Why you should split banks to take advantage of the loan-to-value (LVR) rules

While most of the attention recently around mortgage rule changes has concentrated on the implementation of the debt-to-income (DTI) rules, it is worth noting that on the same day this change came in (1 July 2024), the Reserve Bank also slightly relaxed the loan-to-value restrictions on secondhand investment properties.  

What are the loan-to-value (LVR) rules?

Loan-to-value ratio (LVR) rules in New Zealand are restrictions set by the Reserve Bank to manage lending risks in the housing market. 

They are the percentage of lending that a bank can lend against the value of the property they are taking as security.

For example, a $700k loan against a $1m property is a 70% LVR.

Key points about the current LVR rules

1.  For owner-occupiers purchasing or leveraging property: 
• Generally, a minimum 20% deposit is required, meaning a maximum LVR of 80%.

2.  For residential property investors purchasing or leveraging existing property:
• A minimum 30% deposit is required, meaning a maximum LVR of 70%.

 3.  Exceptions and variations: 
• First-home buyers may have access to lower deposit options, such as the Kāinga Ora First Home Loan with a 5% deposit.
• Some banks may offer low deposit options for first-time buyers with 5-19% deposits.
• New builds and construction loans may be exempt from LVR restrictions. 

LVR changes over time

It is worth noting that the rules have been changed multiple times by the Reserve Bank since their introduction back in 2013.

The first LVR restrictions were implemented in October 2013 by Reserve Bank Governor Graeme Wheeler, aiming to slow house price growth, particularly initially in Auckland. However, these initial measures proved ineffective, as Auckland house prices continued to rise for the next three years.

In 2016, the restrictions were tightened, requiring a 40% deposit for secondhand investment properties in Auckland and 30% for the rest of the country. Over the following years, the Reserve Bank made several adjustments to the rules. 

In April 2020 as part of the Covid-19 response, LVR restrictions were temporarily removed. This led to a significant increase in house prices as the country emerged from lockdown and throughout the rest of 2020.

The restrictions have been modified multiple times since their inception, with at least five changes occurring since 2020. These adjustments reflect the Reserve Bank’s ongoing efforts to manage housing-related credit growth and house price inflation.

Why you should split banks to take advantage of LVR rule changes

When you have multiple properties at one bank, the bank is limited to lending you against the collective security value.

For example, let’s go back to when the Reserve Bank removed the rules in 2020 and it was possible to purchase existing investment properties at 80% LVR. Let’s say you had equity in your home, which had a mortgage at ABC Bank, and you decided to purchase a couple of investment properties. You would have ended up with a situation that looks like this:

ABC Bank would have used equity in your home to enable you to purchase the two investment properties. Effectively what they actually did looks closer to the below because the equity in your home allowed you to top up your mortgage to the full 80% of value, meaning you had an extra $200,000 available for deposits on the investment properties. 

When the LVR rules relax, the positive is that it becomes easier to leverage. However, the opposite applies when LVR’s tighten and if everything is held with one bank – it actually becomes harder to leverage. 

As we saw across 2021 when the rules tightened and it became possible to only leverage to 60%, and then 2022 to now when we have had a tighter property market which erased much of the growth from the low interest rate Covid market, the above investor will have ended up having a position which more looked like this:

In this case, the negative usable equity from the two investment properties offsets the available equity in the investor’s personal residence and they can’t do anything. At this stage they are limited to waiting for capital growth or non-bank solutions to invest further.

In other words, when properties are cross-secured, as illustrated in this example, you can end up with a negative usable equity position when the LVR rules became harder. 

If, however, the investor had separated the investment properties to a different bank so that the only property held with ABC Bank was their home, then ABC Bank does not need to take the current negative usable equity position of the rentals into account because these properties are held by a different lender. Thus by split banking (having the rental properties with another bank), there would still be useable equity available in their home.

In this scenario, it is possible to go back and unlock the $200k equity that is in their home by leveraging it to 80%, and then bring in a further bank lender for the remaining funds to complete another investment purchase.

Besides the above clear benefit, there are also differences between banks as to how they asses a client’s maximum loan affordability. For these reasons, split banking opens up the ability to access further lending and potentially get another purchase across the line.

National’s Tax Plan Highlights

On 30th August 2023 National announced its tax plan ahead of the upcoming election labelled “Back Pocket Boost – Tax Relief for the Squeezed Middle”.

As in the name, the focus is on middle New Zealanders, aiming at putting cash back in their pockets. The plan is to provide $14.6b income tax relief over the next four years and will not require any borrowing.

Income tax bracket adjustments

  • The existing income tax brackets have been in place since 2011
  • Inflation has seen the average New Zealand income rise significantly over this period resulting in many individuals being taxed at higher marginal tax rates
  • The proposed changes in the table below result in less tax being paid on the dollar for all earnings under $78,100 (even for individuals who receive a higher total income than this)

Independent Earner Tax Credit (IETC) threshold increase

  • Currently this provides up to $520 in tax credits for earners on less than $48,000 per year (and over $24,000)
  • The eligibility for this credit will be lifted to those earning up to $70,000, which is estimated to benefit 380,000 working New Zealanders

Other assistance for individuals and families

  • Increasing the value of the in-work credit by $25 a week from 1 April 2024
  • Introducing a FamilyBoost childcare tax credit worth up to $150 per fortnight for families with young children
  • Increasing Working for Families tax credits for working families from 1 July 2024
  • Increasing NZ Super payments every year they are in office

Brightline period on residential property

  • National will reduce the Brightline period from 10 years to two years
  • The rules are to take affect from July 2024
  • Currently any gain on the sale of a property purchased from 27 March 2021 onwards can be subject to tax up to ten years from sale (five years for qualifying new builds)

Interest deductibility for rental properties

  • Restoration of the interest deductibility for rental properties
  • This measure will be phased in with deductibility kept at 50% from April 2024, 75% from April 2025 and fully restoration from April 2026

Commercial building depreciation

  • Depreciation on commercial buildings will be scrapped
  • This measure was re-introduced by Labour in response to COVID-19 following its previous removal from the 2012 income year onwards
  • Labour have also confirmed they would cease this policy to fund other tax measures so it is all but certain to be removed

Foreign buyer tax

  • Introduction of a 15% foreign buyer tax for purchases of homes of $2m or more by people who do not hold a resident class visa in NZ
  • The foreign buyer ban will remain for homes worth less than $2m
  • It is assumed that Australian and Singapore citizens will not be affected by this tax as they not currently affected by the foreign buyer ban

Navigating path to success

In the complex and ever-changing landscape and nature of business, strategic planning stands as a beacon of direction and purpose for enterprises. Strategy is the art and science of envisioning a desired future and charting a course to reach it, guiding organisations toward sustainable viability and success. But what makes strategic planning truly valuable fascinating and insightful? Let’s delve into the depths of this crucial process.

The Foundation of Success

At its core, strategic planning is about setting a clear path forward. It begins with a deep understanding of an organisation’s current culture and state. This introspective phase involves assessing strengths, weaknesses, opportunities, and threats (SWOT analysis), as well as reviewing and understanding the organization’s core values, culture and mission. It’s akin to knowing your starting point on a map before planning your journey.

The Power of Vision

One of the most compelling aspects of strategic planning is the creation of a compelling vision, that all stakeholders can buy into. A vision is not just a statement; it’s a vivid mental image of the future you aim to achieve with the collaboration and support of others. It’s a focal point that inspires and motivates everyone involved. A well-crafted vision brings a sense of purpose and unity to the organisation and its team, aligning individual efforts with collective goals.

Adaptability: The Strategic Imperative

In the modern business environment, adaptability is paramount. This is where outstanding strategic planning truly shines. It’s not a static process but a dynamic iterative one that accommodates change. The ability to pivot and adjust the course in response to shifting market trends, unforeseen challenges, or new opportunities is a hallmark of effective strategic planning. It’s akin to navigating a ship through stormy seas, adjusting the sails to stay on course, when the unexpected is thrown at you.

Effective Resource Allocation

Strategic planning forces organisations to make tough decisions about where to allocate their limited resources—time, money, and talent. It’s no different to budgeting for a long journey; you need to allocate resources wisely, with priority to ensure you have enough of what you need to reach your destination. This aspect of strategic planning involves prioritising initiatives that will have the most significant impact on achieving the desired outcomes.

Alignment and Collaboration

Another vital aspect of strategic planning is its ability to align diverse people, teams and departments within an organisation. It fosters collaboration by providing a shared pathway visible to all. When everyone understands their role in achieving the strategic goals, a sense of unity and synergy emerges. It’s like a good band playing well as a group, each individual and instrument contributing to an exceptional overall collective sound.

Measuring Progress and Accountability

Strategic planning isn’t just about setting goals; it’s about measuring progress and holding individuals and teams accountable. Key performance indicators (KPIs) serve as markers along the journey, helping organisations stay on track, and know where they are on the journey. This aspect brings a sense of discipline and rigor to the process, ensuring that actions align with intentions.

The Art of Risk Management

In the realm of strategic planning, the ability to assess and manage risks is hugely important. Every path forward carries uncertainties and potential pitfalls. Strategic planning involves identifying these risks, developing contingency plans, and making informed decisions. It is similar to a chess game, where foresight and calculated moves in advance are essential to winning, as are adapting to the opponents moves in the game also.

Continuous Improvement

Strategic planning is an iterative process, not a one-time event. The ability to learn from past experiences and adjust the strategy accordingly is a source of enduring insight. It’s a process of refinement over time, making it better with small incremental changes and improvements at each iteration. Organisations that embrace continuous improvement in their strategic planning are more likely to stay ahead of the curve.

Strategic Planning for a Better Tomorrow

In conclusion, strategic planning is more than a business necessity; it’s a necessary and vital part of the business journey. It combines elements of self-awareness, vision, adaptability, resource allocation, collaboration, measurement, risk management, and continuous improvement. It empowers organisations to shape their destinies intentionally rather than just taking what they get passively.

Strategic planning is the compass that navigates organisations toward their desired futures. It transforms abstract visions into concrete actions, enabling businesses to thrive in the complex and dynamic world of today and tomorrow. It’s not merely a tool; it’s a mindset—a commitment to excellence and a belief that the future can be shaped by deliberate choices and actions, in this ongoing quest for success.

Methods for Calculating Provisional Tax

Standard Method

Instalments are calculated at 105% uplift of previous year’s residual income tax; or 110% of the year before residual income tax (if previous year income tax return is not filed).

Pros

Use of money interest is calculated on lowest cost option based on the tax instalment paid per standard uplift or in equal instalment.

If paid in full and on time, use of money interest only applies on underpaid tax from P3 (over $60k taxpayers).

Cons

Payments are due during the year even if the tax payers expects to have a lower residual income tax in current year.

Estimation Method

A formal estimate is required to be filed. (this can be done online in myIR).

Payments are based on 1/3rd of the estimated residual income tax on each provisional tax date.

Pros

Instalment can be paid based on expected liability, particularly if expected amount is lower than standard method.

Cons

Use of money interest is calculated from each instalment date on any underpaid amount.

If taxpayers elects into the estimation method, the same method will apply to all “provisional tax associates” / group entities.

Aim Method

Low uptake.
Higher frequency of payments.

Pros

Good for cash sales business.
Refunds are paid in the period, rather than waiting for the return to be finalised.

Cons

Increased frequency of filing obligations.

Cannot use tax pooling for a missed payment.

High overall compliance cost.

Venturing into the metaverse with strategic M&A (Deloitte)

Technology, media, and telecommunications (TMT) companies play important roles in building the metaverse. As they stake out positions and plan their offerings, industry players could move to build and buy metaverse-related capabilities like spatial computing, tokenized assets, 3D modeling, AI and machine learning, and augmented-, virtual-, and mixed-reality devices. Companies advancing their metaverse strategies should consider how far their existing technologies and in-house skills will take them on this journey, and where targeted acquisitions may offer the fastest and most effective growth strategy.

In the current hype cycle, almost any deal that involves high-speed networking or cloud or edge computing, for example, may be categorized broadly as “metaverse.” Our analysis found that, over the past 24 months, 115 transactions involved a technology or solution that could directly enable the metaverse.1 From offering next-generation entertainment experiences to providing the technologies that power it all, it is no surprise that TMT companies drove three-quarters of these deals. The metaverse landscape is fragmented, however, and still lacks any single dominant player. This could create an opportunity for companies to use mergers and acquisitions (M&A) to purchase critical components and fill strategic gaps.

To identify trends in metaverse M&A activity, we can draw useful “market boundaries” or categories around content, user devices, software, and economy. Three findings emerged from this view of the transactions:

Content remains king: Over the past 23 months, content-related transactions accounted for the largest deals by value and average deal size. Although bolstered by a US$69B gaming deal, content will likely remain at the forefront of metaverse-related deal activity.2 This could be especially true for gaming studios and technology providers that may already be closest to delivering metaverse experiences. Indeed, gaming M&A will likely continue growing.3

User devices may not be a key differentiator: While some deals may be looking at key enabling technologies like optics for AR glasses, overall deal value for user devices tends to be low. The landscape of devices geared towards metaverse experiences may still be fragmented and can be difficult to navigate due to information asymmetry. To enable more widespread adoption, devices may need to align around interoperability standards. Recently, big names in software technology have been forming large consortiums to assemble a standards group for metaverse tech.4 Practically, this means that companies with more mature hardware may seek to acquire emerging device and component manufacturers to accelerate standards compliance. With growing interest in bringing metaverse capabilities to existing devices like laptops and smartphones, novel hardware may focus more on supporting premium experiences and specialized enterprise or industrial use cases.

Financial firms are the biggest movers: When considering the volume of deals, financial buyers have been the early movers, likely given their access to capital and appetite for risk. Over 40% of deals that we analyzed occurred through at least one financial buyer or by groups of smaller private equity shops. In the near term, we could expect cash-rich financial investors and consortium participants to continue gaining familiarity and comfort with the metaverse. However, this may put pressure on other potential buyers hoping to establish early competitive advantage.

WHAT TMT COMPANIES SHOULD CONSIDER

As TMT companies look to develop metaverse capabilities, they should consider all aspects of the value chain, from hardware to software to virtual and physical services. Media and entertainment may look to bring their existing content into metaverse experiences, or to buy content libraries from others. In addition, these companies might need to partner or buy the technology required to deliver and scale those experiences. To help foster broader adoption, hardware companies developing user devices could consider interoperability by exploring partnership strategies. Hardware companies may also want to consider road-map acceleration through acquisitions or partnerships with niche or pure-play technology companies. Software companies and gaming studios can seek innovative capabilities that might enable content providers to bring their intellectual property (IP) into shared immersive experiences.

All these opportunities underscore the need for thoughtful M&A strategies. As TMT companies think about building their metaverse capabilities, they should consider the following:

What is the vision for our role in the metaverse economy? Is it in core infrastructure and services, enterprise enablement, or consumer experiences?

Where do our current strengths lie and where do they fall short? What capabilities are needed to support a metaverse strategy?

Does our organization have the talent needed to execute on its metaverse aspirations?

What technical abilities or IP will we need to bring its metaverse vision to life?

Acquiring a capability may offer an expedited path to knowledge, experience, and captured value. With an informed M&A strategy, companies could shape future markets and offerings and help to accelerate metaverse adoption.

Tax and Trusts

Whether you are a businessperson signing contracts and leases in the ordinary course of business, a property investor signing finance agreements with banks, a property trader, or a developer, you will no doubt want to pay as little tax as legally required and protect the assets you’ve worked so hard to attain.

So how do you do this? Should you set up a company? A trust? Both? Neither?

The answer is in the asset planning process, and the objectives are threefold:

  • To protect your assets
  • To plan your estate
  • To effectively and efficiently manage tax

Without a good asset plan, your assets could unnecessarily land in creditors’ hands, the beneficiaries of your estate might not get what you intend to leave them, and you could end up paying too much tax (or not enough and then get into trouble with IRD).

If your trust succession arrangements are incorrectly set up, your children could lose control of your trusts to lawyers or accountants. If your trust is not administered correctly, it could become a sham trust and be deemed invalid, causing the assets of the trust to become available to creditors or spouses, or suffer adverse tax consequences.

The devil is always in the detail, and sometimes the detail is out of date or just wrong.

Where do you start?

To achieve the right outcome, you need tailored advice from experts who understand the tax, legal, and estate planning aspects of your situation. Be careful of one-sided advice from an accountant focusing on tax, or a lawyer focusing on the law. You need both disciplines working together to achieve an effective asset plan.

The first step a good asset planner will take when planning for success, is to plan for failure. This may sound counterintuitive, but asking the question “what if you knew you would be bankrupt next year?” will mean you can put things in place to minimise the damage, should the worst occur. 

Of course you don’t set out in life or business expecting a financial disaster, but left field events can happen (e.g. dishonest business partner, an uninsured contractor working on your investment property who damages a neighbour’s house or public infrastructure, or a business failure). If you have good tax and trust structures, the negative impact of such an event on you and your family will be greatly reduced.

What happens if you don’t have an asset plan?

If you don’t address these sorts of issues, you will likely end up with a structure that completely fails at asset protection, where you (and your spouse) are liable for all business disasters that may occur and possibly end up bankrupt as a result. And don’t forget the banks – you need to carefully structure debt so your family home is not on the line if your businesses fail.

A structure like the one illustrated below is an example of how a poorly structured asset ownership plan causes all assets to become available to creditors. We’ve seen many people in this situation, who’ve make the mistake of thinking “my risk is low, what could possibly go wrong?” – without actually thinking about what could go wrong.

These people should have traded in a company, and had their assets held in trust. This would have quarantined the risks away from their family home and other business assets.

But then how does the tax work? It all needs to fit together, and moving assets can create tax disposal costs if not carefully thought through. So it’s not just a simple exercise of moving assets around with legal agreements; the tax planning needs to be done with the asset protection.

As always, seek professional advice before deciding on an asset plan.

Legislation Changes

The government have made changes to two areas of legislation that affect property investors: tax (interest deduction and bright-line), and the Resource Management Act.  


Tax Changes

In October the government finally introduced legislation into parliament setting out the proposed interest deduction rules. Here is a summary of the highlights.

a) We still do not have finalised legislation. Even these draft rules are yet to go through select committee. We do not expect it to be finalised legislation until around March next year and there could still be changes to come. Highly unsatisfactory.

b) The definition of new build is different to expectations. Any property where CCC is issued on or after 27 March 2020 qualifies. This broadens the catchment of the new build definition, which was previously expected to apply to new builds where CCC was issued after the announcement in March 2021.

c) Interest can be claimed on borrowing in relation to new builds for a 20-year period. The 20 years runs from the issue of CCC. This means that multiple investors may be able to claim interest in relation to the same property as it changes hands over time – until the 20th anniversary of the issue of CCC arrives.

d) A new exemption has been included for properties that are rented out as social housing. This is a welcome inclusion for investors who rent properties to the Crown or community housing providers.

e) There is a real lack of clarity around whether boarding houses are exempt from the rules or not. There is no reference to boarding houses in the list of exempt residential property, but accompanying commentary suggests that “larger” boarding houses could be regarded as “hostels”, which are a listed exclusion. Naturally there is no definition of a hostel nor what constitutes a “larger” boarding house.

f) Interest that cannot be claimed as deductible will be able to be offset against any subsequent taxable gain realised when a rental property is sold. While this would be common sense drafting to most readers, it was not an assured outcome, so we are pleased to see this taxpayer-friendly inclusion.

g) The proposed “rollover relief” rules have been included. This is also taxpayer friendly and will allow investors to restructure the ownership of assets without triggering adverse tax consequences in certain circumstances. However, there are catches to this and it does not apply as widely as it should.

h) A five-year bright-line period has been confirmed for the sale of new build property, with the definition for these purposes being a property acquired before 12 months have passed from the date of issue of CCC.

i) There has been further amendment made to the main home exemption from the bright-line rule. What once qualified as a reasonably complex definition has now flowered into a near indecipherable mixture of multiple defined terms and mathematical formulas that would take me several pages to explain to readers.

RMA Changes

With cross-party support, the government recently announced arguably the most systemic changes to development controls that New Zealand will witness in our lifetime. Essentially, the main features that enable high-density housing under the Auckland Unitary Plan are being spread across much of NZ. However, the proposed rules have reduced or no parking requirements and even more permissive controls than those adopted in Auckland. The rules will release huge development potential for infill housing and high-density development across the country. 

The changes are part of the Intensification Streamline Planning Process (ISSP), and will cause the main centre Tier 1 Councils and a year later, Tier 2 Councils to adopt the standards a year faster than under normal RMA timeframes. Councils are required to report back with their proposals to adopt the suggested framework by August 2022. If councils do not get on board with the proposed density and development controls, the government, through the independent hearings panel, will force the changes into their district plans.

The proposals might be characterised by Aucklanders as Mixed Housing Urban (MHU) zoning, with more permissive height in relation to boundary (HIRB) rules (more like the THAB HIRB rules), and with even smaller living courts and outdoor living spaces. Let’s call the proposed Medium Density Residential Standards “MHU on steroids”.

The proposed Medium Density Residential Standards (MDRS) will release huge volumes of permitted dwellings across NZ in areas traditionally restrained by density rules (e.g. one dwelling per 450m2 or 600m2).

Tax Changes Update

The Government’s release of draft legislation this week was disappointing on a number of fronts.

First, what was expected to be complex legislation has been successfully made nearly indecipherable. Second, it is of course disappointing that they are pressing ahead with the rules being effective from 1 October despite only this draft version being available to taxpayers at this time. Third, there is no detailed commentary to accompany the draft.  

In working through this, it is important to bear in mind that this draft legislation is yet to go through the select committee process, so there is a chance of details changing between now and when it finally becomes law.

Bits that were as we expected

Five-year bright-line

  • A five-year bright-line period has been brought in for new builds.
  • New builds have been defined as property purchased within 12 months of their code compliance certificate (CCC) being issued, with that CCC being issued on or after 27 March 2020. (Note this is not a typo – the date for the issue of CCC is on or after 27 March 2020, being one year before the 10-year bright-line period applies.)

Interest deductibility

The interest deductibility rules kick in from 1 October 2021 as expected, and there are exemptions for:

  • Renting out part of the main home.
  • Business premises – this excludes a business that involves the provision of accommodation, unless it is a hotel, motel, inn, hospital etc. Boarding houses are notably not included in this list of business premises, which suggests an intention for them to be caught by the new rules. I suspect there will be more to come on this.
  • Property bought as part of the business of dealing in or developing land or erecting buildings.
  • New builds – more information on this below.

Rollover relief

The government has followed through on extending the “rollover relief” rules. Rollover relief means you can transfer property within your structure without triggering adverse tax consequences (like resetting the bright-line period for 10 years). Under this draft legislation, rollover relief will apply to the transfer of residential land or a property that is subject to the interest deduction limitations by an individual(s) to a trust, provided that the individual(s) transferring the property are beneficiaries of the trust and the principal settlors; and every beneficiary of the trust is associated to that individual(s). 

It appears this will apply to transfers on or after 1 April 2022. This is excellent news and will open up scope for transferring property into trust ownership. 

There is also rollover relief when transferring residential land or property subject to the interest deduction limitations to an LTC where the shareholding in the LTC mirrors the ownership of the land pre-transfer. I see this as being of less significance, as there is typically unlikely to be much advantage gained by transferring a property held personally into an LTC where you own the shares personally.

It is also confirmed that the existing rollover relief that applies to transfer of assets under a relationship property agreement also applies for the purposes of the interest deduction limitation rules.

Unexpected developments

Main home exemption

The main home exemption has now undergone a further change for bright-line purposes. This exemption currently applies as long as most (i.e. more than 50%) of the property in question is used as a home. This has meant that if you rented out 50% or more of a property, so that you cannot say it was mostly used as your home, then you got no relief under the main home exemption. In other words, you would have had to pay tax on the full gain if the property was sold within 10 years of acquisition.

A new proportionate approach is now able to be applied where less than 50% of the property is used as the main home. By way of simple example, if you applied 25% of a property acquired on or after 27 March 2021 to your own private residential use, and then you sell it within the bright-line period, 25% of the gain realised on sale will be exempt.

New build exemption

The new build exemption for the interest deduction limitation rules applies for a fixed 20-year period. This means that if you have a property that qualifies as a new build, then interest can be claimed for a period of 20 years from the issue of CCC by all owners during that period who rent it out residentially.

As noted above, a new build is a property where CCC has been issued on or after 27 March 2020. This opens up scope for interest incurred on properties bought prior to the announcement in March 2021 continuing to be deductible under the new build exemption – subject to the 20-year time period. 

Interest can be offset upon sale

Denied interest deductions can be offset against taxable gains realised on sale of the property if that sale is taxable either due to the application of the bright-line rule or other provisions (for example the tainting provisions). While this is what we perhaps should have expected, as it is only fair for the interest costs incurred by an investor to be allowed as a deduction if taxable income arises on sale, this was not guaranteed so it comes as a pleasing inclusion.

Social housing exemption

Also exempt from the interest deduction limitations are properties that are applied towards provision of social housing. This means if you rent your property to Kainga Ora or a registered community housing provider, who in turn uses the property to provide social housing or temporary accommodation for people in need, then you can continue to claim interest deductions. This exemption is better than the new build exemption because there is no time limit attached. You get ongoing interest deductibility for as long as the property is applied towards this purpose. 

Fixing Our Housing Problem

The government need to treat investors and developers as the solution, not the problem. Supply is the long-term solution – and it comes from developers and investors. You need both.

The investors buy the assets from the developers. If the government continue to make it too hard and annoy property owners (the “landed gentry”) with uncommercial tenancy laws and rifle taxes on property (e.g. interest non-deduction, which is manifestly unfair), then the housing crisis gets worse, not better, because as an industry we will increasingly sit on our hands and wait for a more commercial government. 

Instead of vilifying and blaming property investors to deflect the issue away from government, I suggest Labour, academics, and the like do the following:

1. Stop worrying about what investors get, and look at what they actually do for NZ. They supply and manage housing, an essential service. They are one of your most important suppliers. Look after and help them, and you will get more supply. If you really encourage supply with good zoning and infrastructure on tap, you will see developers build too much stock and oversupply the market. (Arguably this is happening in Auckland at present.) Oversupply is the answer to the government’s problems: rents drop and so do house prices. Everyone gets a house.

2. Stop disrespecting investors. You get no respect or buy-in from our industry by pelting us with insults and labels; you just look like envious socialists playing the blame game. And the attitude pervades through public policy. Creating scapegoats (investors) for what is a problem caused by successive governments’ under-investment in housing, is nasty.  Calling us tax cheats, alleging our “real motivation” is untaxed capital gains, demonstrates the government does not understand investors’ business model and intentions at all. (We can’t retire on capital gains; we retire on cashflow, which is taxed.) If you really can’t live with the gains being untaxed, then damn well step up and go to the election on a CGT platform; get permission to do it.

3. Instead, make it easier for developers and investors to succeed, and you will get more supply.

a. Immediately seek consultation with our community on how you can assist us to solve the housing supply problem.

b. Immediately look at how successful the Auckland Unitary Plan has been at reducing land costs in Auckland, by allowing multi-unit sites and high density housing. (Splice a million dollar section into 10 units, replacing one McMansion. Land cost dilutes 90%, houses get cheaper.) All cities and towns across NZ need this zoning change now. I know developers building to rent, and the zoning rules in small towns and most cities come from the 1960s, where everyone gets a quarter acre section. Times have changed; zoning needs to keep up.

c. Immediately assist landlords with rolling back the no-cause 90 day termination notices you abolished. This makes it nearly impossible to manage anti-social tenants, and makes me (and others) very, very picky with tenants, amplifying your emergency housing problems. Do they not see the link? 

d. Continue to ramp up and forward-fund infrastructure. (Brief accolade here to Labour. They inherited a hopelessly rundown national infrastructure from successive National and Labour governments’ under-investment in housing infrastructure. They have pledged $3.8b to infrastructure, and more, and it’s already helping small towns and cities. I’ve seen it first-hand.) Keep doing this and spend more building sewers, stormwater, telecommunications, and all infrastructure. Upgrade roads and public transport. This is the best investment in the future of NZ housing supply.

e. Don’t charge developers a development contribution that exceeds the cost of their actual pro rata share. All this does is encourage developers to land bank and sit on the land undeveloped because they feel like they are being taxed through the back door with exorbitant development levies. If you want supply, do what they did in Australia and forward-fund the 20 years of future development infrastructure. Charge developers a pro rata and fair connection fee as they connect to the infrastructure. There is talk at the moment of doubling development levies and there’s consultation going on about it. Quite simply, if this happens, many developers will just sit on their hands, and this will undermine supply. Moreover, developments that do proceed will simply pass the cost on to the buyers. Government needs to socialise the cost of forward funding, with a long-term scheme socialising the cost over the total potential number of connections. Not slam the current developers in a tax grab.

f. Stop with infusing ideology into Resource Management Act reform. It seems the government’s main agenda coming out of their initial work in this area is implementing He Puapua and Iwi rights into land development and the environment concerns. I thought this reform was about cutting red tape? They have lost perspective here.

g. Repeal interest non-deductions. Otherwise, when interest rates go up, you will send cashflow poor investors broke. This is because a rise in interest rates will no longer trigger tax relief, smashing the cashflow of fixed income households. The damage that will be done to supply by taxing the net yield (i.e. income before interest costs), rather than the net cashflow, won’t be seen until the phased in non-deduction rules bite in the 2025 and 2026 financial years, 3-4 years away. A downturn like this will inevitably stall investment in housing and reduce supply.  

h. Understand that the rough end of the tenant pool is now toxic to private investors, due the removal of the no cause tenancy termination. Labour made this rod for the government’s back because they don’t understand the housing market. Their emergency housing demand is blowing out. One of the reasons is because landlords are under-supported in the tenancy tribunal, and now without the ability to remove a tenant with ‘no cause’, most landlords won’t touch tenants with social problems. It’s just too hard. So it rebounds on to the government and will continue to do so, until tenancy laws are made more commercial. This is directly caused by these tenancy rules. I speak from listening to clients.

There is no one simple or specific cause to problems of housing affordability, lack of supply, and wealth inequity.  But it’s obviously not tax that causes all these problems. It’s cheap money, loose lending practice, and a desire to benefit from leveraged gains, which unleveraged investments (like stocks)

What can I claim as a tax deductible when I am in business?

Apart from a few special rules, any cost necessary to run your business will probably be tax deductible. 

However, there are a few things to be aware of – some items that you might assume could be claimed can’t be, and conversely, there may be others you didn’t realise are legitimate expenses.

General

If you have “incurred” an expense, you can claim it, even though you might not yet have paid it. Note that some costs that provide future benefits, like insurance, may not be fully claimable in the year incurred. 

Inland Revenue may not tell you how to run your business. If you want to run a Mercedes car, it is your choice. You cannot be told a cheaper car will do the same job. However, if the expense has a personal flavour about it, such as a couple going out to dinner and calling it a directors’ meeting, you will not be allowed to claim the cost. 

Business versus private expenses

Some payments appear to be necessary for business but are deemed private. Here are a few examples:

•  Travel from home to work and back

•  The clothes you wear to work unless they are protective clothing like overalls for a painter and sneakers for a roofer. To qualify, the clothes have to be subject to undue wear and tear or of a specialised type – not normal apparel. For example work-boots, overalls.

•  Socialising with mates in a pub

•  Spectacles

•  Costs of getting into business, such as a lawyer’s bill and the cost of creating a limited liability company

•  Usually, the cost of taking your non-working partner on an overseas business trip

•  The costs relating to installing new machinery, including travel to go and evaluate it

•  The debt repayment portion of hire purchase, finance lease or other loans

The above costs are either considered to be personal or costs to put you in a position to do business, as opposed to actually doing it. 

Expenses which have an ongoing benefit to the business over a period of years are “fixed (or non-current) assets.” You can only claim a proportion of their cost each year, known as depreciation.

Use of home

If you use part of your home for business, IRD will accept a claim for a portion of the costs. The portion is work out as a percentage of the total home. For example, if the home office is 9m2, and total home is 100m2, then the portion of costs will be 9%. The standard costs would be:

•  Rates

•  Insurance

•  Interest on mortgage

•  Repairs and maintenance

•  Power

A few things to note:

  • If the business uses the garage, include this as part of the area used for business
  • Substitute rent for interest on mortgage etc, if you do not own the house
  • Keep supplier tax invoices
  • You can also claim GST on the business share of these costs
  • If your business is a company, the home office-related bills will not be made out to it. In this case, claim reimbursement from the company because you are one of its employees.
  • Generally, where income is only interest and dividends, there is no claim for use of home to run your investments.

Motor Vehicle expenses

Sole Traders and Partnerships

In order to clearly establish the apportionment between business use and private use, you need to run a logbook. Based on the logbook, there are two options that can be used for the calculation: the cost method based on actual costs, or the kilometre rate method.    

Cost method

Under the cost method, you claim a deduction based on the business proportion of your actual motor vehicle costs. 

For example, a business owner collects all the receipts and invoices related to motor vehicles expenses (including registration and insurance etc), which total to $12,500. Based on the logbook, 60% of the vehicle’s use is for business. So, the calculation will be:

$12,500 x 60% = $7,500  

Therefore, the total to claim is $7,500. 

Kilometre rate method

Under the kilometre rate method (also often referred to as “mileage”), you are required to keep a logbook for at least 90 consecutive days to determine the proportion of business use versus personal use. This is then applied for a term of up to three years.  

You must make an election to use the kilometre rate method. Once the election is made, it is irrevocable, and the kilometre rate method must be used until the vehicle is disposed of. In other words, you cannot switch between the kilometre rate and cost methods. 

It is important to note that without the election, you are deemed to have chosen the cost method. 

Two tiers of rates for the kilometre method

There are two tiers of rates for the kilometre method.  

•  Tier 1: 82 cents per kilometre for the first 14,000 kilometres related to business use. 

•  Tier 2: Over 14,000km, the rate per kilometre drops significantly to 28 cents.

**Note the per kilometre rate changes regularly – check the IRD website for the latest rates. 

Example: A car is used for business and private use. The logbook shows the car is used 60% of the time for business purposes, and travelled 20,000 kilometres for the year. So the calculation will be: 

14,000km x 82 cents x 60% = $6,888 

Plus (20,000 – 14,000) x 28 cents x 60% = $1,008

Therefore, the total to claim is $7,896

What if I don’t keep a logbook?

If you don’t run a logbook, then deductions are limited to 25% of the use of the vehicle. So for the cost method, this means you can claim 25% of your actual costs. 

For the kilometre rate method, you can only apportion a maximum of 25% of the kilometres travelled to business use, with the same tier rates applying. This means that without a logbook, Tier 1 equates to the first 3,500 business kilometres (14,000 x 25%). 

Example: To illustrate, we’ll use the same circumstances as in the example as above, i.e. the car is used for business and private use and travelled 20,000 kilometres. At least 25% (or 5,000km) was for business, but this time, no logbook was maintained. Now the calculation looks like this: 

3,500km x 82 cents = $2,870

Plus (5,000km – 3,500km) x 28 cents = $420

Therefore, the total to claim is $3,290.

By not keeping a logbook, in this instance, you miss out on a claim of $4,606. 

In summary, if your business use is more than 3,500km per year, it is well worthwhile keeping a logbook for the first 90 days to be able to claim the full deduction you are entitled to.  

Companies
Ordinary companies with five or fewer shareholders have different rules that they are required to follow in relation to motor vehicle expenses. 

Fringe Benefit Tax

Fringe benefit tax (FBT) must be calculated and paid to the IRD if a company’s vehicle is available to employees and/or shareholder employees to use privately, even if they do not actually use it. The FBT regime is complicated to follow, especially in relation to the quarterly calculations and annual FBT reconciliations, so seek help from a qualified accountant. 

If the vehicle is temporarily unavailable for private use (for example, being repaired), or it was used for an emergency call, then it is exempt from FBT during that period. 

Exemptions from FBT

Fringe benefit tax does not apply if you notify your employees in writing that the vehicle is not available for private use, except for travelling between home and work and travel related to the business (e.g. detouring to the post office for business related matters on the way to work).

To be exempt from FBT, there should be a separate document outlining the conditions, which is called a restrictive use agreement. Please get in touch with us if you need one.  

Cost or kilometre methods for companies

Close companies are also allowed to use the cost or kilometre rate methods as an alternative to paying FBT, provided that the vehicle is the employee’s only non-cash benefit. The election should be made via the company’s tax return and once it is done it cannot be revoked.

Telephone/ Internet

Unless you keep records to show the contrary, IRD allows you to claim half domestic telephone rental/internet for business if the phone/internet is used for both private and business, so long as the business element is reasonably significant.

Entertainment

This is complicated. If you want full details on claiming entertainment, you can get a booklet from IRD. 

Interest

Interest is generally tax deductible. However, borrowing to buy real estate can be tricky, as there are new rules surrounding interest deductions for residential investment properties.

Business Expenses

Don’t be tempted to pay yourself an expense allowance. IRD gets concerned that not all of it will be spent on business costs – they prefer actual expenditure.

If your business is a limited liability company, an expense allowance may be permissible on the basis you are an employee of the company. You need to discuss this with your accountant before you determine the amount of the allowance.

If you need cash for parking meters, keep a float in the car and draw cash to top it up from time to time as needed. Try to keep some evidence to show the money was really spent on parking. (You can only do your best.)

Pay as much as you can through your business bank account. For other small petty cash items, keep a notebook. Record the date, nature of cost and amount. Keep supporting receipts where you can. When the business owes you a reasonable amount, get reimbursed from the business bank account and record this in your notebook.