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NZPIF Newsletter for August 2004

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  • NZPIF Newsletter for August 2004

    This month the newsletter is longer than usual, but with all the recent media attention directed towards the proposed changes in the depreciation rules, I thought it was worth covering some of the proposed changes. Further articles can be found on our website www.nzpif.org.nz

    Depreciation
    Below is an outline of the proposed changes which has been drafted by Thomas Chin the Political Lobbyist for the NZPIF. Thomas has been involved in many of the discussions, and has been working hard on behalf of our members to ensure a positive outcome for landlords.

    NEW IRD RULES FOR DEPRECIATING RENTAL PROPERTY
    Overview
    An IRD discussion paper “Repairs and maintenance to the tax depreciation rules” was released on 12 July. It talks about how owners of rental properties will be able to claim depreciation on a building and chattels.

    The paper and its proposals, if enacted, carry many potential effects for residential property investors.

    What does the paper say?
    The paper basically says the present depreciation regime allowed on rental properties is too generous and the Government is to change the rules.

    How might the system change?
    They say that the annual deduction of 4% of a building's diminishing value over 50 years is too high.

    They propose replacing it with straight-line depreciation of 2% a year (which would be equivalent to about 3% a year on a diminishing value basis).

    A second problem identified by officials is that more and more landlords are claiming separate and faster depreciation deductions for structural components of a building, such as electrical wiring, plumbing, hot water systems, carpets and internal walls.

    IRD suggest a list of separately depreciable assets would be drawn up, as in Australia, which would include domestic appliances, hot water cylinders, air-conditioning systems, light fittings, carpets and lifts.

    It would not include wiring, plumbing and internal walls, which IRD considers to be part of the building.

    Landlords wanting to claim faster depreciation for the listed items would need to obtain market values for the assets on purchase and then again on sale.

    When does this take effect?
    The Government wants to include any policy recommendations and make any rule changes through a Taxation Bill to be put before Parliament by the end of the year.

    So how does this affect me?
    Any changes to the status quo will mean property investor’s cash flows will be affected; ultimately property investors will pay more tax.

    Alarmingly, the IRD does not mention whether their proposals will be retrospective or prospective. If the former, it will affect ALL property investors who have claimed any depreciation since 1994.

    What can you do?
    All property investors should take an active interest in initiatives that may affect the tax treatment of your rental properties. IRD will accept written submissions until 30 September.

    TECHNICAL ASPECTS – IN SIMPLE TERMS
    Depreciation on the Building
    Investor A currently depreciates his $100,000 building at 4%.

    The deduction is $4,000 in the first year and approx $87,000 over 50 years.

    IRD proposes the depreciation rate to be 3% DV (diminishing value). The deduction would be $3,000 in the first year and $78,000 over 50 years.

    Therefore, investor A is approximately $330 worse off or $6 per week for cash flow in the first year based on a tax rate of 33%.

    If the investor claimed the proposed 2% Straight line (SL) the deduction would be $2,000 in the first and every year after and the total claimed would be $100,000 over 50 years.

    Therefore, investor A is approximately $660 worse off or $12 per week for cash flow in the first year based on a tax rate of 33%.

    These cash flows are only for the first year and the able shows the effects over a longer period.

    The key for an investor is to have cash flow in the early years of ownership when expenses such as interest are high. In sum, this IRD proposal would hurt the investor.

    Depreciation on Fit-out items & Chattels
    Investor A currently can claim separately Building fit-out and chattels.

    These are at various rates but on average work out to approx 10% DV.

    For Chattels and Fit-out worth $60,000 this would mean $6,000 in depreciation in year one.

    We are unsure of what items exactly IRD will classify as building for depreciation but some of the items that we currently claim at increased rates will default back to the building rate as shown above.

    As we are unsure two calculations have been done. One based on a worst-case scenario (larger number of items reduced to the building rate) and a best-case scenario (Few items).

    Under the best-case scenario it is estimated that the average depreciation rate would drop from the current 10% to 7%.

    This would reduce the first year cash flow by approx $600 or $12 per week.

    The worst-case scenario would reduce the average depreciation rate back to approx 5% which would mean a reduction in cash flow of $1,000 or $19 per week. A big drop!

    The total impact for investor A would be BEST CASE $920 per year reduction or $17 per week required to top up the property.

    WORST CASE would be a drop of $1,650 or $31 per week reduction in cash flow.

    Website Update
    Currently the NZPIF is working on updating our existing website, to ensure it is more up to date and also includes an online forum. The “new look” website will include much of the same information as our current site but will be more user friendly, and contain more detailed information about events, conference and happenings around the country.

    The introduction of a member’s forum will allow PIA members to communicate directly with each other and express opinions on various issues.

    Our new site will be up and running by early September at the latest, with a full update and training provided at conference for those that would like it.

    Tenancy Services Customer Meeting
    Martin Evans who is Vice President of the NZPIF, attended a meeting with Tenancy Services last week. Below is an outline of some of the key points that came out of the meeting. As I get more information this will be posted on the website.

    1)Tenancy services have had an Organisation Diagnostic undertaken by a group called Advanced Dynamics.

    2) As a result of the Diagnostic Tenancy Services are now working on improving their service. This includes

    2.1) Tenancy Services mediators and staff being more mobile, and not always expecting customers to come to them.

    2.2) Improved access to services for landlords,tenants and communities

    2.3) Enhance the incentives on tenants and landlords to use the early interventions system and reduce disincentives.

    3) They will focus on 3 system areas

    3.1) The purpose, process and expected outcomes

    3.2) What drives the behaviour of people in both positive and negative ways.

    3.3) What is the most effective utilisation of people, money and assets.

    4) Tenancy Services will spread the workload by establising a central region - so they will have 3 regions rather than 2.

    5) The new Government Department of Building and Housing will take over from the existing Ministry of Housing, and is expected to be in place by November 2004. This new department will carry out the present work of The Ministry of Housing:

    5.1) Manage the Weathertight Resolution Services Act 2002

    5.2) Administer the new Building Act

    5.3) Administer the Retirement Villages legislation

    5.4) Perform other duties including the regulation of housing standards, administer the legislation around the fencing of swimming pools etc.

    6) The priorities are

    6.1) To get the new Department up and running

    6.2) To get the RTA amendments through parliament.It should have its 2nd reading about August, 3rd reading soon after and be passed through parliament 6 months after that.

    6.3) To finalise the RTA review process.

    7) Steve Mahary will still be Minister of Housing and John Tamihere will be in charge of the new Department.

    8 ) The new Department intends extending the mediation process to handle Builders vs Homeowner disputes.

    9) Tenancy Services has observed that demand for rental accommodation by tenants has eased off, affecting some landlords who have high leverage.

    10) Interestingly as I looked around the Tenancy Services call center there was a predominance of staff in the 40-60yrs age group, as Tenancy Services recruit staff who have life skills, a good understanding of the law and excellent people skills

    Sponsors
    Each month we will profile one of our sponsors:

    Last month I made an error and missed CIA off our list of sponsors, so apologies to Geoff and his team.

    Chase Investigative Agencies Ltd (CIA) is a specialist tenancy debt collector with a National Network. They are licensed by the Ministry of Justice and have been in operation for more than 10 years. Six years ago they formed the first on-line tenant specific checking system - Tenancy Information New Zealand. The website has information about 20,000 + TT orders, 10 day notices that have been issued by landlords and property managers, and bankruptcies. You can also do credit checks via the website.

    CIA has recently joined together with TenantNet and will soon be offering their subjective comment type facility, and, the ability for you to load up your 10 notices and TT orders on-line on their revamped website. (Available early Sept).

    For more information free phone 0800 TENANT (0800 83626 or www.tenancyinformationnz.co.nz or their debt collecting services via www.cia.co.nz

    8 June 2004

    New Zealand Housing Strategy

    Freepost 184559

    PO Box 3802

    Shortland Street

    AUCKLAND

    Helen Fulcher

    Chief Executive

    Housing New Zealand Corporation

    Copy to Steve Maharey, Minister of Housing

    New Zealand Housing strategy

    Thank you for the opportunity to comment on the proposed Housing Strategy.

    Nelson City Council supports Government’s decision to develop a 10 year housing strategy. Adequate housing is one of the basic requirements of life. It is also one of the most significant assets of any community.

    The Nelson City Council supports the six areas of action identified in the discussion document. Specific submissions which the Nelson City Council wishes to make are as follows:

    Area One- Improving Housing Assistance and Housing Affordability

    While the increase in the level of Accommodation Supplement available in Nelson is welcomed, we strongly urge Government to significantly increase the level of support home owners can receive under the Rates Rebates Scheme. The Rates Rebates Scheme has not been adjusted since the 1980s. As a result the level of assistance that home owners can access through this scheme is now minimal. With both the Accommodation Supplement and the Rates Rebate Scheme, Council requests that Government benchmarks them against appropriate indicators such as the Consumer Price Index and adjusts them annually.

    Area Two- Responding to Housing Markets Under Stress

    Please note that the report quoted in page 33 of the Discussion Document was prepared by the Nelson Community and Whanau not the Nelson City Council.

    On page 25 of the discussion document Nelson is rightly identified as one of the communities where the housing market is under stress. The Nelson City Council would like to point out to Government that one of the exacerbating factors is the low percentage of the housing stock owned by Housing New Zealand Corporation (HNZC) in Nelson Tasman and that HNZC does not appear to be making any significant efforts to expand its housing stock. The 704 houses owned by HNZC comprise only 2.2% of the houses in Nelson/Tasman. Nationally, HNZC owns 4.5% of the housing stock, while in the Auckland Region, HNZC is making significant investments and currently owns 7% of the housing stock (page 31 of the Discussion Document).

    Area Three: Innovative home ownership programmes

    The Nelson City Council supports this area for action but submits that the threshold for initiatives such as the Kiwibank Mortgage Insurance Scheme is too low for nationally expensive housing areas such as Nelson. The present housing loans criteria does not assist low income families into their own homes.

    Area Four: Developing the Private Rental Sector

    The private sector has a key role in meeting the housing needs of the community. In Nelson City, the amount of housing in the private rental sector is far greater than the housing provided by HNZC, Nelson City Council and all the other community housing providers combined.

    Area Five: Improving Housing Quality

    The Nelson City Council supports this area. However, it also urges Government to ensure that any new requirements that come about as a result of the Building Bill do not add to the cost of building new homes or create additional barriers to home ownership. Some estimates suggest that the requirements of the new Building Bill could add more than 10% to the cost of new houses.

    AREA Six: Building Capacity and Capability across the Sector

    There is a need for much better data and information on the housing market. For example, one of the main indicators used is Massey University’s home affordability index yet this is of limited relevance to Nelson as “Nelson” in the index also includes Buller and Marlborough. New Zealand is going through one of the largest demographic shifts it has ever faced as the “Baby Boom” generation reach retirement age. Nelson/Tasman in particular is facing unprecedented growth. There needs to be robust analysis of such demographic shifts and their implications on the housing stock if mismatches between housing stock and needs are to be avoided.

    Government support needs to be better tailored to meet the circumstances of local authorities and community organisations to develop community housing initiatives. For example, Nelson City Council has evaluated the financial viability of developing a new community housing complex using Government support under the Housing Innovation Fund. However, it is not financially viable to do so given the high building costs in this region.

    Yours faithfully

    Paul Matheson

    MAYOR
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