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Welcome to the Vision Accounting e-newsletter for August 2016. This is a great way for us to share important information you need to know, helpful tips and hints and practical resources to help you in business for 2016.  
 

What’s very important?

Proposed Auckland Unitary Plan – Warnings ahead

The Independent Hearings Panel has reported back to the Auckland Council with its recommendations on the Proposed Auckland Unitary Plan (“PAUP”) and the Council will later this month decide whether or not to adopt the Panel’s recommendations.

Section CB 14 of the Income Tax Act 2007 is a little known and rarely applied provision but we will not be surprised if the IRD seek to use this provision for tax gains made from the sale of properties affected by the PAUP.  The position we have taken in previous advice is that section CB 14 does require consideration and we believe that the IRD would be correct in its approach, unfortunately.

Section CB 14 treats the proceeds of the sale of land within 10 years of acquisition as taxable income where at least 20% of the gain arises from one or more factors that occurred after the land was acquired. The factors include a change or the likelihood of a change in the operative district plan. Section CB 14 only applies if none of the other land taxing provisions in section CB 6A (bright-line income) to section CB 12 (development or division scheme commenced within 10 years of acquisition involving more than minor work) apply. 

A deduction for 10 percent of the gain is allowed for each year of ownership and therefore net taxable income will only arise if the property is sold within 10 years of acquisition.

Section CB 14 will need to be considered for properties that, following acquisition, are rezoned for higher density or as Special Housing Areas under the PAUP. Ultimately, it comes down to a valuation question as to whether the increase in value is due to the change or the likelihood of a change in zoning. 

The residential exclusion in section CB 18 only applies where both the vendor and purchaser used or intended to use the land for residential purposes. The purchaser’s purpose is ascertained from the circumstances of the disposal and “other relevant matters”. If selling to a developer the exemption will not apply. Please talk to us before selling any property that may have had a zone change, especially if ownership has been less than 10 years.(Article courtesy of NSA Ltd, amended to suit)

What you need to know

Changes to land sales could affect you

Are you selling residential land? From 1 July 2016, a new withholding tax – residential land withholding tax (RLWT) – may need to be deducted from a property sale/disposal where the property being sold/disposed of is in New Zealand and meets the definition of ‘residential land’, and the vendor:
  • acquired the property on or after 1 October 2015, and
  • has owned it for less than two years before selling or disposing of the property, and 
  • is an offshore RLWT person
Obviously, this affects non-residents. Less obviously, an 'offshore RLWT person' includes New Zealand resident companies who have shareholdings of 25% or greater held by foreign persons, and trusts where more than 25% of the trustees are foreign persons. Just because your business is New Zealand company, it doesn't mean
that you will not be caught by these new rules. It is possible for certificates of exemption to be applied for affected taxpayers. Contact us if you think this may affect you.

What you need to look out for

Running on Empty

What do you do when you’ve been through all your incomings and outgoings for the quarter and you’re running at a loss? It can give you the flutters but it’s not uncommon for business owners to find themselves in this position, particularly in the start-up phase. It can also accompany a growth spurt in the business before the business has really stabilised at its growth targets.

When you have more money going out of the business than is coming in, if you can’t pay your bills, you’re running at a loss. You may have a big order in the pipeline that will cover you but you might need to seek out a loan to cover you until the money comes through. You can distinguish temporary cash-flow issues from larger issues but either way you need to act.
 

Running at a loss: what to do next

Most people starting up a business need to allow for a period when they have more money going out than coming in. If you have a loan, it’s a good idea to keep an eye on your business plan to see whether you’ve allowed for a period of running at a loss and have a realistic amount of capital to keep you going through that period.

If your plans weren’t realistic enough or you’ve been hit by an unexpected downturn, you may have to consider raising further finance. Your bank manager will be looking at your cash-flow forecast for three to six months ahead, to run reality checks on the kind of costs you face. Plot this out before the loan interview.

Check check check

  • Check your financial records and make sure they are accurate and set up so that it is easy to keep track of income and expenses
  • Are your bank accounts set up so that your business bank account is only used solely for the business and there’s no bleed through to personal expenses?
  • Do you have a separate account to put aside taxes and levies?
  • Check your invoicing. Are you on top of your debtors, invoicing work on completion and chasing up late payers?
  • What does your budget look like? Have you set one and are you on track with it?
  • Take a look at your expenses. Are there any you can trim? Is it possible to approach your creditors and set up time payment arrangements?

Professional advisors – who can help?

Lastly, are you trying to do all of this yourself? We understand that when money is tight, calling on a professional advisor might seem like a luxury you can’t afford right now. However, sometimes you can’t afford not to.

If anything described above rings alarm bells but you just don’t know how to fix it, please let us know. We can help you put together a plan of action.

Sharing news from my clients -
with my clients

I like to introduce you to Peter, Sabine and Kat Tetzlaff of Milestone Financial Services (North) Ltd.
Is a financial advice practice specializing in holistic, goal based financial advice for their clients.

Holistic financial advice encompasses all the different areas of financial planning such as budgeting, retirement planning and investments as well as estate planning, risk management (insurance) and taxation. They work closely with their clients’ other specialists like accountants and lawyers to ensure the best possible outcome.

Milestone Financial Services (North) Limited is a financial planning practice based on the North Shore, dealing with clients all over New Zealand and globally. Milestone is DIMS licensed, which is currently the highest compliance standard for the industry in New Zealand.

They are a member of the Milestone group (www.milestone.co.nz), which looks after approx. 600M in client funds. Their initial client meetings are obligation free and at no cost to you, if you wish to discuss your financial future please contact the team at Milestone Financial (North) Limited on 09 410 4538 and talk to them in full confidentiality.

Milestone provided this very topical article about the Auckland Housing Bubble that we would like to share with you.
 

Why worry about the Auckland housing bubble

Every day, our newspapers and TVs have an article about the Auckland housing issue and why someone needs to be doing something about it. Most New Zealanders glance at these articles and pity those trying to buy their first home, then shrug and move on - secretly thinking that long may this housing boom continue as it is good for their net worth. There is also a commonly held view that the rapid rise in Auckland house prices is an Auckland first home buyer problem and it doesn’t really affect anyone else.
However, the Auckland house boom is now a New Zealand issue. It will have a future impact on many New Zealanders and we should all be starting to think about how we will handle the inevitable fallout from it.
 

What is driving the Auckland housing bubble?

This part of the equation has been well documented by the media and a plethora of experts. In the last 10 years Auckland’s median house price has risen by 213 per cent, averaging over 20 per cent per year. This is clearly not sustainable. This massive price growth has been driven by:
  • Migration: Auckland’s position as New Zealand’s number one city of choice has resulted in faster population growth than the rest of New Zealand. This puts the housing stock under increasing pressure. On an annual basis, net migration has risen to 68,000 people (in the year to March 2016) helping to underpin the economy and boost the property market. Much of this growth has come from international students and fewer Kiwis leaving for Australia, given the downturn in their mining sector and weaker employment market.
  • Town planning and infrastructure restrictions: Auckland Council has been reluctant to relax its zoning requirements and enable Auckland to expand out and also up. This pushes up the price of what land is available for development under the plans approved by the council. In a number of instances, large potential subdivisions have been shelved due to inadequate infrastructure such as power, water and sewage.
  • Low interest rates: We now have historically low interest rates and until early 2016, a huge appetite by the banks to lend money for property purchase or speculation. When interest rates are low, people feel more comfortable borrowing money to buy a rental property as they believe it is a one-way road to riches - most of these investors/speculators have never experienced a significant downturn in property prices.
  • Tax inequalities and a positive property psyche: There have been significant tax advantages associated with borrowing to buy a rental property. When people see massive house price increases occurring year after year and there is an ability to borrow cheap and offset costs against one’s personal income, then it is natural that they want to be a part of it. This property psyche feeds upon itself and reaches a stage (as in 2016) where the fundamentals of the property as an investment are not being seriously considered and instead, the purchaser becomes a speculator- they are buying on the assumption that the property will rapidly increase in value and they can easily sell it for a substantial gain. We are now in a situation where New Zealand must have one of the highest rental property ownership rates in the world amongst ‘mum and dad’ type investors.

What impact is this having around New Zealand?

  • Auckland halo effect: This is where Aucklanders have been selling up and moving to cheaper towns and cities - fuelling a rapid growth in house prices in those areas most favoured by Aucklanders. In recent times, growth rates in excess of 20% have been seen in the provinces.
  • Provincial speculation: Aucklanders, recent immigrants and in some cases locals, have snapped up rental properties in provincial towns believing that lower purchase prices, low interest rates and higher yields will continue into the future.
  • Rising stridency of warnings: Investment commentators, economists, the Reserve Bank, the government, and even mainstream bankers, are warning that this rapid rise in house prices is unsustainable and the inevitable end could be ‘messy’- a trendy term for losing money from housing investments.
  • Increasing LVRs: The Reserve Bank has pressured the banks to raise the loan to value ratio (LVR) in an effort to restrict the rampant lending on rental property. There is also a restriction on how soon an investor can sell a home without triggering a tax liability (the bright line test).
  • Government intervention: The government is pulling out all the stops it possibly can to slow the house price rise. This includes restricting lending, increasing supply, and threatening to change tax laws.
  • Massive increase in building: There are now more houses being built in Auckland each year than ever before. The house shortage in Christchurch is now over and many Christchurch builders will turn to Auckland and the Bay of Plenty and help to further speed up construction rates in the areas of most demand.

When might the housing boom end?

Unfortunately, we do not have a crystal ball so we need to look to events elsewhere in the world and bow to the collective wisdom of some pretty smart experts in New Zealand.

Building supply is a blunt instrument. It takes years to gear up to start to meet demand and then it takes years to slow down. Because of the inability to exactly meet demand, there will inevitably be a house oversupply situation once migration has slowed, interest rates have nudged up, access to mortgages has tightened, and house supply has expanded and the confidence level of the public has fallen. All these factors lead to falling house prices.

Gordon Edington, a director in property consultancy firm Prendos, believes things will unravel in 2018/19. He believes the stimulus for a fall will be a combination of increased house supply, rising interest rates, reduced migration and a cyclical 10-year down turn (10 years coincides with the 2008 start of the Global Financial Crisis).

The government will want to see bold steps made to meet housing demand before the 2017 election and see a flattening of house prices and if possible a small decline. The government is keen to manage the situation as well as something like this can be managed so that house affordability does not become the number one election issue in 2017.
 

Why might this be ‘messy for many New Zealanders?

Auckland is undoubtedly the economic powerhouse of New Zealand. It is fuelled by massive levels of household debt. When house prices rise, owners feel good and will consume more - believing they can add the new debt to their house mortgage and rising house prices will pay it off one day. When house prices fall, the credit cards stop coming out and a down turn occurs. This spending reduction affects all of New Zealand. If this spending reduction coincides with a global cyclical downturn, then it becomes a double whammy and many parts of our economy slow - overtime is reduced, people may be laid off, tenants struggle to pay rents, migration slows, and young people return home to live with parents. All this leads to falling house prices and also falling rents.

However, things don’t stop there. The banks will want increased equity in the houses they are financing, they may want borrowers to start paying off capital rather than just sitting on ‘interest only loans’, and interest rates might rise.

About this time, any changes to tax rules made by the government in 2017 to slow house price appreciation will start to kick in and those who borrowed heavily to buy rental properties could be hit badly.

It is difficult to predict how much house prices in Auckland and elsewhere could possibly fall. We have seen property values decline in parts of Asia, the USA, Canada, UK and Europe by 50-60% during the GFC. A number of economists believe Auckland house prices are 40% or more overvalued, but that does not necessarily translate into a fall of that size in Auckland. Statistics produced by First New Zealand Capital in early 2016 indicate that a price fall of 13-17%, based upon historical falls in New Zealand, would be more likely.

Those who are not heavily indebted or are debt free, need not excessively worry. Your house price may drop, but provided you have a well-diversified investment portfolio and your house is not part of your retirement planning, then you just ride it out knowing that you will be worth a little less on paper than what you were during the boom.

For those who have massive mortgages or who have recently purchased, then things could be very messy. It is important that debt levels be reduced while interest rates are low and you focus on building up liquidity in a diversified investment portfolio so that if the banks demand a sudden debt reduction, you have money available in your non-KiwiSaver scheme investment portfolio to make this payment.

If you own a rental property and the yield on it is 3% or less (based on current market value and assuming it is debt free) then talk to Milestone about whether now is a good time to consider selling it and diversifying your overall investment portfolio. If you are planning to sell a property, it is always better to do it in a buoyant market rather than a declining one.
 

Do you have something to share? We are keen to hear from you. We are always seeking relevant and informative articles to include in our newsletters, so don’t be shy, contact us with your suggestions and we will do our best to include it in one of our newsletters.

Ask us a question

Have you got an accounting question that leaves you worried or confused?


We love a challenge – see if we can come up with the answer that gives you the ‘ah ha! moment'.

Contact Virginia at Vision Accounting NOW on 09 415 0319

Remember

We offer the service of a one on one meeting to review your financials and help set you up for a strong 2017.
This one meeting can make a huge difference to the cashflow and profit of your business.

If you would like to schedule a business review meeting, or have a no-obligation chat – we’re happy to help.     

Thanks, and have a great month,
Virginia and the team at Vision Accounting

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Contact Us

Tel: (09) 415 0319
Email: admin@visionaccounting.co.nz
Web: www.visionaccounting.co.nz
Physical Address:
106A Bush Road, Albany, Auckland
(When posting documents please use the PO Box address, as there is no mail delivery to our street address. Thank you.)
Postal Address:
PO Box 303 157
North Harbour
Auckland 0751