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What do the Budget tax changes mean for property investors?

AUTHOR: Matthew Gilligan

POSTED: 21 June 2010

Now that the dust has settled on what was one of the most anticipated Budget announcements in recent memory, now is time to reflect on the impact of the announced and proposed changes on property investors.

In doing so I am going to focus on the specific impact of the tax changes and leave aside for the moment the wider macro effects of the impact of this budget on the economy. Broadly speaking, there are five areas where the tax changes will impact on property investors. They are as follows:

The drop in personal marginal tax rates;
The removal of depreciation claims on buildings;
Proposed changes to the LAQC regime;
Raising GST to 15%;
Extra funding for audit activity at the IRD.

For advice on how the tax changes impact you, contact us at GRA.

Depreciation vs Tax Cuts

Let's take an example of a typical property investor who has taxable income from their job of $75,000 per annum and owns two rental properties that are currently worth circa $700,000 but were bought in 2002 and 2006 for $550,000. For the 2011/12 income year if depreciation was still able to be claimed on buildings, they would have been expecting to make a circa $6,800 depreciation claim which would have a maximum tax benefit of circa $2,200. At the same time, due to the cuts in personal tax rates, there is an increase to their after tax income of circa $2,400. Following this, the investor is $200 better off in the 2011/12 year. It is also worth nothing that of course depreciation is usually claimed on a diminishing value basis so the amount that would have been claimed on the building moving forward would be reducing over time. Finally, there is also the fact that in many instances depreciation claims produce a timing benefit only, in that it is then recovered on sale.

Following this, we see the removal of depreciation claims as being mitigated by the drop in income tax rates (of course there will be additional private GST costs).

LAQC Regime

The Budget announcement also signalled that there will be changes from the 2011/12 year to the LAQC regime. At the moment the proposals are at issues paper stage only, which means they are open for public submission until early July 2010. The philosophy behind the proposed changes is to align the tax treatment of qualifying companies and loss attributing qualifying companies with limited partnerships. This means that some of the same aspects that LAQCs have now will be retained in that tax losses will continue to be attributed to shareholders in proportion to their relative shareholding. However, it also means a number of changes to other aspects of the LAQC regime. It will mean that taxable profit is attributed to shareholders rather than taxed at company level and there is also a proposal to limit the amount of tax loss that can be claimed to the shareholders' exposure in the investment.

If you have an LAQC that may become tax profitable, contact us for advice.

At this point in time the rules are not finalised but we will be watching this closely. It may well be that many investors who currently have properties in an LAQC will need to consider whether this is the appropriate structure for them moving forward.

If you have an LAQC with property in it, contact us for advice on restructuring prior to the rules changing.

The fact that depreciation on buildings has been removed, which may lead to a decrease in the tax losses (or perhaps some properties even becoming profitable), along with the proposed changes to the LAQC regime mean that a review of structures is necessary. If the changes continue to proceed as proposed, affected investors would be best placed to restructure prior to 1 April 2011.

If you are selling property and want to know about the impact of depreciation recovery, contact us.

Likewise, if you are buying property and want to know if the LAQC is still the right structure, contact us.

The Rise in the GST Rate & Audit Activity

The rise in the GST rate will not have a discernible effect on residential property investors other than expenses that they currently incur which attract GST will increase without the ability for the GST to be reclaimed. There will be an impact on property traders and commercial property investors, however.

If you are a property trader, you need advice on transactions occurring around 1 October 2010 when the rate changes. Please contact us for advice.

It is also worth noting that extra funding is going to be provided to the IRD with one of the focuses being the property industry. As a result, we encourage property investors to make sure that they are involving professionals in the preparation and filing of their tax returns and making sure that they are getting appropriate tax advice in relation to property transactions.

If you are concerned about tax treatment on past transactions or need advice on current ones, contact us

Overview

Overall we think the Budget was a largely positive one for property investors, even in respect to the tax changes. Certainly leading into the Budget there was talk of ring-fencing of losses, which has not come to fruition and would have had a much more significant impact on the property investment sector. As it is, the removal of depreciation claims on buildings from the 2011/12 year will definitely impact property investors, but perhaps for property investors any impact of this will be matched by gains to the drop in personal tax rates.

Request a Meeting

Matthew Gilligan
Director

09 522-7955

mg@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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