Russell Bell PHOTO/FILE
This week I'd like to introduce Craig McKinnon who is an associate at Balance, specialising in accountancy and tax services.
It has now been over two years since Craig moved back to Whanganui with his wife and two children, and it didn't take them long to find a house in what was a buyers market at the time.
"Of course, this is a matter of perspective," he says. "I was comparing every house that I saw to those in Wellington. I imagine what I felt at that time is similar to what every Aucklander feels when picking up our local property guide."
It is clear that the invisible forces of supply and demand are starting to take hold of even Whanganui's once slumbering property market. Speculators and investors may be looking to realise investments in a positive fashion or they may be looking at shifting down from highly "geared" positions.
For those looking to invest, I asked Craig about how we are best suited to structure these investments given today's regulatory and tax environment.
"Since the removal of depreciation from buildings for tax purposes, property investors are (perhaps as the government intended) finding different ways to structure their position," says Craig.
"Rising property values create an opportunity to restructure to achieve the most effective tax position.
"It is also important to take note of how any debt will be weighted where interest payments will fall. The Income Tax Act 2007 allows deduction of interest charges when you are deriving assessable income.
"The more interest that can be offset against rental income without materially altering the overall economic position of the investor, the greater the benefit. This is not a new concept, by any means, but presents an opportunity right now because of the surge in property values and current tax legislation."
However, the impact of recent Reserve Bank rule changes will need to be watched carefully.
Current tax legislation provides mechanisms which allow the ability to return the income and expenses of the rental business via the individual shareholders' tax return. An example of this is known as a Look Through Company (LTC).
Craig says that "LTCs are transparent for income tax purposes. All income and expenses of the LTC pass through to the shareholders and are taxed at the respective shareholder's marginal tax rate (the percentage of tax applied to your income for each tax bracket in which you qualify)".
What this means is that any profits resulting from the rental activity could possibly be taxed at a lower rate than that of the company tax rate. "Any losses could be offset against the shareholders other income to reduce any overall tax payable."
It is important to remember that such matters are not without risk and seeking professional advice is very important. If there is anything in this article which you would like more information about, you can call Craig or Yvonne Wallis on 0800 480062.