be easy to reach large number of people. Dropbox or Google Drive can save your data in cloud so you don’t have to worry about losing your important data when PC crashes.

In November 2015, the Government released the fourth document in a series of discussion documents for public consultation planned for the next few years to support consultation on the Government’s proposals for modernising and simplifying tax and social policy administration in New Zealand.