The heat of summer might be lingering on, but we’re several months into 2020 now and that means it’s time to start thinking seriously about tax. With March 31 marking the end of the financial year, property investors need to get their accounts in order. To that end, here’s my pick of the 10 key tax matters that investors must consider in preparation for the rapidly approaching 2020 filing season.

1 Residential Loss Ring-Fencing

This tax year is the first year that the coalition Government’s new rules around the ring-fencing of residential rental property losses will actually take effect. What the new rules mean is that from now on tax losses from residential property can only be offset against other rental profits in a portfolio of residential property. Losses can’t be offset against other income sources like salaries or business profits.

With interest rates as low as they are, many investors are trading at profits, but those highly geared or having to make large repairs may well find themselves in loss. A decision must be made to either ring-fence on a property by property basis or as a portfolio. It seems unlikely that many taxpayers will opt for a property-by-property ring-fencing but the option does exist.

‘With interest rates as low as they are, many investors are trading at profits, but those highly geared or having to make large repairs may well find themselves in loss’

If you do have ring-fenced losses, consider raising your rent if it is below market rate; spreading R and M expenditure; or selling low yielding property to move the remaining portfolio into profit. If you are in business, look at moving debt out of rental structures and into business entities.

2 The Brightline Test

The bright line test on residential land bought and sold within a certain period of time was extended from two years to five years on March 29, 2018. As a result, any residential land sold within five years of the owner being registered on the title is potentially subject to tax. Exemptions exist for a taxpayer’s main home and inherited land. It also means that extreme care is needed when re-structuring as moving properties between related parties triggers bright line tax and resets the bright-line date.

3 Accounting Upgrade

Accounting has changed. Modern accounting systems are now in the cloud. This allows your bank data to be streamed directly into your system. It also allows you to make information available to your accountant via login codes. Accountants are also moving their systems into the cloud to facilitate efficiency and improved turnaround times. If you have not yet adopted a cloud-based accounting system, the best time to do so is always a new financial year. Make the change and enjoy the efficiencies.

4 Material Changes In Portfolio

If you have purchased a property, sold a property or refinanced, make sure you have sale and purchase agreements, settlement statements and title documents along with details of any refinancing available for your accountant. The dates titles changed and the dates you entered agreements are mission critical to tracking bright-line day counts. Your accountant will need all of this information.

5 Repairs Or Improvements

The old chestnut of whether the work done on your properties counts as genuine repairs or capital improvements is as contentious as ever. If you have done material repairs, especially if it’s a leaky building remediation, your accountant will need to understand exactly what you did and why. Provide invoices to support the costs and explain why the work was necessary and in what context it was done. If you have pictures of the damage you repaired these will help the accountant understand the extent and degree of the issues. Remember that works undertaken immediately after acquisition, or after the tenant left, but before sale, are almost always nondeductible costs.

6 Disposal Of Old Chattels

When you take an old chattel item to the dump there is no transaction to evidence this through your bank account. That means that in order to get a deduction for the write-off of the chattel items’ book value, you have to tell your accountant which items on the asset schedule have been scrapped during the year.

7 Mixed Use Assets

If you are renting a property night by night (on Airbnb, for example) and also using it yourself it’s a mixed use asset. In this situation your accountant needs to know how many nights you or your family used it, how many nights it was rented to arm’s length guests, and how many nights it was vacant. This ratio of usage determines how much of the mixed-use costs can be claimed. If there is a loss, this loss can be claimed, despite ring-fencing as long as the gross rental income from the property exceeds 2% of the property’s CV. Your accountant will need the latest CV to establish this.

8 Break Costs

Have you done a refinance that has triggered an early repayment break penalty? These costs are generally deductible when the finance is related to an investment property, even if the break cost is incurred as a result of the property being sold.

9 Planning For Next Year

If you have made plans to alter your investment portfolio in the year ahead make sure you share these plans with your accountant and keep them in the loop when things change. Buildings that have been owned pre 2012 will still have accumulated depreciations that are subject to recovery and it is critical to keep track of your bright-line day count if you are planning to sell. The things you do in the year ahead can impact on provisional tax planning.

10 Audit Shield

Many accountants now offer their clients audit shield, which is insurance against the cost of dealing with an IRD review or audit. It’s relatively inexpensive and can take the financial pain out of a stressful event. IRD’s new computer system, benchmarking technology and information sharing with foreign financial institutions has targeted reviewing on the increase. Consider taking cover as the costs are deductible.