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Exemptions, New Builds And More: Answers On New Property Rules

New Property Rules

Back in March, it took everyone by surprise when the Government changed its rules on interest tax deductibility for property investors, and extended the bright line test. We had a lot of questions that didn’t seem to have answers.

Now we have some guidance, because Inland Revenue has released a Q&A document covering a long list of questions about the new Government proposals for interest limitation and adding to the bright-line rules.

Here we’ve summarised some aspects of the approach that Inland Revenue has taken, and you should talk to us for more clarity around the rules for your particular situation.

What is exempt from the new limitations?

Taxation remains unchanged for:

  • Retirement villages
  • Developments, including build-to-rent and some remediation work
  • New builds (certified after 27 March 2021)

The new rules do not affect your main home.

How does the new build exemption work?

The new build exemption still hasn’t been finalised, but there are a few options being considered, including a perpetual exemption and a time limit of 10 or 20 years.

Tenants, boarders, Airbnb

Here it seems that if the person is staying within your house, there are no limits on interest deductibility. Once they’re housed in a separate dwelling, even if it’s on the same property (a granny flat for example), interest deductibility limitations will apply.

Transferring home ownership and the bright-line test

Currently, moving your home into a family trust can trigger the bright-line test. However, there is a proposal for the transfer to be effectively ignored under certain conditions. There is also a proposal to ignore a land transfer to a look-through company or partnership. Our advice? Don’t make any sudden moves on this one without talking to us first.

Helping kids into first homes

The IR provides this example: you took out a loan to help your child buy their first home, and your child pays you interest. You pay tax on the income and claim deductions on the interest. In this instance, the interest limitation rules would not apply to you.

However, if you own a second property and rent it to your child, or another family member, interest limitation rules would apply.

It’s complicated…

The new taxation regimen starts to kick in from 1 October 2021. If you own properties that might be affected, please get in touch – we can show you ways to make these rules easier to understand and comply with.

We can also run the numbers to show you how much difference these regulations will make to your overall financial position over the next few years. Should you sell up now or keep holding? We can give you the information you need to make smart decisions.

Give us a call on 09 366 7025, email us at hello@smefinancial.co.nz, or visit our website https://smefinancial.co.nz to get in touch.

Together we can achieve more.

Goodwill: What’s it worth?

Goodwill can add value to your business

Goodwill is one of your business assets – but you can’t measure it and it’s very tricky to put a price on it. When you sell your business, goodwill is the intangibles in your business that add value beyond the physical assets and guaranteed income stream.

Goodwill includes:

  • Your brand’s great reputation
  • Your loyal customer base
  • Your positive customer relationships
  • Your happy employees who want to stay
  • Proprietary data and intellectual property
  • The great systems that make your business run smoothly

Goodwill can have an impact on the value of your business

Most small and medium-sized businesses in New Zealand are sold based on their assets and earnings, and goodwill isn’t much of a factor in the valuation. But some types of businesses do have significant value in their intangible assets, particularly in the tech sector.

Discovering the value of your business’s goodwill usually comes down to the negotiating process with a potential buyer. You’ll need to agree on what the business is worth, and that means agreeing on the price of those intangible assets.

Tax on goodwill

Usually you’ll only need to think about goodwill if you’re buying or selling a business. Goodwill is non-taxable for the vendor in a business sale and non-deductible to the purchaser (although there are exceptions; you can read more about tax on business asset sales here).

Goodwill cannot be depreciated like a physical asset. However, some types of intangible property, like patents or trademarks, can be depreciated, so talk to us if you think this might apply.

What is your business’s goodwill worth?

We can help you work out the value of your business in today’s market – get in touch and we can figure out how much money you could walk away with if you sold in today’s market.

Should you dive into tax pooling?

Diving into tax pooling

Okay, let’s be honest – paying provisional tax can be tricky. The amounts change from year to year, and bigger payments sometimes coincide with periods of low cashflow. Not to mention that if you underpay your provisional tax, you will likely be charged use of money interest (UOMI) by Inland Revenue (IR).

Tax pooling is designed to help solve this problem and smooth out your tax payments. Let us tell you how.

What is tax pooling?

A tax pool is a fund of money created by many taxpayers paying in their provisional tax. It’s organized by a registered intermediary, which works with both taxpayers and the Inland Revenue. We have partnered with Tax Traders and believe you will not be disappointed by the benefits they can bring.

When you join a tax pool, you pay your provisional tax into the fund. You can make a regular fixed monthly payment, for example, so it’s easier to manage your cashflow.

Your tax is then paid out of this fund on your behalf. The funds are held in an Inland Revenue account, which transfers them against the name of the members of the tax pool as instructed by the intermediary.

If you haven’t paid enough into the pool to cover your tax, the tax pool lends you the money at a cheaper rate than the IRD’s UOMI rate. If you have overpaid, the extra money is lent to other people in the tax pool and you earn interest.

How can you find out whether tax pooling is right for you?

The advantages of tax pooling are lower costs on late payments, earnings on overpayment, and generally making it easier to manage provisional tax payments.

If you’d like to know more about tax pooling, and whether it could work for you, get in touch.

We can help by answering your questions.

Scaling up sustainably: Grow your team without overcommitting

Scaling up your business

Growing your small business into a team enterprise can be daunting. The amount of work coming in will tend to surge and retreat, leaving you alternately overworked and underworked – you don’t want to commit to an employee when you’re not certain of your workflow.

How can you manage workflow surges and get the help you need, without overcommitting to staff costs?

Start with on-demand assistance

The first step might be to outsource some of the jobs you least like doing, or during your busiest periods. That might mean using a local freelancer or finding an offshore service to take over your social media, for instance, or your invoicing. Those services can be an affordable way to get on-demand help when you need it, giving you the ability to drop that cost at any time if your workflow drops away.

Can you take on an apprentice?

An apprentice can be an extremely cost-effective way to get an extra pair of hands. A wide range of trades can participate in apprenticeship schemes, including construction, engineering, beauty, farming, tourism and sports. Apprenticeships are currently free for apprentices and subsidised for employers by the Apprenticeship Boost. You’ll need to train them and pay them at least the minimum wage.

For those who aren’t in a trade, an intern could be an option to help over the summer or uni holidays.

Contractors and part-timers

Using contractors and part-timers also gives you some flexibility when it comes to growing your workforce. Contractors are usually more expensive, because they need to pay their own employment costs of ACC, holiday pay, sick pay and so on. The advantage of contractors is that you can pay for the expertise you need, when you need it.

Part-time employees are more of a commitment, but you can build in some seasonal or work-based flexibility on their hours – and they’re less expensive than contractors.

Once you are successfully managing contractors or part-timers, you’ll have a better understanding of when you can make that jump to a full-time employee.

Managing the team as you grow

When you’re responsible for a team, particularly when they’re working on diverse projects for a range of clients, you’ll need a way to manage them effectively. SME is partnered with simPRO project management software, which is designed in New Zealand to meet the needs of local businesses, and lets you do your invoicing, quotes, field management and project management all in one place.

If you need some advice about sustainably building your team, we’re here to help. Get in touch and we can run the numbers, consider the pros and cons, and give you the information you need to make the best decisions for your business.

Surprise tax bill? Here are six possible reasons

Surprise tax bill

Did you, or someone you know, get a surprise tax bill they weren’t expecting?

Several Kiwi’s have recently been in touch after having received tax bills that took them by surprise, and they’ve been asking Inland Revenue what’s going on.

An Inland Revenue spokesperson has provided six likely reasons that more people seem to have been caught out this year:

  1. Last year, tax bills below $200 were written off as part of the pandemic support measures. This year, it’s back to the usual write-off threshold of $50.
  2. Inland Revenue is now doing tax assessments for everyone, so some people are getting bills or refunds who never have before, including some children with KiwiSaver funds or other investments.
  3. Anyone paid 27 fortnightly wage packets may have underpaid their tax – that can be fixed once IR has the correct information.
  4. Many incorrect tax codes were corrected last year, and for a few people (mainly aged over 65) the IRD made errors which they are correcting.
  5. Pension tax code changes were delayed, leading to some undertaxing which is now being rectified.
  6. Some people’s tax codes are still incorrect.

We can sort out any surprise tax bill issues

Ultimately, the Inland Revenue calculates your tax based on the information they have about you and your business. If they have the wrong information, you may be paying too much tax or too little tax.

We can look at your surprise tax bill and help you work out what’s gone wrong. We can also deal with Inland Revenue on your behalf to give them the right information and ensure you’re paying exactly what’s required and no more. We’ll work with Inland Revenue to get your refund sorted out or to come up with an affordable payment plan.

Get in touch – our tax specialists at SME Financial are here to help.

Xero Payroll Help: Review and Update Sick Leave Entitlements prior to 24 July 2021

Xero Payroll

What you need to know

  • From 24 July 2021 all eligible employees’ minimum annual sick leave entitlement of five days increases to 10 days.
  • An existing employee becomes entitled to 10 days sick leave on their next entitlement date, based on their anniversary date.
  • New employees receive 10 days entitlement as soon as they become entitled to sick leave – usually after six months.

Visit MBIE’s website for more information about increased sick leave entitlements.

You need to review and update your employees’ records to account for the new minimum sick leave entitlement. Xero automatically assigns one of the following sick leave statuses to an employee’s record based on their next anniversary date:

  • Needs review
  • Minimums met
  • Review later

Review your employees’ sick leave entitlements

  1. In the Payroll menu, select Employees.
  2. Click on the Sick Leave Review tab to review your employees’ status.

Choose the the correct Sick leave status below and follow the steps to update your employee’s record.

Employees with ‘Needs Review’ statuses

Employees with the sick leave status Needs review have their next sick leave anniversary on or after 24 July 2021 and either:

  • Current sick leave Hours Accrued Annually is below the new minimum requirement of 10 days; or
  • Sick leave Maximum to Accrue is below the minimum requirement of 20 days.

To review and update the sick leave entitlement for each employee with Needs review status:

  1. Review the employee’s sick leave entitlement based on their employment agreement.
    For example, if the employee is entitled to the minimum under the legislation, their entitlement would be 10 days.
  2. Multiply the number of sick leave days they’re entitled to based on step 1 by the Hours per Day column to get their new entitlement which you’ll need to update in the system.
    For example: An employee’s employment agreement says they’re entitled to the minimum sick leave days and their Hours per Day says four – then 10 days multiplied by four hours brings their entitlement to 40 hours sick leave per annum.
  3. Ensure their Maximum to Accrue is either blank (meaning there is no maximum) or is at least 20 times the Hours per Day.
  4. In the Status column, click the Needs review link to open the employee’s Leave record.
  5. Click Sick leave and update Hours Accrued Annually based on your calculation in step 2, and if necessary the Maximum to Accrue based on the calculation in step 3.
  6. Click Save.

Repeat the process for each employee with Needs review status.

Employees with ‘Minimums Met’ statuses

Employees with the Minimums met status have their next sick leave anniversary on or after 24 July 2021 and:

  • Current sick leave Hours Accrued Annually equal to or greater than 10 days; and
  • Sick leave Maximum to Accrue equal to or greater than 20 days.

We recommend reviewing these employees’ employment agreement to determine if they are entitled to more than the minimum.

If you need to make any adjustments to these employees’ annual entitlement, for each employee with Minimums met status:

  1. Review the employee’s sick leave entitlement based on their employment agreement.
    For example: If the employee is entitled to the minimum under the legislation plus an additional five days, this would be 15 days.
  2. Multiply the number of sick leave days they’re entitled to based on step 1 by the Hours per Day column. This is the employee’s new annual entitlement that you will need to update in the system.
    For example: An employee’s employment agreement says they’re entitled to 15 sick leave days and their Hours per Day says eight – then 15 days multiplied by eight hours and they’re entitled to 120 hours sick leave per annum.
  3. In the Status column, click Minimums met to open the employee’s Leave record.
  4. Click on Sick Leave to review the setup.
  5. Update Hours Accrued Annually based on your calculation in step 2.
  6. Click Save.

Repeat the process for each employee with Minimums met status.

Employees with ‘Review Later’ statuses

No action is required at this time for employees with a Review Later status. Their next sick leave anniversary falls before 24 July 2021.

When these employees have been included in a pay run that spans their anniversary:

  • Their Next Anniversary date will be automatically updated
  • Their Status will change to either Needs review or Minimums met

Once the employee’s anniversary has been included in a pay run, return to the Sick Leave Review tab to review the employees status and make any updates needed.