taxation issues during renovation

[The_Dog]

Hi Peoples,

I have a number of properties that have the opportunity to add another room.

To add the other room, I intend to remove the tenant (as they are paying for a 2 bed), add the room, and then put it back up for rental as a 3 bed. I don't think it likely (or reasonable) that the current tenant would appreciate a rental hike for an extra room, builders dust and disruption that they didn't request!!

If, during the renovation I was to live in the house, would the cost of materials etc be tax deductable??

I would only be in the property for the time it took to make the reno, and not draw it out unnecessarily. i.e, the house would be availabe for rent 'continously', and would never become my PPOR.

What are the issues to consider?

The Dog

[kolzee]

Hi Dog,

If you are living in it then it's not available for rent continuously.....ie you can't claim depreciation right through this period.

Also, the materials should be capitalised and depreciated during periods where it IS available for use, therefore it doesn't matter whether you are living in it or not - you just depreciate it from when it's available to rent.

Does this clarify?

[CJ]

How long does it take to add a third room? two weeks? a month? If you are just dossing on the floor and turning it around quickly is anyone going to know you were living in it. If you move in the bed, lounge and dining table, that would be another story.

Capitalise the materials and depreciate when avaliable for use.

With the deminimis upping to $500 (did this get made legistaion before parliament split up), can you buy in small quantities so that you can expense in the year of purchase (too much of a hasstle with $200 but could be worth it with $500 - ie, buy the toilet and the vanity and the shower all on different days to keep under $500.

[Gypsygirl]

With the deminimis upping to $500 (did this get made legistaion before parliament split up), can you buy in small quantities so that you can expense in the year of purchase (too much of a hasstle with $200 but could be worth it with $500 - ie, buy the toilet and the vanity and the shower all on different days to keep under $500.

I'm unfamiliar with deminimis - can you explainfurther.
Thanks

[fudosan]

Does it refer to the new maximum price ex GST of thing you can claim as expense rather than as asset which must be depreciated over a number of years?

[Warren]

[QUOTE=CJ]
With the deminimis upping to $500 (did this get made legislation before parliament split up),QUOTE]

CJ the answer is No, this did not pass into legislation prior to the election (along with other proposed changes to depreciation). Our Understanding is that is has 6 months once Parliament starts to sit again for the wheels to get moving and for the proposed bill to be considered by the appropriate Select Committee.

Regards

[CJ]

Warren,

Looks like I am ont the only one having trouble with quotes.

Gypsygirl,

Deminimis is a just a fancy way of saying that a rule does not apply if the amounts involved are not big enough. The one I refered to is as Fudosan stated if you buy something less than $200 ($500 if Labour manages to form a government and enact the draft bill they had before the house - all parties would support this I would expect) then you done have to apply the normal rule that states you have to capitalise. Is just a rule to reduce administration burden.

Not sure with the GST thing. I would have thought if you weren't GST registered (ie residential property) the it is GST inclusive but that is just a gut thing and not based on anything.

Hint: If you buy an asset, negotiate the price to below $200 and you can expense it rather than capitalise it.

Not sure on the exact rules but the invoice total (not the individual item) must be under $200 and I would expect you cant split purchases into smaller invoices on the same day.

[fudosan]

I thought the $500 raised limit is already set in stone starting in May(?) this year. I remember checking the IRD site a while back and got the information. So it is something still up in the air?

[Cliffy]

I thought the $500 raised limit is already set in stone starting in May(?) this year.

I thought this was the case also. I have been trying to keep capital expenses below $500 for this reason.

[kalovatt]

Me too.

My understanding is that this new limit of $500 was already applicable - along with the change to building depreciation to 3% and the other minor changes.

Am I missing something......................??????

[fudosan]

I digged out the information I printed off IRD's website back in May. Accoridng to it,

The increase in the low value asset threshold will apply to assets acquired after today.

Today = 19 May, 2005

So, yes the new $500 max is in effect now.

[Warren]

I think this may need some further research and clarification.

My understanding is that Dr Cullens intent was that some of these changes were to take effect from 19 May (budget day) as announced. However, the changes to the relevant legislation "to make it so" has (in my understanding) effectively been suspended due to the election process. It is possible the Bill (containing the changes announced in the May budget) could get passed into law as proposed once the Bill is actually considered. This can not happen until Parliament is sitting again. As to what will happen to the Bill once Parliament does sit - who knows what will happen as we do not have a Government yet!

I wonder what would happen if people have been claiming on the "proposed changes" but they do not actually eventuate into law.

I would be interested in any accountants comments.

[masteraccountants]

Income Tax Returns not due until after 31/3/06

Hi Warren,

The Bill should become legislation long before income tax returns for the year 1/4/05 to 31/3/06 have to be lodged.

GST Returns are being lodged in the meantime. But the GST was always claimable on all business purchases - whether capital or recurrent expenditure.

So the income tax issue will only come into play after 31/3/06.

Kind regards

[SEIBU]

Does the low value asset threshold rule apply to ALL assets? For example, in a chattels valuation a number of items are given an opening book value of less than $500. Are these deductable as an expense too? It's not clear whteher this is so from the IRD report.

[Warren]

CJ the answer is No, this did not pass into legislation prior to the election (along with other proposed changes to depreciation). Our Understanding is that is has 6 months once Parliament starts to sit again for the wheels to get moving and for the proposed bill to be considered by the appropriate Select Committee.

Regards

Here is an update.

It is a case of steady as she goes. Labour are hoping to get the changes announced in the May Budget into law by the end of March.. but this may not happen. If this is the case then the Government will look at effective dates etc. This was outlined in a speech given to the Institute of Chartered Accountants at their Annual Conference in Rotorua by Hon. David Cunliffe, Associate Minister of Finance and Revenue.

A copy of the full speech is available here

I have reproduced some of the relevant bits from the speech below.

“I am sure I do not need to remind you that we have just had a general election, and a new government is in the process of being formed as a result. My remarks today need to be seen in the context of the conventions of a caretaker government…..”

“When Parliament was dissolved in the lead-up to the election, two revenue-related bills were before the House: the May tax bill – the Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Bill and the Child Support Amendment Bill.

The tax bill had its first reading and was referred to the Finance and Expenditure Committee, which called for submissions by 12 August. The Child Support Amendment Bill was introduced in July and was awaiting its first reading when Parliament rose. Both bills lapsed on dissolution.....

... The tax bill included a number of measures announced in the 2005 Budget. Overall these were business-friendly measures that would reduce compliance costs, reduce tax and increase business efficiency. On that basis it could be expected that, at least in broad terms, the proposed measures will have reasonably wide support in Parliament.

It therefore seems likely that the tax bill will be reinstated. However, there could be some time before such a bill could be enacted. Parliament needs to meet, by law, no later than 18 November.

Every effort will be made to pass the bill by the end of March 2006. If it is not, it is appreciated that this creates some problems with effective dates of:

April / May 2005 for depreciation;
1 April 2006 for provisional tax and GST date alignment;
1 April 2006 for the payroll subsidy; and
1 April 2006 for fringe benefit tax – and so on.

All these dates would need to be reviewed in terms of their viability. That means not only their feasibility for taxpayers, but also for Inland Revenue, which has to implement them. The government will be seeking clarity on these matters as early as possible”.