COUNTING ON IT: Four-pronged approach tackles property issues

THE MAY Budget brought some sweeping changes to the taxation of investment properties.
It was perceived that people with rental properties were able to obtain tax advantages by offsetting losses against their other income, and they weren't being taxed on any capital gain on the sale of the property.
The areas of concern have been addressed in the Budget in four main ways: Depreciation on buildings removed.
From the start of the 2011/12 income year, the ability to claim depreciation on buildings with an estimated useful life of 50 years or more has been removed.
The majority of buildings do have an estimated useful life of at least 50 years so this generally would affect all buildings that are rented or leased.
This move is designed to minimise the amount of losses that may occur and be offset against other income.
When the building is sold at a value higher than book value, there will still be a depreciation clawback for the previously claimed depreciation.
The depreciation on the buildings is generally a substantial portion of the cost of a rental property, and having this claim denied may leave you in a situation of having to pay tax.
It may even make you liable for provisional tax payments throughout the year.
If you have relied on tax losses to partially fund your rental property by using special tax codes or to reduce your tax payable, then you need to examine the effect of this change closely.
Depreciation loading.
Any new assets purchased are no longer eligible for the 20 per cent depreciation loading. This means that the writedown of new assets will be slower and the amount of depreciation claimable each year is less.
Qualifying Companies (QC) and Loss Attributing Qualifying Companies (LAQC).
The QC regime and particularly LAQCs have been attractive for property investment entities due to the protection offered in a corporate structure and the ability to pass losses to shareholders to offset against other income.
Profits generally remained in the company and thereby have been limited to the corporate tax rate.
However, since the introduction of the Limited Partnership Regime the writing has been on the wall for changes to be made to the QC regime to align with the Partnership regime.
The Budget announced that from April 1, 2011, these qualifying companies will now be effectively taxed as limited partnerships, and both profits and losses will flow through to the shareholders.
It is also proposed that the losses will be limited to the amount of the shareholder's interest in the company.
These steps are designed to tax any share of profit at the shareholder's marginal tax rates rather than the corporate rate.
At present submissions are being sought on the proposals, but it is clear that the Government is seeking to fundamentally change the QC regime and is looking to take away some of the advantages of the regime.
We strongly advise that you discuss your options with your professional adviser.
 Working for Families Tax Credit.
The Government was concerned that people on otherwise high income have been entitled to working for families tax credits by offsetting their investment income losses.
From April 1 next year, investment losses will not offset the entitlement calculation. Anyone who receives the family tax credit payments weekly or fortnightly and offsets the investment losses against other income will need to review their entitlement for the next financial year.
Depending on your circumstances, we would generally recommend waiting until the end of year to claim, when practical.
The effect of all these changes on the investment property market is largely unknown.
There has been speculation within the real estate industry that the rents will have to rise to partially offset the effect of the changes.
But it is unknown whether there will be a surge of people looking to sell their investment properties and, therefore, what effect if any will flow on to market values.
* Disclaimer: No liability is assumed by Staples Rodway Tauranga Ltd for any losses suffered by any person relying directly or indirectly upon the article above. It is recommended that you consult your adviser before acting upon this information.
Gail Thomson is from chartered accountant firm Staples Rodway Tauranga