New rules for CGT and restrictions for offshore investors to cool off the housing market in Auckland. Does it go far enough or do little short-term effects trigger further changes?
Properties and Tax
New Policies to cool off the Housing Market
Properties and tax duties
· As renter, you pay your income tax (PAYE when employed, or as part of your self-employment/business) and rent for your home. The rent includes council tax and service fees charged to residents. Housing costs are not tax deductible.
· As owner occupier—a lifestyle choice, you pay your income tax like a renter, everything that is directly charged to homeowners by the council, EQC and insurance, maintenance and repair. The heaviest load on homeowner’s shoulders is to pay interests to the bank and mortgage re-payments to cumulate wealth. Likewise to renters, housing costs are not tax deductible.
Note; everyone (renter and homeowner) who is using a private home partial to derive taxable income (e.g. The garage for a car maintenance/repair business, a home office for services as accountant, insurance broker, online trader, etc) is able to claim back partial housing costs as business expense.
Property investor, trader/developer and tax duties
Regardless of your housing situation as renter or homeowner, you can be an investor, trader or property developer. All you need is funding (cash and/or loaned money) and disposable income from your job/business if you want to obtain finance (bank loan) for your project. The bank’s lending rules are strict regarding; what you can offer as security (LVR—loan value ratio) and your serviceability (disposable income/net income) based an your lifestyle. The lender will scrutinise your expenses, job security and credit file in terms of debts and payment history. Back to taxation;
Income from properties is taxed based on intention
That means you plan ahead and document with your lawyer or accountant your intention —wanting to invest in rental properties (rental loss versus capital gain) or trade and develop properties (buying and selling for profit).
This initial decision is the basis for the Inland Revenue Department (IRD) to be taxed accordantly due to different taxation rules. Unluckily, that is a crucial point where people fail and where the NZ public suffers major confusions— be aware of that.
Investment properties are taxed on rental income
An investment property can be a rental property or a home & income property (e.g. house divided in units, one flat owner-occupied, the other units are rented out). Rental homes are taxed on rental income/loss and when sold following the rules capital gain tax free. The new 2-years rule specifies income tax on capital gained when sold within the first two years.
Buying and selling properties are taxed on profit
Properties purchased to re-sale for profit (including developed land, sub-divisions, etc) are taxed on individual taxation rates, company (28%) or trust (33%) plus 15% GST. Let me give you a simple illustration how that works:
A trader purchased a house for 300k, spent 50k on renovation, sold for 450k and made gross profit of 100k. The taxman claimed:
28% tax on profit = 28,000 Dollars
15% GST on the selling price = 67,000 Dollars
The net profit (100k—28k—76k ) = 4,500 Dollars
Bold quotes in the media outlining that housing is a tax-free investment lead to a climate that is not helpful to resolve the urgencies. Also quite wrong is arguing that investing in housing is contra productive. Consider the amounts you spent only for housing every week, compare them with your income and the rest of your household spending. That gives you an indication how many industries and services around housing dominate the economy.
The costs of housing are by far the largest expense in your life. By looking at the housing politics the need for housing is widely misused to attract voters and tested on a battle field that is not any good for individual needs. You are on your own to come to the right conclusions.
Let me ask you a financial question; when buying a home with a home loan of 300k for a 30 years term—how much do you pay approximately only interests wasted to the bank? What is your guess— more or less of a half million Dollars? You can find out by using an online mortgage calculator. When working for this sort of money, as you do, plus 300k savings (mortgage repayment), why would you listen to housing politics? Why not invest that amount for the benefits in future?
The 2-years CGT rule makes it clearer—there is no “free meal” in properties. It gives more clarity to draw the line between an investor/landlord, developer/trader or speculator. Good luck for making the best out of it.
Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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How do CGT rules affect you?
Firstly, the term “Capital gains tax” is quite confusing in comparison with taxation rules in other countries like AU. The new 2-years rule defines income tax applied to capital gained. Actually, IRD’s ability to tax capital gain on investment properties has always been there. But the change makes it easier to draw a line between an investor and a trader/developer or speculator.
The new rule affects people who sell an investment property before the threshold of two years. For investors who obey the current rules that change won’t make any difference to their investment strategy. To clarify;
Housing Politics in muddy waters
Housing politics, true there is no escape – everyone needs housing and a job (or at least income) to pay for it. And that is what people do when moving to Auckland, but dealing with the consequences is a struggle for many. Politics have been deliberately stirring up muddy waters to circumstantiate the rule changes since 2010. But has it been successful or has the housing crisis deepened?
That is why the new CGT rules are to be seen more or less as doing something. The rules about offshore investors requiring a local bank account and IRD number are something new designed to release another pressure point and to restrict offshore investors. Some people say these changes do not go far enough and I assume—little short-term effects will trigger further changes. Watch this space, let me help you being vigilant for making your own observations and informed decisions.