Now that the dust has settled on what was one of the most anticipated Budget announcements in recent memory, now is time to reflect on the impact of the announced and proposed changes on property investors. In doing so I am going to focus on the specific impact of the tax changes and leave aside for the moment the wider macro effects of the impact of this Budget on the economy. Broadly speaking there are five areas where the tax changes will impact on property investors. They are as follows:
- The drop in personal marginal tax rates;
- The removal of depreciation claims on buildings;
- Proposed changes to the LAQC regime;
- Raising GST to 15%;
- Extra funding for audit activity at the IRD.
For advice on how the changes impact you, please contact us.
Depreciation vs Tax Cuts
Let’s take an example of a typical property investor who has taxable income from their job of $75,000 per annum and owns two rental properties that are currently worth circa $700,000 but were bought in 2002 and 2006 respectively for $550,000. For the 2011/12 income year if depreciation was still able to be claimed on buildings,. they would have been expecting to make a circa $6,800 depreciation claim which would have a maximum tax benefit of circa $2,200. At the same time due to the cuts in personal tax rates there is an increase to their after tax income of circa $2,400. Following this rationale, the investor would have been $200 better off (from a cash flow perspective) in the 2011/12 year. It is also worth nothing that of course depreciation is usually claimed on a diminishing value basis so the amount that would have been claimed on the building moving forward would be reducing over time. Finally, there is also the fact that in many instances depreciation claims produce a timing benefit only in that any depreciation claimed is then recovered on the sale of the corresponding asset.
Following this, we see the removal of depreciation claims as being mitigated by the drop in income tax rates (of course there will be additional private GST costs).
LAQC Regime
The budget announcement also signalled that there will be changes from the 2011/12 year to the LAQC regime. At the moment the proposals are at “Issues Paper” stage only which means they are open for public submission until early July 2010. The philosophy behind the proposed changes is to align the tax treatment of qualifying companies and loss attributing qualifying companies with limited partnerships. This means that some of the same aspects that LAQCs have now will be retained, in that tax losses will continue to be attributed to shareholders in proportion to their relative shareholdings. However, it also means a number of changes to other aspects of the LAQC regime. It will mean that taxable profit is attributed to shareholders rather than taxed at company level and there is also a proposal to limit the amount of tax loss that can be claimed to the shareholders’ exposure in the investment.
If you have an LAQC that may become tax profitable, then contact us for advice.
At this point in time the rules are not finalised but we will be watching this closely and it may well be that many investors who currently have properties in an LAQC will need to consider whether this is the appropriate structure for them moving forward.
If you have an LAQC with property in it, contact us for advice on
restructuring prior to the rules changing.
The fact that
depreciation on buildings has been removed, which may lead to a decrease in the
tax losses (or perhaps even some properties even becoming profitable), along
with the proposed changes to the LAQC regime, means that a review of structures
is necessary. If the changes continue to proceed as proposed, affected
investors would be best placed to restructure prior to 1 April 2011.
If you are selling property and want to know about the impact of depreciation recovery then contact us.
Likewise if you are buying property and want to know if the LAQC is still the right structure then contact us.
The rise in the GST Rate & Audit Activity
The rise in the GST rate will not have a discernible effect on residential property investors other than expenses that they currently incur that attract GST will increase without the ability for the GST to be recovered. There will however be an impact on property traders and commercial property investors.
If you are a property trader you will need guidance on transactions occurring around 1 October 2010 when the rate changes. Please contact us for advice.
It is also worth noting that extra funding is going to be provided to the IRD with one of the focuses being the property industry. As a result we encourage property investors to make sure that they are involving professionals in the preparation and filing of their tax returns and making sure that they are getting appropriate tax advice in relation to property transactions.
If you are concerned about tax treatment on past transactions or need advice on current ones, then contact us
Overview
Overall we think the Budget was a largely positive one for property investors even in respect to the tax changes. Certainly leading into the Budget there was talk of ring fencing of losses, which has not come to fruition. This would have had a much more significant impact on the property investment sector. As it is, the removal of depreciation claims on buildings from the 2011/12 year will definitely impact on property investors, but perhaps for many property investors any impact of this will be matched by gains resulting from the drop in personal tax rates.
Matthew Gilligan
Director
Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955
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