Rental tax changes are about to kick in – are you ready?

Rental Tax Changes

Earlier this year, the Government announced the removal of tax deductions on loan interest for rental properties. Previously, interest payments could be claimed as a business expense and taxed accordingly, giving property investment a tax advantage.

Now, properties bought from April 2021 onwards will not be able to claim any tax deductions for the interest paid on the mortgages. For all existing rental properties, including holiday home rentals, the tax deductibility is being phased out over four years.

Changes take effect from 1 October

Until October, the old 100% interest tax deductibility is in place. Then on 1 October this year, rental property tax deductibility reduces to 75%: you can still claim three-quarters of your interest payments as a business expense and get a tax advantage. The 75% rate remains in place until 31 March, 2023.

For the following financial year (1 April 2023 to 31 March 2024), you’ll be able to claim 50% of your interest payments as a business expense against your rental income. Then it drops to 25% for the next financial year (1 April 2024 to 31 March 2025). From 1 April 2025 onwards, no interest deductibility will be available. You can read more details here.

What should you do?

To assess how much impact this will have on your situation, we can calculate the difference this is likely to make to your overall gains or losses in the years ahead. Our forecasts will be a good guide, but the exact situation will vary depending on several other factors, too. For instance, as interest rate deductibility reduces, you may also find that rents increase to help you meet the higher costs. However, your mortgage interest payments may also go up, if (as seems likely), interest rates increase over that time.

Ideally, you should think carefully about your rental properties and whether they will still be fulfilling their role in your financial strategy. You might choose to keep them – switching from interest-only to principal-and-interest repayments could be a way to start reducing your interest costs over time. Or you could sell up and invest the proceeds somewhere else.

Talk to us to get a better understanding of what your position will be when these tax changes come into effect, so you can make smart decisions about your financial future.

Growing pains: expanding a one-person business can be a challenge

Expanding a Business

Awesome, your business is growing! You have more clients, or your clients are spending more. Maybe you’re offering more products or services; hopefully you’re also making more money. It all sounds like you’re moving in the right direction.

 

But with growth comes growing pains. You might also be working longer hours, struggling with cashflow, losing track of invoicing and starting to occasionally drop the ball on jobs because you’re so busy. This is a critical point: how can you manage your business so you don’t lose control of your growing workload?

 

These are some of the challenges we often see facing our clients. One-person businesses that expand too quickly can seriously struggle. Wages and taxes must be paid, while outstanding debts can pile up rapidly. The business owner is stressed out and overworked, invoicing gets forgotten, clients start complaining and the quality of work begins to deteriorate. All this adds up to leave the owner short of cash and scrambling to survive.

 

However, with some planning, a little research and a bit of investment, you can grow a one-person business into a thriving enterprise with a happy team.

 

Our client Bruce is a great example; he’s an electrician who decided to go out on his own in mid-2020 as the demand for electricians (or any tradie for that matter) ramped up. There’s no shortage of work out there for Bruce – he’s reliable, friendly and reasonably priced, so he’s hugely in demand (we’ve changed his name to protect his privacy). In fact, he’s so popular that he’s busy all the time. He doesn’t even have time to reply to queries he gets from new clients and his phone rings all day. He’s trying to manage three new contractors and a couple of employees (including an apprentice) across up to 20 different job sites each day. He doesn’t always manage them as well as he could, so Bruce often ends up back on the tools doing basic work.

 

We’ve been working with Bruce to try to help him get things back under control. He’s identified some of his strengths: dealing with customers and council, quoting, and onsite problem-solving. Those are the jobs we want him to keep doing, while handing off the jobs he likes less to other people and systems. We’ve helped him sign up for simPRO field management software so he can keep track of his team, progress on jobs, and generating quotes and invoices. Bruce has hired a part-time bookkeeper to send and chase up invoices and quotes. He’s come up with a system of pre-written reply emails to keep new enquiries under control.

 

You can grow sustainably and successfully – just don’t be afraid to ask for help. Investing in the right advice will almost always pay dividends; you’ll have the support you need to build a thriving team and a valuable business.