While 2020 has been eventful, to say the least, it has been a relatively quiet year on the tax policy front. Here is our brief summary of relevant tax matters from the 2020 year (so far).
RECENT TAX CHANGES
Depreciation on non-residential buildings One important change for the property sector is the reintroduction of depreciation on buildings for non-residential buildings. This applies from the 2020-21 tax year for new or existing commercial buildings. This change was included as part of a COVID-19 recovery/ stimulus package, but the change had been signalled by Inland Revenue Policy late last year.
Loss carry-back scheme The ability to carry-back losses is another change that was announced as part of a COVID-19 stimulus package, despite also being signalled late last year. A temporary ability to carry-back 2019-20 losses to 2018-19, or 2020-21 losses to 2019-20 has been introduced as an interim measure while a permanent scheme is created. Being able to carry-back losses could be very useful to landlords who end up in a tax loss for 2020-21 due to providing rental holidays or tenant defaults or vacancies. Carrying back losses will generate refunds of prior year tax paid (if any).
Ring-fencing of losses Ring-fencing of residential rental tax losses came into force for the 2019-20 tax year, so the first tax returns under these new rules are now being filed. These rules mean that residential rental losses can no longer be used to offset a taxpayer’s other income. These rules also make filing tax returns for rental properties far more complicated.
COVID-19 TAX CHANGES
Provisional tax, late payment penalties, and use of money interest The threshold for provisional tax has doubled from $2,500 to $5,000. This change will shift many taxpayers out of the provisional tax regime, giving them the cashflow advantage of having further time to pay their income tax. The Inland Revenue has been given the power to write-off penalties and interest for taxpayers who cannot make their tax payments on time due to the cashflow impacts of COVID-19. To take advantage of this concession, affected taxpayers need to contact Inland Revenue and agree to an ‘instalment arrangement’ as soon as practicable. Generally, Inland Revenue is giving the taxpayer 24 months to pay the tax arrears. Once the tax arrears are paid off, the taxpayer can then request the write-off of interest and penalties. Also, a very recent change essentially allows taxpayers to pay provisional tax instalments based on their forecasted 2020-21 profit. If the taxpayer’s forecasts were wrong due to the uncertainty caused by COVID-19 and they did not pay enough at a given instalment date, the taxpayer can request a write-off of interest. The Inland Revenue expects taxpayers relying on this rule to keep records for the reasoning of the amount paid at each instalment, and to revisit their forecasts for any subsequent instalment date.
Low asset write-offs The threshold for immediately expensing the purchase price of low value assets has increased from $500 to $5,000 for the 2020-21 year. The threshold will drop back down to $1,000 in the following year.
GST registration for short-term rentals So far, the only specific tax change for the property sector due to COVID-19 is in relation to GST on short-term rentals. The border being closed has meant that many property owners who had been using their properties for Airbnb type short-term rental have had to switch the use of the property to long-term residential rental. If a property owner in this situation does not have a separate ‘taxable activity’ for GST purposes, then this change in use normally mean that they need to deregister from GST, and this would require them to pay GST on the market value of the property. The Inland Revenue released a ‘COVID Variation’ where a property owner is given 18 months to re-commence a short-term rental activity without needing to deregister. To take advantage of this, they need to send an email to the following address: STRdisclosures@ird.govt. nz to give notice to the Inland Revenue that they are taking advantage of this concession. Where a short-term rental is used for long-term residential rental also triggers the need to make ‘change in use adjustments’ for GST purposes. Basically, the owners will need to pay back some of the GST they have claimed for each period they use the property for the GST exempt longterm rental. The COVID Variation states that the change in use adjustments are still required. These adjustments are unnecessarily complex, so affected taxpayers will suffer unnecessary compliance costs if the Inland Revenue does not remedy this. We have asked the Inland Revenue to consider some relief from change in use adjustments in these circumstances.
WHAT ELSE ARE WE SEEING?
Bright-line rules are catching property sellers out The ‘bright-line’ rules have been around since 2015, but we still regularly see property sellers being caught out. Remember, the bright-line rules are a form of capital gains tax that treat the sale of residential land/houses that are not a person’s main home as taxable if they are sold in the bright-line period. The bright-line period increased from 2 to 5 years for properties acquired on or after 29 March 2018. Residential rental properties (whether long-term or short-term) will almost always be caught by the bright-line rules, so you need to understand the consequences before selling (or otherwise transferring) a residential rental property. One trap we see often is where rental property (or holiday home) is transferred to a trust, or a trust is resettled, and then the property is later sold. The transaction involving the trust will generally start the 5-year clock running again for the bright-line rules. Commercial properties that are not on residential land are not captured by the bright-line rules.
Read the latest Spring Canterbury Property Investor here.