Tauranga Property Investors Association Blog

Established in 1994 The Tauranga Property Investors' Association (TPIA) is a non profit organisation of people who own or otherwise have an interest in residential, commercial or other investment property.

The association organise monthly meetings and e-newsletters which provide the opportunity for new and existing members to increase knowledge, gain support and build confidence in all aspects of property acquisition and management.

TPIA is sponsored by PMG Funds, Quinovic and Ingham Mora. All organisations provide useful information on a monthly basis. Check out some of it below.

ANSWERED BY

Answered by Ingham Mora:

There is definitely a wrong way if you want to save on the tax (via achieving a deduction for interest). If you buy the new home and the settlement statement shows that you used the bank loan to directly purchase the new home then there is no way to claim interest on that loan as a deduction against the rental income you’ll earn from your old home. What the bank loans are secured over doesn’t matter – IRD looks at what the loans were used to buy as part of assessing whether the interest is deductible or not.

The correct way to structure this is to ‘sell’ your current home to a new entity – usually a company. The company then borrows up to 100% from the bank to pay you back for the home. The company earns the rental income and borrows to purchase the rental. As the company took a loan to buy a property that will earn it income then it is allowed an interest deduction (80% of the interest is claimable in the 2025 tax year, 100% for the 2026 tax year).

As an example, Beauden owns a home in Otumoetai with no debt. He wants to buy a new home in Bethlehem and rent Otumoetai out. To achieve the best tax outcome Beauden ‘sells’ Otumoetai to All Blacks Rentals Ltd (a new company he forms) for its market value, say $1m. The company borrows $1m from the bank to pay him back. Beauden then uses the borrowed $1m as payment for the new home in Bethlehem. By doing it this way the interest deduction for the company is achieved.

Please note this is a very simple example and does not cover all scenarios. It is easy to muck this up so I recommend getting your Chartered Accountant involved in all cases.

Written by Tom Beswick of Ingham Mora

The comments in this section are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.

Answered by Ingham Mora: Labour has proposed a change to the Trust tax rate so that from 1 April 2024 trust profits will be taxed at 39%. The current tax rate is 33%. So, does this mean that all income earned from family Trusts will incur this new rate? Fortunately not - not all income will end up being taxed at 39%. This is because Trusts are still allowed to distribute income to beneficiaries and those beneficiaries will pay tax at their personal tax rate. This makes sense to do in a world where Trusts pay 39% on income when the beneficiaries personal tax rate is under 39%.

Let’s say we have a scenario where we are in the March 2025 financial year and the 39% Trust tax rate has come into force.
Let’s say Ma and Pa each have wages of $75k per annum and a Trust that makes $100k of rental and other investment profit.
Any profit left in the Trusts name will incur 39% tax. On $100k of income the tax bill will be an extra $6k per year!
The Trustees agree that it makes sense to legally minimize the tax that the family pays. So, the Trustees decide to make a beneficiary distribution to Ma and Pa of $50k each.
Ma and Pa now have income of $125k and pay only 33% tax on the income they receive from the Trust – not 39%.
Note this can be a paper distribution only – i.e., the cash doesn’t have to immediately be paid. This paper entry will save Ma and Pa $6k – every year (assuming $100k income stays the same).
Overall, this means that Ma and Pa can earn up to $180k per year before they are paying the 39% rate (including Trust distributions). Usually this would mean that until the family is earning over $360k per year from all sources that you wouldn’t normally be paying tax at 39%.

The impact of the Trust tax rate going to 39% may not be as large as you might first expect and generally it will be only the very high earners, or those with a lot of Trust income who may pay it.

The comments in this section are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.

Facts;

House & Land cost Mike $1.2m inclusive of GST (if any).
Show home lease is $58k p.a. Lease agreement provides that Symphony Homes pays rates ($3.5k p.a) & insurance ($1.5k p.a)
Symphony Homes is GST registered
After 2 years Mike will exit the lease and rent the house out under a long-term residential tenancy
The market value of the property at the end of the lease is $1.4m
Mike does not carry on any other business or income earning activity

Answer by Ingham Mora:

There are GST consequences that Mike will need to consider:

1. On purchase of home and lease to Symphony Homes:

Although Mike has purchased a residential house, the agreement to lease back to Symphony Homes is a commercial lease
The total value of the lease includes the Mike’s landowner obligations (lease, insurance) = $63k p.a. This is over the $60k GST registration threshold.
Mike is therefore liable to be registered for GST. If he doesn’t register, he is deemed to be registered under GST legislation
As both Mike and Symphony Homes are GST registered the $1.2m purchase price includes GST of $0.00 (i.e Mike can’t claim any GST back in respect of the purchase)
Mike is required to charge lease of $58k p.a plus GST ($66.7k incl GST)

So, Mike pays $1.2m for the property and benefits from 2years of lease value of $126k. This gives him a net cost of $1.074m. Mike thinks this is a pretty good deal!

2. But what happens in 2 years when the show home lease ends?

Mike’s activity changes to an “exempt GST activity” of residential rental
Mike must deregister from GST under the GST rules
On deregistration, Mike is liable to pay GST on the market value of the property $1.4m = $0.183m GST

So, the net cost of the property to Mike is now $1.074m +$0.183m GST = $1.257m. This is not as an attractive deal as Mike had anticipated due to the GST cost!

Answered by Ingham Mora (Jen Ruffley, Trust Director): Any good trustee would insist trust properties are insured. The Trustees have a fiduciary duty under legislation to act for the benefit of the beneficiaries. In the event of a property being damaged or destroyed with no insurance policy in place, the trustees would likely be in breach of their duties, meaning any indemnity they receive under the trust deed or the Trust Act 2019 would be invalid, making them personally liable. Don’t take the risk, insist on trust assets being insured!

Answered by Ingham Mora (Alice Scapens, Director): Maybe not! IRD brought in some Bright-Line tax rollover relief rules a year ago, intending to lessen the tax burden when property ownership structures changed but the effective ownership remained the same. Unfortunately those rules had some limitations. For example, you were able to transfer a property out of a Trust to the Settlors, but only if the Settlors had originally owned the property and then transferred it into the Trust, not when the Trust had purchased the property directly.

As of 31 March 2023,however, IRD has expanded the rollover relief provisions to allow Trusts to transfer property to the settlors where the Trust had originally acquired the property. There are several criteria that you must meet – key being that the Trust must meet the definition of a “Roll Over Trust” which requires the settlors and beneficiaries to be close family members/associates. Further, the property can only be transferred to settlors who are principal settlors at the time the land is transferred, and also at the time the Trust originally acquired the land.

Answered by Ingham Mora: Purchasing as a co-owner / joint tenant could expose you to a tax bill should you later dispose of your interest in the property to either your daughter or a unrelated third party. In such a case, tax would arise if you sold your interest (50%) at a profit within the tax Bright-Line period. If you gifted your interest to your daughter, the gift would be deemed to be at market value and so a profit could still be realised. As a co-owner you would not have a defined share in the property, but for tax purposes you would be considered to hold a notional 50% interest, and it is this interest that could be subject to tax.

There may be other means to structure the arrangement without exposing you to the tax Bright Line rules. Such means include you acquiring an interest as bare trustee for your daughter. Another is you entering into an agreement to on-sell your interest in the property to your daughter (at the same time you acquired your interest) in future, conditional on her obtaining finance.

Answered by Ingham Mora: Yes you can. The tax rules do not deny a correction on a go-forward basis (i.e from FY 2022). There is no reason why FY 2022 and future can’t be split out providing the fit-out value can be accurately and independently assessed. However, you can’t go back and claim depreciation for the past FY2019 and 2021 periods.

Valuit is one such business that performs chattel appraisals for deprecation purposes. Note, the book value of the fit-out that you depreciate from FY 2022 will not the independently assessed value when you purchased the property. The book value upon which you can claim depreciation from FY 2022 forward is reduced by a notional amount of depreciation, being the depreciation that you would have been claimed had you commenced depreciating the fit-out when you acquired it back in FY 2019. That is, the book value is reduced by the historic depreciation not claimed.

ANSWERED BY

link to Quinovic

Answered by Quinovic: In short, no. Although your thoughts are coming from a conscientious place, you cannot discriminate against families with young children. Advertising something like this could lead to a claim of discrimination. The best advice here is to make your property as safe as appropriate. For example, can you add fencing to help mitigate risk? For applicants with families, you can advise them of the potential risk, but ultimately, it is the parents’ responsibility to manage as long as you have put some measure of safety in place.

Answered by Quinovic: It depends on who your target tenants are. Are you focusing on families, flatmates, retirees? Families with small children find the most value in having a tub, but it isn’t a deal killer. Flatmates and retirees typically don’t care. It doesn’t add any real value to the rent value. It is more about providing value to your target tenant, so you need to consider who that is first.

Answered by Quinovic: If your tenancy agreement states “no subletting”, she cannot sublet unless you give permission, and you can issue her with a 14 day letter. However, it probably would be best to contact her first if she’s been a good tenant to understand the situation. You may decide to agree to allow a flatmate IF they go through a normal application process with you after she meets them and puts them forward. This is important to cover you because some insurance policies could withhold coverage on a damage claim if proper vetting is not completed.

Answered by Quinovic: Under Section 46 of the Residential Tenancies Act 1986, neither party can change locks without the consent of the other. The landlord is responsible for maintaining the locks, so she should have contacted you to get permission and then to provide the new key. You can breach the tenant with a 14 day letter on this basis. On the second point, she cannot prevent access for inspections as long as you have given the proper notice as outlined in Section 48(2)(b). Her presence is not required. I would recommend having a meeting with the tenant to understand why she changed the locks and her concerns, then explain to her the tenant obligations in this scenario and see if can come to a reasonable and amiable agreement as a first step toward resolution. That approach typically resolves most conflicts.

Answered by Quinovic: Under Section 19 of the Residential Tenancies Act 1986, you must lodge the bond payment with Tenancy Services within 23 working days after the payment is made with the approved bond form signed by both parties. This includes partial bond payments, and you should not hold onto those funds otherwise, you risk being fined. Subsequent payments can be made following this time limit and using a copy of the original signed bond form. Also, under this section, you are obligated to provide a receipt for any funds you receive. If you have the tenant’s agreement to use their email address as a service address, each time you receive bond funds from them, send them a simple email including the address of the property, date of payment, name of payer, and the amount and nature of the payment. Be sure to keep all records of payments received from the tenant, and all payments made to Tenancy Services. They do conduct random audits, and if your records are in good order, it is easy to comply with the audit.

Answered by Quinovic: Under section 48(3)(d), the landlord can enter the premises to show the premises “to a real estate agent engaged in appraising, evaluating, or selling or otherwise disposing of the premises” with the prior consent of the tenant. So, although you have given the tenant notice, you actually need their consent to enter. The landlord may not enter without that consent as this is unlawful and subject to fines. However, the tenant cannot unreasonably withhold consent either as this is also unlawful. The best thing to do is to have a conversation with your tenant to reach agreement on a date and time for the appraisal. Do keep in mind that if you want to proceed with marketing the property after the appraisal is complete, you have other notice obligations to adhere to prior to undertaking that activity.

Facts; My understanding from advice from the council and tenancy services is I pay for water usage, but have also paid for the base services charges for water supply to the property. I have asked my landlord about this and this was his reply: “Yes the water invoice is calculated as having a fixed and a variable charge. It is the means of calculation that they adopt. I guess it offers the council more revenue from low volume users. The sum of the two (total consumption and base charge) make up the water rates. The water rates bill is the responsibility of the tenant to pay during the term of tenancy.” I would appreciate some advice of what is correct, and should I pay the final bill then follow this up with tenancy services?

Answered by Quinovic:

Good question! Tenants are responsible for consumption charges and landlords are responsible for base line charges. To clarify, under Section 39 of the Residential Tenancies Act, the landlord is responsible for all outgoings that are incurred regardless of occupancy and this includes the base line charges incurred for water services in Tauranga city. Under the same section, it states that tenants are responsible for the water charges based on consumption as long as the charges are exclusively for that specific residence. Therefore, a tenant is only liable for the consumption charges associated to the meter reads on the water invoice. For Tauranga City Council water invoices, these charges are separated on the invoice. For Western Bay of Plenty invoices, there are no base line charges as these are included in the rates and therefore, their water invoices are solely consumption charges.

Answered by Quinovic: Sticky situation. Under Section 7(2A), a tenancy cannot be established for a short term (under 90 days) to use it as a trial period “for ascertaining the desirability of extending or renewing”. You unfortunately have done just that, so she does have grounds to argue that it is a tenancy that falls under the RTA and can choose to have the tenancy roll over to a periodic. Therefore, you would have to follow the standard process of terminating a tenancy, and can only give notice for one of the reasons listed under Section 51. It is always risky entering into agreements without understanding the law and the risks. Our recommendation would be to try to work out an amicable solution between the two parties and avoid an escalation to Tribunal as it will likely not go in your favour.

Answered by Quinovic: In short, no. Some furnishings can add a bit more value to the rent, however, the drawback is that you are responsible for repair or replacement of anything that needs attention, and you will return to goods that may have had more wear and tear on them than you would have preferred. Further, furnished properties cater to specific tenants who are usually mobile and looking for short term situations which means more turnover, typically six (6) month segments, and often take longer to secure qualified tenants. The more turnover, the more opportunity for damage while people move in and out of the property. It often rules out a lot of good applicants who have their own furnishings and are looking for a longer-term tenancy. If you can find a reasonable solution for storing your goods, it is usually the better option to attract a wider range of good quality tenants.

ANSWERED BY

Answered by PMG Funds: There are several reasons to consider investing in a commercial property fund. A diversified commercial property fund can provide investors with the benefits of investing alongside a pool of other investors across multiple properties with a mix of tenants. This means investors’ risk is feasibly spread across more properties and tenants than if they owned a single property.

As with PMG, diversification of properties, tenants and locations can provide investors with improved income sustainability. Should a single tenant or property not perform as expected, the other properties and tenants in the fund may help reduce the impact on the overall portfolio’s returns.

As a result of having multiple investors in a property fund (compared to single property syndication), there are more investors who may wish to sell shares or units, or buy shares or units, should an investor’s circumstances change. This service is called the PMG matching service. The time it takes for PMG to assist with the sale and purchase of investments can vary, and we would always encourage investors to take a long-term view when investing with PMG.

ANSWERED BY

Answered by Harris Tate: The buyer has signed on the dotted line, the contract conditions have been satisfied and the agreement is unconditional. There’s no turning back for the buyer unless they are prepared to deal with some pretty serious consequences so you’re as good as sold, right?

Unfortunately, the fall in property values across New Zealand, increased interest rates and stricter borrowing criteria have seen some buyers unable to obtain finance and complete settlement. This leaves both seller and buyer in a terrible position, as their lawyers scramble to minimise losses on each side.

If a buyer can't settle on the due date they will most likely be liable to pay damages to the seller. If late settlement is possible, such damages may be limited to penalty interest. But, if the buyer can’t settle at all (or doesn’t settle within the time frame specified under the sale and purchase agreement), the buyer will likely forfeit their deposit and be liable for damages suffered by the seller.

If settlement becomes impossible a buyer may request the seller list the property for sale and take any step possible to assist the seller with on-selling the property. Should this occur the seller has a duty to act reasonably to limit their losses.

In such a situation both sides should take professional advice from the outset, to restrict the losses suffered, and the costs of litigation.

Answered by Harris Tate: Recently one of our clients (who we’ll call the ‘Smiths’) saw a beautiful place in a rural lakeside location. You simply could not surpass the views on this stunning property.

The Smiths fell in love with it too and purchased the property. Unfortunately after settlement they found that the actual boundaries of the property did not follow the fence lines as they expected.

They were surprised to find out that the driveway was, in fact, partly over the neighbour’s property.

Sellers are generally not obligated to point out the boundaries of a property except in certain circumstances. Lawyers cannot check boundaries. Only a surveyor can do this.

Fence lines, roads and even old pegs cannot be trusted as boundary markers. It’s important as part of the wider property due diligence to check out the boundaries before purchasing so there won’t be any surprises later on. The cost of obtaining a survey is a sensible investment as part of property purchase due diligence.

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