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Accounting & Finance

Property Traders Income Tax Traps

Property investors, whether they are following the trading strategy and/or the buy and hold, will need to be aware of the wide ranging and often complex taxation ramifications. Taxation (including GST) is the largest single expense you will face.

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Property investors, whether they are following the trading strategy and/or the buy and hold, will need to be aware of the wide ranging and often complex taxation ramifications. Taxation (including GST) is the largest single expense you will face. For example for traders their personal tax rate from profits may likely be 33% or even 39%. (note, these rates could be reduced through trusts)… Added to these rates, is the need to factor in the GST component on traders’ profits of 12.5%, which could bring these totals up to 45.5% and 51.5% respectively.

Tax Freedom Day

For a full time trader, after adding additional Government taxes such as GST on private expenditure which is not claimable on the business, such as food, clothing, fuel, alcohol, tobacco, holiday accommodation etc. and Local Body rates, the trader taxpayer could likely have to work effectively for well in excess of 5 months of every year for the Government before they start working for themselves, which is generally described as their “tax freedom day”.

As a comparison, the average New Zealander’s average tax freedom day has been estimated to be June 1st after 151 days working to pay taxes. These figures above, can climb even higher if the taxpayer is a provisional taxpayer personally, or is operating through a structure which even by default rather than selection, falls into the provisional tax net, and should they be caught by shortfall penalties and/or use of money interest (UOMI), which can be part and parcel of the provisional tax regime. This is when the real ‘fun’ starts.

What is Provisional Tax?

Just as salary and wage earners pay tax throughout the year, a taxpayer who earns income which does not have tax deducted at source is also required to make payments of tax in the same period the income is being earned. These provisional payments, as with PAYE, represent a payment of tax on account of the year’s tax liability, and are payable by those with residual income tax (RIT) which exceeds $2,500.

Provisional tax is generally paid in three instalments due on or before the 7th day of the 4th, 8th, and 12th months of the taxpayer’s year. For example for those taxpayers with a standard 31 March balance date, provisional tax is due on 7th July, 7th November, and 7th March. If there is an amount of tax still payable after allowing for any provisional tax paid and for any other tax credits, this is the terminal tax. For taxpayers with standard 31 March balance dates, terminal tax is due on the following 7th February. If the taxpayer’s return is linked to a tax agent, the terminal date is extended to 7th April.

New provisional tax payers are not obliged to pay provisional tax because they would have not had RIT for the previous year. However if their RIT for this first year is more than $2,500, they will be hit with UOMI. Investors involved only in the buy and hold strategy, should generally not be troubled by the penalties from provisional tax, because for approximately the first 6 years of ownership of each property, tax losses will be experienced, mainly resulting from depreciation.

Then from the break even point forwards, the profits are easily budgeted and without unexpected peaks in income, provisional tax can be accurately calculated. However provisional tax can be troublesome for certain traders.

Other Problem Areas which can hurt

There are two methods of calculating provisional tax. The standard method, being 105% of the taxpayers’ residual income tax for the previous year, payable in three equal payments.

This method can be referred to as the “safe harbour method” for taxpayers (particularly property traders, other than a trustee), because taxpayers can be safe from shortfall penalties providing they pay the due tax on time. Individual taxpayers who have RIT of $35,000 or less, and adopt the safe harbour method, are not subject to Use of Money Interest (UOMI) where the provisional tax paid is less than the actual tax liability for the year provided: (i) the tax is paid by due date; and (ii) the individual does not hold an exemption certificate from Resident Withholding Tax on interest and dividends.

The alternative method, is the estimation method. Under this method, the provisional taxpayer estimates their residual income tax for an income year and pays on the basis of their estimate. This estimate can be revised at any time up to the third instalment date. Taxpayers in this regime are vulnerable to shortfall penalties of 20%, if they do not take reasonable care when making their estimates and pay less than the minimum amount of provisional tax. They will also suffer UOMI calculated at 13.08% per annum as shown in the example below.

This will apply even where the amount paid by the third instalment date exceeds 105% of the previous year’s residual tax. An example of the danger of this method, is a trader taxpayer who has paid their 3rd provisional tax payment on say 7th March based on their earlier estimate. Then for example on 15th March they have an unplanned trade sale, which settles before 1st April produces a sizeable profit.

They will face a hefty shortfall penalty calculated on the 3rd provisional tax payment unless they can show as at 7th March the estimate was reasonable, together with UOMI on provisional tax underpayments going all the way back to the first instalment date of 7th July. The following table will illustrate the effect.

Profit on transaction on 15th March 06 = $20,000 x tax of 33% = $6,600 Penalty taxes 20% are potentially payable on $6,600 = $1,320 Plus UOMI Payable 7 July 2005 $2,200 at 13.08% p.a. for 123 days = $ 97 Payable 7 November 2005 $4,400 at 13.08% p.a. for 120 days = $ 189 Payable 7 March 2006 $6,600 x 13.08%p.a. for 337 days to 7 February 2007 = $ 797 Total Payable = $9,003 Total penalties and UOMI = $2,403

Summary on how to resolve these problems

This demonstrates the difficulty for the trader trying to hit a moving target, and just how expensive their total tax bill may be, including income tax and GST, plus if they get it wrong, shortfall penalties as well as UOMI. In this example, it would have been far more advantageous to have had better planning and deferred the property settlement until after 1 April being the new tax year. A Tax Pool specialist company could also be consulted in attempt to purchase tax for an earlier date to eliminate the penalties and reduce the interest. Trust structures, together with sound accountancy and tax advice can ameliorate the situation.

Disclaimer: This information is educational material only and should not be relied upon exclusively. The reader is directed to seek professional advice before proceeding. It is essential to seek specific professional advice pertinent to the individual’s requirements as circumstances and conditions may vary.

Accounting & Finance

Low Interest Rates Winners and Losers

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Lower mortgage interest rates is a big deal for most homeowners and buyers.

Existing homeowners can hunt around for a better deal with the same or another lender and in the process save hundreds, if not thousands of dollars on interest payments. Even if a borrower is locked into a fixed rate deal on a fixed term, it often pays to break it and reap the rewards of paying a lot less interest.

For first time home buyers, lower interest rates can be the difference between renting and owning a home. Existing homeowners trading up or down, see lower interest rates as a great time to sell and buy too, Therefore there is always a frenzy of activity in the mortgages sector when there is movement in interest rates and there will be winners and and there will be losers.

Winners and Losers

Lower interest rates sends a signal to vendors with homes to sell, that there are more buyers in the market. This can get unsold properties sold which is a win win for vendor and buyer.

More buyers in the market, however can also push the sales price up, as vendors aim to get the best price and there can be only one buyer, the one who is willing and able to pay the most.

In this situation it’s more of a win for the vendor. The eventual purchaser is likely to have paid more than they were comfortable with and thus borrowed more to get the property. Plus there were many buyers locked out by the higher price.

First Home Buyer Tip

The tip for first home buyers is to always be ready to take action as soon as the timing is right.

For first home buyers, it’s always a good time keep a financial advisor or broker up to speed on your personal financial position. This way when the timing is right, like a downward move in interest rates, you can just ask the question:

“What can I afford to borrow, now the interest rates are lower?”

There is no such thing as one size fits all when it comes to borrowing money. Your position will determine how high risk you are to a lender.

A trusted advisor in the know, can act fast on your behalf when lending conditions favour you. Lenders who see you a good ‘investment’ will be keen to move quickly too, to secure your business and thus beat their competition, i.e. other lenders.

Recent news of an OCR rate drop by the RBNZ, spread like wildfire around the country and the early worm is sure to get the best deals.

Homeowners with advisors already up to speed on their current position, will be busy acting on their behalf, to find the best deal saving their clients hundreds if not thousands in interest repayments over the term of their loan.

Property price increases have cooled in Auckland, increasing by just 1.7 percent compared to the previous year. Listings too have been lower, however that’s all about to change. More buyers, trigger more listings and with more buying power, higher property prices.

Timing is everything, so whatever your circumstance, talk to your mortgage advisor and act on the deal that’s right for you.

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Accounting & Finance

Property Listings Drought Adds Fuel To Fire

A property listings drought is adding further fuel to our over-heated property market. Property prices are increasing everywhere except Taranaki according to Trade Me Sales Price Index and that’s got the RBNZ considering further action to curb demand.

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A property listings drought is adding further fuel to our over-heated property market.  Property prices are increasing everywhere except Taranaki according to Trade Me Sales Price Index and that’s got the RBNZ considering further action to curb demand.

The RBNZ’s LVR restriction on Auckland property investors has done little to dampen their appetite and many have also moved their focus to other areas where property prices have been on the increase since October 2015.

The listings drought suggests most home owners are electing to improve their properties using the equity in their homes over moving house.  Some Aucklanders have chosen to leave the city for change of lifestyle and Tauranga has been one of the main benefactors as well as the region of Hawkes Bay.

Curbing demand is how the RBNZ want to deal with the property market and they’re considering a variety of measures.  Bernard Hickey in a news item on NZHerald believes we’ll know more on the RBNZ’s next move  in the second half of 2016.  Bernard mentions two dates in particular: 19 August is the deadline for Auckland  Council to accept all or some or reject all the Unitary Plan.  The Government is hinting at wading in if the Unitary Plan does not meet their goals of an Auckland growing up and out to meet new housing supply targets.

The other date to watch out for is 30 November.  On this day the RBNZ presents it’s Financial Stability Report.  One of the measures under consideration by the RBNZ is the fixing of the income to loan ratio.

From the news item on NZHerald

“The Reserve Bank helpfully included a chart in this week’s report that showed around 35 per cent of owner-occupiers and 60 per cent of investors had borrowed more than 5 times their income.”

New rules are coming and if what’s happened to date is anything to go by the RBNZ is not shy at taking action so keep these dates in your diary.  No doubt investors are now very aware of their income to lending ratio and will be taken the necessary steps to survive the next round of RBNZ restrictions.


This blog article was written for PropertyBlogs by Mobilize Mail.

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Accounting & Finance

How Low Can Mortgage Rates Go?

News of lower wholesale interest rates suggests we may be in for another round of super low home loan interest rates as early as next week. A news item on interest.co.nz provides examples of the correlation between swap rates and the mortgage rates with one example being SBS Bank’s one year rate as it was back in November 2015.

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News of lower wholesale interest rates suggests we may be in for another round of super low home loan interest rates as early as next week.   A news item on interest.co.nz provides examples of the correlation between swap rates and the mortgage rates with one example being SBS Bank’s one year rate as it was back in November 2015.  At the time their rate was big news as it was the lowest at 3.99% while the one year swap rate was at 2.72%.

Fast forward to February 2016 and SBS Bank’s one year rate is at 4.35% while the one year swap rate is currently lower than it was back in November, its currently 2.58%.  A downwards move is predicted and SBS Bank could move back to where it was in November 2015 at 3.99% or go even lower.

It really just takes one lender to make a move and the other lenders are sure to follow.  Borrowers in the know are regularly speaking to their mortgage broker to keep up to speed on the best deals and terms on offer.

So how low can mortgage rates go?  Possibly lower than they were in 2015.


This blog article was written for PropertyBlogs by Mobilize Mail.

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