What you can and can’t claim as an expense when buying a rental property is a hot topic of conversation. The confusion around this issue is likely inflamed by the recent changes to the rules that the IRD has quietly made without much publicity.

Below are some of the most common questions we get asked with property purchases. If your question isn’t below, get in touch with our team of property tax pros and we can help get you sorted.

Can I Claim for Legal Fees When Buying a Rental Property?

Yes. The IRD has recently accepted that their previous opinion on these fees was incorrect. You are now permitted a deduction for legal fees related to the purchase of a rental property, up tot he standard maximum of $10,000.00 in any tax year.

You can also claim for fees related to taking legal action to recover unpaid rent.

You can only claim the legal fees for selling a property if you are in the business of providing residential rental accommodation. This means that your intention needs to be clearly long-term rental and not speculative.

Can I Claim for Due Diligence When Buying a Rental Property?

Mostly, yes. This is a grey area as it depends entirely on the intentions for the property and the outcome of negotiations. Builders and LIM Reports are always treated as capital expenditure and so are not deductible. However, other due diligence costs might be.

If you go ahead and purchase the property and then operate it as a rental, then the due diligence is most likely deductible. The deduction depends on whether the due diligence is in the form of advice, coaching and support with regards to the management of the property as an income generating rental. Due diligence with regards to financing, general property education and leveraging advice would not be deductible. These items are considered more to do with the acquisition of the property than the generating of income from it and so they are deemed to be capital in nature.

Can I Claim for Builders Reports When Assessing a Rental Property?

No. Builders reports are considered to be capital in nature and so are not deductible. This is because the builders report is solely for the purchase and not for the ongoing rental income generation. A deduction is allowed only when there is a direct link to the income generation.

Can I Claim for LIM Reports When Assessing a Rental Property?

No. LIM Reports are directly related to the purchase of the property, not generating income from it. An income tax deduction is only available for expenses incurred in the generation of the taxable income. LIM Reports are therefore deemed to be a capital expenditure.

Can I Claim for a Registered Valuation When Buying a Rental Property?

Yes. But only if the cost is for the express purpose of securing finance for the rental property. You can’t claim for valuations that are for insurance purposes or to help you identify a reasonable offer/ purchase price. Many banks require a registered valuation before they will finalise your mortgage so it helps that this is a tax deductible cost.

Can I Claim for my Travel Expenses to View a Rental Property?

No. If you have to drive, fly or sail to an open home that cost is unfortunately not deductible.

Once you own the rental property, you can claim for your travel costs to inspect the property, you just can’t make the same claim for inspecting it before you’re the landlord.

However, some costs of acquisition, like loan fees, can be deducted.

Can I Claim for Loan Fees When Financing a Rental Property?

Yes. Fees for arranging the financing of a rental property are deductible.

This can be confusing as the purchase price itself and most of the associated costs (like the capital portion of the loan) are not deductible. However, there is specific guidance from the IRD allowing the deduction of loan fees.

Can I Claim for Finders Fees Paid for a Rental Property?

No. This type of expense is deemed to be capital in nature and therefore not tax deductible. Finders fees are a cost associated with the acquisition of the property rather than the operation of the property as a rental. As such, they have no direct link to the generation of taxable income.

Capital expenditure such as this can be claimed as a deduction against any tax on capital gains, such as a CGT/ Bright Line Test tax, so it still helps to keep a record of it.

Can I Claim for Property Mentoring, Coaching or Education?

Mostly, yes. This is a bit of a grey area and depends on the specific program and nature of the advice and support.

Property investment education that is centered on how to find and finance a property is likely to be considered capital in nature. This is because this type of education is not directly related to the generation of taxable income. Rather its advice for the accumulation of wealth and the leveraging of any existing wealth.

Property investment advice, mentoring and education that is focused on managing your rental, setting and maximising rents and dealing with ongoing property issues would be deductible. This type of expense is directly related to the income you generate from the rental property.

Most often, the costs of chatting with your MBP Advisor are totally deductible. If you’re on one of our rental property packages then chatting with us about your rental portfolio is totally FREE. So reach out to your advisor today for tailored, expert advice and support. Don’t have and advisor? Get one today by reaching out to the team at MBP.

 

Note: The above information is general in nature and accurate at the initial time of publication. Every effort is made to keep this page updated but you should always get specific advice tailored to your unique situation, so don’t hesitate to get in touch with our team of property tax professionals.

The New Year is a time for setting goals and targets for the months head. Its also the best time to make sure you have the best people on your team to help you achieve those goals and targets. That makes it a great time to look for a new accountant.

Your accountant is one of the most important people on your team. They might not be the first person you’d consider. However, a having an approachable, proactive accountant can be the difference between success and failure.

When is it Time to Consider a New Accountant?

Any time is a good time to look at your options. Whether you want better results, better service or better value for money, its always a good time to look for your best fit.

If you aren’t happy with the services provided, don’t feel your treated properly or are not getting value for money, its definitely time to switch. No matter what time of year it is.

Take the Time to Find the Right New Accountant

Regardless of how long you’ve been with your current accountant, a new accountant could be the perfect match for you. Not all accountants are created equal and every single business is different. To get the best value from the relationship between you and your accountant, you have to be a good match.

For example, at MBP, we have a set of unwritten ‘clubhouse rules’. These aren’t anything hard and fast but are a way for us to get to quickly understand how a new business will partner with us. We use the term partner instead of client because its far more appropriate. We consider all of our clients to be our MBP Business Partners. As such, they get the best partner level service, direct access to the team and generous discounts on business products and services. If we don’t think a business will fit in comfortably or won’t be a good fit, we’ll refer them to another firm in our network who we think will be a better match.

Should You Look for a New Accountant with Fixed Fees?

Fixed fee accounting is a great way to ensure that you get everything you need at a price you’re willing to pay. Its also really easy on cash flow as you don’t get stung with any huge bills. The smaller monthly payments make cash flow management a breeze.

Fixed fees, no surprises.

At MBP, we have a range of fixed price packages built for every business. From sole traders to rental property investments, end of year essentials to monthly management reports, we have every solution you need at a fixed fee.

A Proactive New Accountant Will Highlight Potential Issues

Time seems to pass faster than ever in the modern world and in business it seems to fly even faster. Gone are the days when you can afford to only see your accountant once a year to discuss things that happened months ago. To not only stay ahead of the competition but to maintain your financial position in the face of increase competition, you need a proactive accountant.

A proactive accountant doesn’t just sit back and wait. They get stuck into your books throughout the year. At least bi-monthly they will review how things are tracking, and if anything jumps out to them as an issue. This gives you an invaluable opportunity to benefit from outside eyes looking in, holding you accountable and giving you any necessary nudges..

Often, business owners get stuck in the day to day. With a proactive new accountant, that isn’t an issue. You can get stuck into doing what you love while they focus on making sure the big picture is still working.

Is it Difficult To Shift to a New Accountant?

Moving to a new accountant is as easy as having a cup of coffee. In fact, you can sit there and have a cup of coffee while we get it all sorted. The team at MBP do all the heavy lifting, including handling the divorce with your old accountant.

You won’t notice any interruptions and before you know it, you’ll be all moved in with your new accountant and their team.

Make The Move To Modern Accounting With MBP

The team at MBP aren’t your old accountants. We don’t just meet with you once a year, we’re there by you all year long, through it all. With fixed price packages and unlimited communication, you never have to be afraid of getting a bill for a simple phone call or a quick query over email. Our team are here to support you and your business on your path to success.

We leverage the power of the best accounting software and tools available to streamline our services. This means we invest more time in dealing with our clients direct. Unlike old firms, we’re able to give you timely monthly reports, KPI tracking and business coaching in real time.

If its time for a new accountant, get in touch with the team at MBP. We’ll schedule a proactive accounting meeting to see exactly what your needs are and how we can tailor our services to give you everything you need and nothing you don’t.

If you’ve got a couple of spare rooms, renting them out is a great way to make some extra cash. However, how you rent them out can make all the difference and can even be the difference between paying a large tax bill and no tax at all. It all comes down to whether you are renting to a boarder or flatmates. therefore, we’ve drawn up this quick guide to give you a run-down of the key facts you need to know.

What Is A Boarder?

A boarder gets a lot more than just a room. Generally, the boarder pays a fixed amount each week. This covers the room, power, phone, internet and all other overheads as well as food. The food provided might be all breakfasts and dinners with lunches sorted by the boarder at work or school. It just has to be more substantial than snacks or morning tea. The bills and food are all covered by the fixed weekly payment, not split like they would be with a flatmate.

For Example:
You have an international student staying with you for a semester. The student is paying you $250.00 per week. This covers their room, three meals a day, power, internet and use of the rest of the common areas in the house with all furniture provided. Regardless of fluctuating power and grocery bills, the student pays the same weekly amount. Therefore, this international student is your boarder.

What Is A Flatmate?

A flatmate is not the same as a boarder. A flatmate generally rents a room, furnishes it with their own furniture and then pays a share of the other bills like power and internet. Flatmates can share food costs or split the grocery bill but unlike with boarders, there is not one person providing all of the food and preparing the meals as a part of the weekly rent.

For Example:
You rent a three bedroom house. You have a spare room so you get in a friend to help share the costs. They pay a third of the rent, power and phone. You all split the grocery bill and take turns cooking dinner. Your friend is your flatmate, not your boarder as you are not providing all of their meals for them and they are paying utilities on a variable split basis rather than all included in the one weekly charge.

How Do I Rent Out My Rooms And Pay No Income Tax?

If you are renting to flatmates, you will have to apply the actual cost method and declare all income and deduct a portion of all overheads. If you have a heavily leveraged house (large mortgage) then this may result in a loss. From April 2019, this loss is not tax deductible so will not result in any refund but will also not trigger any tax liability. The loss will be ring-fenced and carried forward to apply against any future profits from the rental.

If you are renting to boarders, you may be able to completely avoid any tax liabilities or obligations on the income. As long as your boarder rent is below the maximum standard cost, as calculated by the IRD, then you can earn that board and pay no tax on it. If you have a house with very low overheads (low or no mortgage) then this can be a profitable enterprise. The boarder income thresholds are outlined in the section below.

Based on the below standard cost method, you could rent out three rooms to boarders and earn $750.00 a week ($39,000.00 per year) completely tax-free.

Boarder Income Thresholds

The IRD annually calculates the national average standard cost for running a household. This standard cost takes into account the cost of food, heating, power, transport and includes an amount for outgoings such as rates, insurance, mortgage interest cost, and repairs and maintenance.

  • Boarders
  • First Boarder
  • Second Boarder
  • Third Boarder
  • Fourth Boarder
  • Standard Cost (per week)
  • $266.00
  • $266.00
  • $218.00
  • $218.00
  • Total (per week)
  • $266.00
  • $532.00
  • $750.00
  • $968.00

The above standard cost rates are for the year ended 31st March 2018. The IRD will publish inflation adjusted figures for each financial year so keep an eye on your changing tax-free threshold regularly.

Note:
If you have five or more boarders you are unable to use the standard cost method. You must us the actual cost method and return all income received in your IR3. You will need to keep records for all income declared and expenses you deduct.

Hopefully you have found this quick guide helpful. If you would like to have a more in-depth discussion about your options, feel free to get in touch with the team at MBP for a free consultation.

This advice is general in nature and should not be relied on as a recommendation. The information was accurate at the time of publication but may now be out of date. Every situation is unique and requires tailored advice. Get in touch for a free consultation by emailing mailbox@mbponline.co.nz or call us free on 0800 86 85 86.

New Zealand does not have the most liberal tax laws when it comes to making claims for work clothes. This is one thing that our cousins across the ditch are far more generous with.

There is a very narrow definition in NZ tax law and IRD interpretation as to what is a deductible business expense for work clothing. In order to help you avoid making expensive mistakes that could land you with an audit, back taxes, interest, penalties and even home detention, we’ve drawn up this simple list and handy explanation of the law that limits your claims. That’s right, its not just a grumpy accountant that won’t let you claim things, its actually the law.

What Work Clothes Can I Claim As A Business Expense?

If you want to claim for clothes that you (or your employees) wear to work the clothes must:

  • Be a uniform that is distinctive to your business, or
  • Prominently and permanently advertise your business, or
  • Be necessary for protection in the workplace (e.g. protective eye wear, steel capped boots, etc.), or
  • Be required for health and safety compliance on the work site (e.g. high-visibility or waterproof clothing), or
  • Is a taxable clothing allowance paid to employees to purchase their work attire (FBT or PAYE is payable), or
  • Simply is not clothing that you or an employee would wear for private purposes.

Essentially, the simplest test we can think of is that it’s deductible if you only wear it because you have to. To quote the IRD, claimable clothing “only includes uniforms or specialist clothing that isn’t reasonably suitable for private use and is necessary and peculiar to a particular occupation.”

You might get away with it once or twice, maybe even 46 times, but the IRD will likely catch up with you eventually. After filing dozens of flawed claims, a personal trainer was given home detention and hundreds of hours of community work for claiming exercise clothing (among other things) as a business expense. Chances are your new shoes for your real estate work are not allowable (unless they are steel capped for visiting industrial property and emblazoned with the company logo).

What Limits What Work Clothes I Can Claim?

The main thing that limits your claims for work clothes as a business expense is this pesky thing call the law. In particular, two sections of the Income Tax Act 2007 (ITA 2007). These two sections work together to highlight and limit all claims that can be made for business expenditure, including work clothes.

Section DA1: The General Permission

Section DA1 sets the groundwork for all business expense claims as it allows for a deduction as long as there is a nexus, or link, to business activity or income generation. This broad allowance is known as the general permission. You can read the full section here, but for your convenience here is the core of it:

DA1 (1) A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is—
  (a) incurred by them in deriving –
     (i) their assessable income; or
     (ii) their excluded income; or
     (iii) a combination of their assessable income and excluded income; or
  (b) incurred by them in the course of carrying on a business for the purpose of deriving –
     (i) their assesable income; or
     (ii) their excluded income; or
     (iii) a combination of their assessable income and secluded income.

For an expense to be deductible, it must first pass the low bar of the general permission test by having a link to your income generation. However, just because something passes this first hurdle doesn’t make it instantly deductible. Other sections of the ITA 2007 act to limit or override the general permission. In terms of work clothes, this is where section DA2 comes in.

Section DA2: The General Limitations

Where section DA1 creates what many might see as the freedom to claim anything and everything, section DA2 firmly squashes most dream deductions.

Of particular note for work clothes is section DA2(2):
“A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature. This rule is called the private limitation.”

Clothing falls squarely under this private limitation. You may argue that you need clothes for work but you also need them for basic modesty. When you aren’t wearing clothes for work, you aren’t going to the supermarket naked. Therefore, your clothes fall into the category of being a standard private expense, any business use is simply incidental rather than peculiar.

If you are still confused or on the fence about an item you’d like to claim, get in touch with the team at MBP. What you can and can not claim is not always black and white and each situation has subtle differences that can make a big difference to the deductibility. Not getting your claims right up front can result in back dated tax assessments, penalties of over 100% of your mistake and use of money interest on the outstanding back tax.

This advice is general in nature and should not be relied on as a recommendation. Every situation is unique and requires tailored advice. Get in touch for a free consultation by emailing mailbox@mbponline.co.nz or call us free on 0800 86 85 86.

Many businesses need to get their employees around the place to do their jobs. This often means that they need to either have company motor vehicles for their employees to use, or reimburse their employees for the use of their personal cars.  Much of the motor vehicle expense claim methods have undergone some changes in recent years so its important to keep up with what you can now claim. In this article we’ll be taking a quick look at the three main options you have available; personal vehicle reimbursed, company car and third party motor vehicles.

Personally Owned Motor Vehicles

If you or your employees are required to use your personal vehicles for business, you can pay a mileage rate reimbursement.

The IRD has recently overhauled the mileage rate calculation method and pay-out per kilometer, you can read more from them here. Previously, you could only claim up to 5,000km of travel per year at their annually adjusted rate per km with minimal records. Now you can claim an unlimited number of kilometers at variable rates, as long as you keep records to back up your mileage claims.

No matter what your vehicle type, you can now claim up to 14,000km of business travel at

Vehicle TypeFirst 14,000 kmsOver 14,000 kms
Petrol or Diesel$0.76 per km$0.26 per km
Hybrid$0.76 per km$0.18 per km
Electric$0.76 per km$0.09 per km

Record Keeping Requirements

You must keep a record of the number of kilometers traveled for business in order to make accurate reimbursements. There are many apps and fleet management software solutions available that allow you to do this effortlessly.

If you do not keep accurate or reliable records of business use, then the reimbursements permitted are severly limited.

The $0.76/km rate is only allowed for the first 3,500km of undocumented travel. Beyond 3,500km the reimbursement rates are limited to the tier two rates (e.g. $0.26 for a petrol or diesel). If you drive a lot for work it pays to keep good records.

For Example
Steve uses his personal diesel ute for work. He drives 15,000km per year for work. If he keeps accurate records of his business trips, he claims the first 14,000km at $0.76/km and and the final 1,000km at $0.26/km. This is a total reimbursement of $10,900. However, if no proper records are kept to back-up the claims, then the rates drop. He can claim the first $3,500km at $0.76 and the final 11,500km at $0.26/km for a total claim of $5,650. Bad record keeping almost halves his reimbursement and leaves him $5,250 out of pocket.

Your Company Owned Motor Vehicles

If your company owns the vehicle you can claim deductions for its running costs. These costs includes things such as fuel, road user charges, repairs and maintenance, and insurance.

Logbook-Based Motor Vehicle Expense Apportionment

If the vehicle is used by you, the business owner/shareholder, then you can apportion the expenses based on your usage. This means that you keep a logbook for three months to track all of your business versus personal trips. This will allow you to calculate the proportion of the vehicle usage that is business related. This business portion of the motor vehicle expenses is the deductible portion. This logbook determination remain in place for up to three years, or until your usage fluctuates by 20% or more.

For Example:
You drive 10,000km over the three months you are keeping the logbook. 8,000km was for business related travel and 2,000km was for personal travel. 80% of your motor vehicle expenses can be claimed as a deduction against your business. If the business is paying all of the running costs, your 20% personal portion can be split off through your shareholder current account. This essentially treats this benefit you get the same way your cash drawings are treated.

As the vehicle is owned by the company, any depreciation of the vehicle as an asset will also have to be adjusted. Therefore, with the vehicle in the example above, only 80% of the depreciation is deductible. Likewise, with a financed or leased vehicle there will be adjustment to make. The interest expense on any finance arrangement and the payments on any operating lease will have to be adjusted. The personal portion of the depreciation, interest and lease payments will be treated in the same way as the other personal portions.

If you have employees using the company vehicles, the shareholder account apportionment method will be inappropriate.

Tax Adjustment for Employee Use of Company Motor Vehicles

As with an owner used vehicle, you can claim for the business related motor vehicle expenses when your employees use the company car.

However, if the company car is also available for personal use by the employee, you will need to pay tax on that added benefit. This tax is called Fringe Benefit Tax (FBT). This is because the use of the motor vehicle is an added (or fringe) benefit to the employee of their employment. The purpose of FBT is to treat this added benefit as if it were a salary. FBT is added to the net value of the benefit provided, usually at a rate of 49.25%. This might seem like an extremely high tax rate but it is designed so that the added tax liability equates to approximately 33% of the gross fringe benefit.

For Example:
You provide a vehicle to be used by an employee. The employee is allowed to use the vehicle personally. The calculated value of this added personal benefit is $10,000. At 49.25%, the FBT on this benefit is $4,925. This makes the total gross benefit $14,925. The added tax portion is 32.998% of this gross. This means that the tax is therefore roughly equivalent to the income tax payable if that non-cash vehicle benefit had otherwise been paid in cash as a salary.

There will also be GST adjustments to make along with the FBT compliance. This is a lot of added tax to take into account when considering how to structure your vehicle policies and arrangements. Ensure that you have properly discussed the matter with your tax or business advisor.

Proper compliance does have its perks. You can claim 100% of the motor vehicle expenses when you are properly complying with the FBT regime. These expense claims should be enough to offset the added GST and FBT taxes through GST claims and Income Tax deductions. If they aren’t, you will need to consider the benefit of the vehicle to the business and the other options you may have to reduce or eliminate the added burdens.

Check Out Our Definitive Guide to FBT Compliance

FBT can be a complicated issue and it’s important that you get it right to avoid running foul of the IRD. This is a key area that they are focusing on as kiwi businesses love a company car but often skip over proper tax compliance with those motor vehicles. We will publish a more definitive guide to FBT compliance at a future date so keep an eye out or subscribe to our newsletter, MBP Business Briefing, to keep up to date.

You Don’t Own Any Motor Vehicles

For many businesses, owning vehicles and accounting for the added usage, benefits and taxes is just too much of a burden and distracts them from what their core focus should be. These businesses are instead turning to third parties like Uber or corporate cab companies. This is a growing trend, especially in larger cities. Services like Uber for Business are changing the way that teams travel, offering affordability, convenience and professionalism that is often hard to imitate with a dedicated company car.

Since you are only paying for what you use, this can be a far more affordable option, especially for larger teams or ones that don’t travel regularly. Not only do you have access to a car whenever you need it but you get picked up at the front of the office and never have to worry about parking. Overall, less time and money wasted on non-value adding activities and more timely and reliable service for both employees and your customers or clients.

This has been a really quick (as quick as it could be) run through of these three options. There are some other options and methods so please get professional advice, preferably before you make any big and potentially very expensive decisions.

This advice is general in nature and should not be relied on as a recommendation. Every situation is unique and requires tailored advice. Get in touch for a free consultation by emailing mailbox@mbponline.co.nz or call us free on 0800 86 85 86.