Archive for October, 2010
The Real Returns from Term Deposits
We only have to look at term deposit rates which now range between 1.55% and 6.75% with major lenders across various terms from 1 month to 5 years. If for example you have $40,000 on term deposit with BNZ and you wanted to place this on term deposit you would be quoted a rate of 4.40%. When tax is taken off at say 33%, your net rate becomes 2.95%, as tax must be paid first and is deducted at source from the borrower (bank). If you add the great cash savings eater that is inflation into the mix – lets use the September 2010 quarter figure of 1.5% (the lowest CPI figure since March 2004 quarter too). Your real return from this term deposit is just a paltry 1.45%. Your $40,000 in 12 months time is really only worth $40,580, a net increase of $580. That is hardly motivating to save lots of money in the bank, hence a lot of people moving to ‘invest’ in their own homes and lifestyles, spend on themselves as you only live once, invest in shares, managed funds including Kiwisaver products, gold, silver, commodities, foreign exchange and of course property. The returns are no exciting enough for so many people from term deposits.
Basically I consider that term deposits are too heavily eroded by taxation and inflation. As a result in a diversified portfolio would only recommend a small portion of funds be held on term deposit for any significant length of time. Instead I am massive fan of property, that’s obvious having served on the Board of the Auckland Property Investors’ Association as long as I have and having been elected its President earlier this year.
What I would instead do with $40,000
In my opinion $40,000 is a deposit on a positive cashflow property that you could and should buy over 10% below value. Ie. here’s what I encouraged my mentoring student to do last week. They went to ANZ and got loan pre-approval that will be fixed for 2 years at just 6.44% with your APIA membership entitling you to ANZ@work package discounts (0.25% discount off fixed rates) and receive a $500 contribution towards legal fees. They will be contributing $36,800 as 20% of the purchase price ($184,000) for a two bedroom unit in Kelston (West Auckland) that has a registered valuation of $212,000. They are buying this $28,000 below value, which gives them instant equity at purchase. Try doing this with a term deposit, gold, silver etc! The property is positive cashflow to the tune of over $2,000 per year, after an allowance for repairs & maintenance, insurance, and taking tax considerations into account with no building structure depreciation, but getting a Valu-it report to depreciate fit-out and chattels. This $2,500 return is a lot higher than the $580 return, and don’t forget you didn’t even invest all $40,000.
The funny thing is that there are plenty of good deals and opportunities in the market. Sometimes you just have to open your eyes and look. Remember to protect yourself in the event that there is a slight negative market movement, by buying below true value.
NZ Property Mentor – Seminar
I am the keynote presenter at the NZ Property Mentor seminar at the Employers and Manufacturers’ Association premises in Khyber Pass Road, Grafton, Auckland at 6:30pm – 9pm this evening. Come to hear me talk more about:
- The Current Market and House Price Movement -understanding the fear in the current market and contradicting statistics.
- Rental Levels – learn about recent market movements in the Auckland market, and how you can put your rents up to maximise your cashflow from property.
- Residential Tenancies Amendment Act – the governing document to determine rights and obligations between Landlords and Tenants has changed. This has just undergone its largest changes in 24 years, so find out what these mean for you at this event
- Interest Rates - where interest rates are likely to be heading and how you can profit from it.
- Structure Update – Find out about the draft legislation which provides for LAQCs to be abolished, and for a new tax structure, Look Through Companies (LTCs) and with the tax depreciation changes earlier in the year. You will get get more information on what is the best structure for you.
- Where we are at in the Property Cycle
- Opportunities in Today’s Market
- My new improved comprehensive 12 month Group Mentoring programme with NZ Property Mentor.
Don’t delay, learn about the current market, recent legislative changes so you can keep on top of the new rules and not make very expensive mistakes, and hear about some of the wonderful opportunities for profiting from today’s property market. Go to http://www.nzpropertymentor.info and register for your tickets now.
Dr Alan Bollard, Governor of the Reserve Bank of New Zealand announced less than half an hour ago that the Official Cash Rate would remain unchanged at 3%. He stated:
Despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remains broadly in line with that assumed at the time of the SeptemberMonetary Policy Statement.
Downside risks to the outlook for global growth continue, with high public and private debt inhibiting recovery in many developed economies. Moreover, it is unclear how further policy support would impact on the outlook for growth in our Western trading partners. Offsetting this weakness, strong growth continues in China, Australia and emerging Asia.
“Domestically, recent data has turned out weaker than projected. Continued household caution has seen consumer spending and housing market activity remain muted, and many firms have become less optimistic about their future prospects. However, continued high export prices, along with reconstruction and repairs in Canterbury, will support activity over the coming year.
Overall, continued GDP growth is expected to gradually absorb current surplus capacity over the next few years. Headline inflation is expected to move higher following the recent increase in the rate of GST. The subdued state of domestic demand suggests this inflation spike will have limited impact on medium-term inflation expectations.
While it is appropriate to keep the OCR on hold today, it remains likely that further removal of monetary policy support will be required at some stage.”
Source: Reserve Bank announcement 28 October 2010 - http://reservebank.govt.nz/news/2010/4216773.html
My Interpretation and Thoughts on the Announcement
Lets look briefly at the global macroeconomic factors in this environment of fear and uncertainty. What exactly will happen in light of the second round of Quantitative Easing by the American Government (and to a lesser extent the European Central Bank and Bank of England) where they will be printing trillions of dollars to encourage spending, devalue their currency and retire debts? Is China going to finally slow down its outstanding >9% year on year growth in its Gross Domestic Product causing major damage to commodity based currencies like the Aussie and Kiwi Dollars? If Asian countries (particularly China and India) import less from New Zealand then we will have an issue and our long road to recovery will be quicker.
Inflation is something the Reserve Bank must control. The historically high levels of unemployment unfortunately are not a prime consideration to the Reserve Bank. Therefore they are likely to raise the OCR on 10 March 2011 to 3.25%, and a bit of crystal ball gazing this far out but again on 28 July 2011 to 3.50%, on 27 October 2011 to 3.75% and then on 26 January 2012 to 4.00%. This means that I am a fan of the two and three year fixed rates at present, particularly if you can negotiate a slight discount on them.
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An important note on New Zealand Tax Structures in this blog. Property investors using Loss Attributing Qualifying Companies (“LAQCs”) don’t need to fear the tax changes. The draft legislation was released last Friday afternoon with submissions on it due by the end of the month, and the news is not all bad. One thing is for certain though. Change is imminent and investors with LAQCs will need to think carefully and financially analyse their current portfolio and determine what structure is best for their needs going forward.
A New Tax Structure: the LTC
The proposed legislation creates a new tax entity: a Look Through Company (“LTC”). Here’s an overview of how LTCs work. An LTC’s income, expenses, tax credits, rebates, gains and losses are passed onto its owners. These items are allocated in accordance with each owner’s effective interest in the company. An LTC is taxed as a ‘transparent’ entity – that is you look through the company and income is taxed at the owner’s marginal tax rate, and expenses are deducted at the owner’s marginal tax rate.
The LTC rules differ from LAQC rules in that they include a loss limitation rule. Owners can offset tax losses only to the extent the losses reflect their economic loss. This does include loans by the owner to the company.
All owners of a company must elect for that company to become an LTC. Then the company will remain an LTC until the company breaches the eligibility criteria or an owner chooses to revoke the LTC election. When a company ceases to be an LTC it will be taxed as an ordinary company.
The rules are being grandfathered in, so there are friendly transitional rules in section CB 32C(2), DV 23, HA 33B, HB 13(3)(c) and HZ 4C of the Income Tax Act 2007, that allow existing LAQCS (and indeed qualifying companies) to leave the QC rules and use the LTC rules, or transition their business structure into a partnership, limited liability partnership or a sole trader with no tax cost. For LAQCs making losses all of the shareholders must make an LTC election within 6 months of the start of that income year (for the vast majority of LAQCs this due date is 30 September 2010). If you want to change your shareholding of your LAQC before this structure expires – do so before 31 March 2011 – that is not that far away.
There is a lot of confusion and a lot more detail I can go into with real examples of properties and portfolios for different circumstances. I am keynote presenter at a seminar on Thursday evening next week at the Employers and Manufacturers Association Building starting at 7:00pm.
NZ Property Mentor Event – Thursday 28 October 2010
Next week on Thursday 28th October 2010 I am going to be presenting for just over 2 hours on a variety of relevant things to New Zealand property investment. I will be talking about:
- The Auckland Property Market, focus on House Price Movements by sub-region and where we are at in the Property Cycle
- Rental Levels to tell you about recent market movements in the Auckland market, why you should be raising your rents and how you can do this to maximise your cashflow from property.
- Changes to the Residential Tenancies Act – where the largest changes in the past 24 years to the legislation governing Landlord and Tenant obligations
- Interest Rates – where the various interest rates are likely to be heading, considering global financial issues and New Zealand economic issues
- Structure Update – Come to hear about more detail on the new tax structure, Look Through Companies (LTCs) and learn about what options you have with your LAQC, since this tax structure will shortly be abolished
- Launching my revamped Property Mentoring Programme
I am back from a cameo visit to Sydney today where I was a paid presenter for a six hour module on “Investing in New Zealand”. I was very interested to see the announcement from the Government that LAQCs which I knew were going to be abolished but thought they had left the door open for some offsetting of losses against personal income.
The writing has been on the wall for a long time for property investors using Loss Attributing Qualifying Companies (“LAQCs”). We know that the ultimate goal is to ring fence tax losses completely, so we property investors cannot use the LAQC ownership structure (our vehicle of choice) to offset rental property losses against or salary/wages. Investors should not be surprised about this, although the hopes of many appear to have finally been dashed with the hope that there would still be the ability to deduct tax losses against income from personal exertion to the extent of capital contributed or even more hopefully against the amount of loans personally guaranteed. Now the missing piece of the puzzle has been found – with the Minister of Revenue, the Honourable Peter Dunne saying this afternoon that “the Government would introduce new rules preventing loss attributing qualifying companies (LAQCs) from passing losses on to their shareholders.”
How did LAQCs become such a problem?
Lets look at this issue. I don’t use LAQCs myself, instead preferring the asset protection (creditor protection, succession planning) benefits that well managed trusts bring along, with some incidental tax benefits, since I am not ‘normal’ and like to buy properties that make me money. A lot of investors have bought on the rising market during the boom from 2003 – 2007 and fair few bought in 2008 thinking the market was just taking a short breathe before it would go up in value again.
The credit criteria for getting bank loans were very relaxed from 2004 until the Global Financial Crisis kicked into gear in New Zealand around September 2008. Investor friends of mine were able to get their effective tax rates down from over 33% to below 15% through rental property losses being attributed via the LAQC against their salaries. Instead of being net taxpayers, property investors (particularly residential property investors) became net taxrefundees! In 2003 before the last property boom kicked off there were $710 million of losses from LAQCs. This more than tripled to a significant $2.256 billion by 2008.
The Tax Working Group made a big thing of this in 2009, and the information they had from Inland Revenue and Treasury showed the last two years that property investors were making big losses, despite control what they perceive to be well over $150 billion worth of property.
As a result of the financial crisis affecting companies, reducing consumption spending, rising unemployment and lets not forget the fact that we have many hundreds of thousands of New Zealanders not earning a single cent who have been in increasing numbers totally dependent on Government handouts, our Government has been suffering reduced income, yet facing increased expenditure pressures. We are losing money to the tune of over $200 million per week. This has to be borrowed at interest from abroad. A few things had to give in the May 2010 Government budget. One was the consumption tax that is Goods and Services Tax (“GST”) being raised to 15% with effect from 1 October 2011, another was building fit-out items being deemed to be fixtures and classified as part of the “building structure” eg. tiles and vinyl flooring is now depreciated at the building structure depreciation rate, and the building structure depreciation rate has been reduced to 0% (from 3% diminishing value, 2% straight line) with effect from 1 April 2011. At that time the Minister of Revenue the Honourable Peter Dunne and the Honourable Bill English as Minister of Finance suggested that there would be tax changes to LAQCs. We knew changes were coming – we had thought that LAQCs would be taxed as Limited Liability Partnerships and have to file IR7 returns, with LAQCs would be abolished to just be qualifying companies. Now far more light has been shed with LAQCs and QCs being able to continue, just without the ability to attribute losses to their shareholders! So from 1 April 2011 LAQCs will lose their major benefit – being able to reduce their taxable income. They called for submissions on this and wanted to work out the detail. My previous blog contains the Press Release.
My Interpretation
If you have an LAQC you will need to take an extremely serious look at your structure and indeed portfolio and look for options on what to do with it. The draft legislation will give full certainty, but one thing is for certain. If you have an LAQC and make tax losses from which you have been offsetting your personal income – you will not be able to do this post 1 April 2011. You will need to make changes, and before 31 March next year.
Follow the text of the draft legislation very carefully and look very carefully at your depreciation claims. As Steve Tucker the owner of NZ’s leading chattels appraisal company Valu-it said in his address to APIA in July 2010, that depreciation claims are likely to be slashed by 60 – 85% depending on the type and nature of the property. Older buildings with few valuable depreciable fit-out and chattels items would be amongst the hardest hit, as would commercial property as their is very little Landlord fitout or chattels.
Look at your latest set of financial accounts and analyse what is likely to happen to you post 1 April 2011. If you need to make changes I would strongly suggest that you talk to me and we can look together at all of the fantastic benefits that trusts can provide you with. Having worked at both leading chartered accountancy firm Deloitte, leading law firm Russell McVeagh, being a successful property investor myself, and having worked with property investors on ownership structures for a number of years, I can work with you to balance tax optimisation and asset protection objectives in this challenging political climate. Contact me at david@davidwhitburn.com or on direct dial (+64 9) 528 5533.
Qualifying company reforms announced by the Hon. Peter Dunne
Minister of Revenue, Peter Dunne said today that:
the Government would introduce new rules preventing loss attributing qualifying companies (LAQCs) from passing losses on to their shareholders.”
The move follows public consultation on proposals for reforms to the tax rules announced in Budget 2010 for qualifying companies and LAQCs.
The new rules will also provide a flow-through income tax treatment for closely held companies who choose to use them. Business income and losses will be able to be passed to shareholders who will pay any tax due, but the rules will allow a business to still have the benefits of a company, such as limited liability.
In response to feedback from small businesses, the Government has also decided to review the tax rules for dividends, with a view to simplifying them for closely held companies” said Mr Dunne.
Until this review is undertaken, existing qualifying companies and LAQCs can continue to use the current qualifying company rules, but without the ability to attribute losses.
Draft legislation for these changes will be available from Inland Revenue later this week, for feedback.
Mr Dunne said that the draft legislation will allow existing qualifying companies and LAQCs to transition into the new flow-through rules, or change to another business vehicle such as a limited partnership, without a tax cost.
The legislation for the new rules is expected to be enacted before the end of this year and will come into effect from 1 April 2011.
Paul Henry has over-stepped the mark this time and deservedly has been suspended from his role as presenter on TV One’s Breakfast (sadly for only 2 weeks), with his disgraceful comments about NZ Governor General and great New Zealander, The Right Honourable Sir Anand Satyanand GNZM, QSO, KStJ with:
Is he even a New Zealander?”
“Are you going to choose a New Zealander who looks and sounds like a New Zealander this time?”
Racism?
The issue is one of racism, perception and an arrogance issue on Paul Henry’s part. Sir Anand Satyanand was born in Auckland, New Zealand – the same city Paul Henry was born in. Interestingly Anand was fully schooled in New Zealand, Paul Henry was schooled for the most part in Bristol in the United Kingdom. My Grandfather Algar was an Obstetrician and Gynaecologist and worked closely for a number of years with his dear friend and Anand’s father, Mutyala (who we knew as “Saty”). They shared many found memories together and my grandparents went to meet Mutyala and his wife Tara’s family in Fiji. It was fantastic that Anand and his brother Vijay were able to join my family for my grandmother’s funeral in late January this year, in their own car and in their private capacities as family friends – rather than with military escorts as is usual.
The passion that Anand and his wife Susan (a New Zealander) have for our wonderful country is there for all to see. My parents have been to functions at Anand’s house (Government House in Epsom, Auckland) and he has shared his vision for Auckland, and his love for all of our country regularly. So the issue of what makes a New Zealander comes up next. I for one love the ethic diversity that our country (well in particular Auckland has). Whether we are British, Indian, Korean, Chinese, Samoan, Niuean, Maori, Tongan, American, Canadian, Australian, Peruvian, South African, Ugandan, Polish, Spanish, French, German, Danish, Swedish, Latvian or Ukrainian in our ancestry it matters not. Nor does it matter where you were born. What is important is the contribution you can make to being a part, as well as improving and advancing our society. Sir Anand Satyanand is one of our nation’s finest citizens, so to address a racist comment like Paul Henry did to our Prime Minister was disgraceful, and John Key was somewhat soft in not dimissing it (although to be fair he may have been taken a back and not wanting to dignify with a response).
Hone Harawira
I heard driving back from negotiating on a commercial property some talkback callers saying what Paul Henry did was tongue in cheek, and we should have more “white New Zealanders” in power, and strong arguments that Maori Party MP Hone Harawira’s comments are much worse – and I think they are and that he should be expelled from Parliament too.
Hone last November went on a junket (on us taxpayers) skipping a meeting that he was meant to attend in Brussels. Here’s his justification:
How many times in my lifetime am I going to get to Europe? So I thought, ‘F*** it, I’m off. I’m off to Paris’,” he said.
This got a whole lot worse in a subsequent email exchange where he was criticised by a friend of his. Mr Harawira lashed out at white people, with
White motherf***ers have been raping our lands and ripping us off for centuries and all of a sudden you want me to play along with their puritanical bullshit….And, quite frankly, I don’t give a shit what you or anyone else thinks about it. OK?”.
You tell me if that is a person worthy of representing a New Zealand that you want to be a part of. I am genuinely worried now with the ACT party’s implosion and subsequent low poll ratings, that National will cosy up to the Maori party, and let the foreshore and seabed be open to more claims, more legal fees and court related costs, and some Maori like Mr Harawira will not stop until 100% of the foreshore and seabed are in Maori hands. More on that at another time. I just think that Mr Harawira should be made to apologise and be suspended until he does, and expelled if he continues to refuse to apologise. Paul Henry and Hone Harawira are both racists and not part of a New Zealand I desire.
Paul Henry’s History
I like TV One Breakfast Paul Henry on the most part for his intellect, wit, sense of humour and charm. He is a fantastic presenter and entertaining individual. His acceptance address (see below) at the Qantas Media Awards reciting a viewer’s complaint received rave reviews, and his ‘shock jock’ factor demand repeat audiences.
He could perhaps be forgiven for calling Scottish singer and breakthrough Britain’s Got Talent singer Susan Boyle a “retard”. My wife’s uncle is severely handicapped and has been for over 60 years since a birthing accident in Ireland, and a family friend who I last visited a couple of months ago is in Laura Ferguson Trust’s Remuera premises. They didn’t ask to be handicapped, and wish that they were “normal” – whatever that concept is! Putting labels on like retard is clumsy but I think just not well thought out, and is forgivable.
In additions Paul’s comments on Greenpeace activist Stephanie Mills’ moustache could perhaps be put down as immature, and also Paul was only reading out printed feedback emailed to the Breakfast show. After all producers know Paul is a confident man, not a Green Party nor a fan of their militant wing Greenpeace, and he is not ashamed to read out any feedback – so despite his producers and his co-host Alison Mau asking him not to read out the viewer’s comments, he did:
Seriously. I have no idea what Stephanie Mills was thinking going on telly with that enormous moustache. Wax is cheap you know. Are mo’s for Greenpeace members standard issue.”
However this got worse with further feedback:
“I noticed myself you know, and that is a moustache on a lady.”
Then in response to hate mail from feedback:
“Start a group, really… how hard can be really to wax.”
“It’s like there’s an elephant in the room.. God, there was a lady with a moustache on.. don’t mention it!”
So those were Paul’s biggest issues to date. They were extremely entertaining to many, infuriating to others, yet he still commanded record viewing audiences and he greatly assisted the demise of Sunrise on TV 3 at the same timeslot, by cannibalising their audience. What Paul did in the months and years prior to this Monday was fine by me, but his comments questionning the “New Zealandness” of our Governor General are simply disgraceful and he is worthy of a lengthy ban from our TV screens.
Aussie Shock Jock
Just quickly I have some Australian readers and want to point out that New Zealand is not along in having a shock jock. There is the infamous Kyle Sandilands in Australia, 2Day FM co-host was suspended for a segment where a 14 year old and her mother came in to the show and the girl was hooked up to a lie detector. The girl started by saying, “I’m scared. It’s not fair“. Sandilands said, “She is scared everyone. Yeah.“ The segment went astray when the girl revealed she had been raped at the age of 12. The girl had been asked by her mother if she had any sexual experience. After a long pause, Sandilands then clarified with this appalling question: “Right … is that the only experience you’ve had?“.
This shocked many people including Australian prime minister Kevin Rudd and he was sacked from his high paying role as a judge on Australian Idol. He then said in September 2009 on Australian actress, comedian and new face of Jenny Craig weight-loss adverts, Magda Szubanski:
You put her in a concentration camp and you watch the weight fall off … like she could be skinny”.
Sandilands is now thought to earn over $2 million per year for hosting 2Day FM and being a judge on X-Factor (Australia).
Postscript: Letter from the Governor General
I was pleasantly surprised to receive the following handwritten note from the Governor General.
A handwritten note from a great Kiwi, and our Governor General, Sir Anand Satyanand thanking me for supporting him.
I am delighted that Anand reads my blogs from time to time and I truly appreciate his thank you letter. It is great to have a true patriot serving New Zealand as its Governor General. This letter shows Anand’s class and to me proves his stature as one of fantastic country’s greatest citizens.