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The tax benefits of a new build
Monday, 02 October 2023
The benefits of a new build property has been outlined by chartered accountant and tax specialist Matthew Gilligan of Gilligan Rowe & Associates in a recent webinar.
Apart from a five year Brightline test compared to the 10 year period for second hand properties, Gilligan says investors can claim chattel depreciation on a build.
“Investors can identify the new chattels and break them out and separately depreciate them.
“Also investors get the added benefit that anything related to fixing a new build is automatically classed as repairs and maintenance because they are clearly not improving the capital side of the property, just reinstating it to the previous state, which is new. In other words, the IRD can't allege that it's capital maintenance because it is just being reinstated back to the house when it was brand new.”
Gilligan outlining his views to a recent Bayleys Old vs New Property webinar says new build tax exemptions, coupled with these relatively well-known but sometimes not thought of benefits, do stack up in favour of new builds, particularly if new builds have good cash yields.
“It’s a little bit about how new builds are exempt from the interest deduction rules and a shorter Brightline test benefit as it exists.”
On the ring fencing of losses for property investors, which Gilligan labels another unfair tax rule along with the removal of mortgage interest payments as tax deductible, there are no plans to change it from any of the political parties. “ACT’s David Seymour says he'd be in favour of changing it, but he doesn't have the budget for it in his fiscal plans. There is pretty much no chance of loss ring fencing being repealed,” he says.
Another rule that could be coming to an end if National and ACT form a new government is tenancy terminations. Landlords have to either move in themselves, sell the property, extensively renovate it, or rebuild it to get a tenant out. Both parties have said they repeal that law.
Gilligan says as the business of being a landlord becomes more onerous, he is often asked by investors what is the best tax structure, a question that is impossible to answer as everybody’s individual circumstances are different. But he says a couple of the common structures used are:
- For a salaried person, married or single, a rental company. These days, investors want to park their income at 28% as opposed to exposing it to their personal tax returns, presumably at 33% or 39% and, so, a company for a new build straight into it is going to be useful. I would avoid rental partnerships. Companies are good. They're cheap to set up $1,000 and shares can be split between the two spouses. A trust can also be formed the shares go into the trust. All of that needs tailoring to individual circumstances.
- For self-employed people, there are better ways than that. This is a common structure. For example, an engineering company is making $1 million - $720,000 after tax. The shares are in a trust. The company doesn’t want to declare a dividend to the trust because it will have to pay 11% top-up tax – the difference between the company tax at 28% and next year’s trust tax of 39%. The company should just pay the $280,000 tax from its main earnings to the IRD. Then if the trust owns a rental company a corporate group can be formed, and money can be passed between the companies. The rental company simply uses the $700,000 to pay down debt and keeps the 11% tax deferral. Compound interest is being earned on that deferred tax. If a corporate group is not set up before taking the money out, tax will have to be paid on the overdrawn current account. That creates either Fringe Benefit Tax or tax issues on deemed interest on the overdrawn current account. This is how you avoid that issue.
So tax structures do need to be tailored to individual circumstances. They're pretty complex things and easy to get wrong, Gilligan says.
