Low interest rates for home loans, especially after Reserve Bank Governor Dr Alan Bollard’s recent announcement to drop OCR has had a tremendous impact on the debt servicing capacity of prospective borrowers. This should, under normal market conditions, give a big lift to the housing market.
However, the global economic recession has resulted in the international credit crunch from which the New Zealand economy has not escaped. Despite the improved borrowing capacity investors are being cautious. The primary reasons for this cautious approach are employment losses and uncertainty as to how long this economic recession is going to last.
The banks have tightened their lending policies. Most banks are looking at a deposit of 20% of the value of the property. Very few banks are lending up to 90%.
The falling interest rates have triggered another issue. Many borrowers with existing mortgages fixed for longer periods, three to five years, expecting to gain from the falling interest rates approached their banks to come out of the fixed term mortgages and re-fix these at lower interest rates. The banks informed them of the break fees payable which in many cases amount to tens of thousand of dollars.
Some borrowers are unhappy and expect their banks not to charge the break fee at this time of economic downturn which is resulting in employment losses. The banks argue that they are bound by their own financial commitments and are charging costs resulting from breaking of fixed term mortgages.
The problem lies in different banks calculating the break fees differently. The issue is further compounded where the banks are unable to provide timely clarifications sought by their customers as to how these break fees are calculated or apply the discount margins that are not expressly provided in the loan agreements. These further increase the break fees implications in the falling interest rates market. The media has reported that many borrowers have lodged complaints with the Banking Ombudsman.
On a brighter note, where the break fee is paid by the property investors in respect of a loan borrowed for the investment property, they can claim such break fee as a tax deductible expense.
The income tax legislation provides for a redundancy tax credit to make taxing redundancy payments fairer to people when they receive the lump sum payment for loss of employment.
The redundancy tax credit is payable at flat 6% of the redundancy payment subject to a maximum of $3,600. There are a number of payments that do not qualify for a redundancy tax credit.
To claim the redundancy tax credit IR 524, the Redundancy tax credit claim form, must be completed and filed with documentation showing the redundancy payment received.
The July 2008 tax bill proposed changes to strengthen the definitions of ‘associated persons’. These provisions are mainly anti-avoidance provisions to counter transactions that are not conducted at arm’s length.
The main change is to close gaps in the definition relating to land sales that allow land dealers, builders and developers to avoid the rules by operating through certain entities.
The proposed changes, once legislated are expected to be effective from 1.04.09. The existing business structures, designed to avoid ‘tainting’, will no longer be effective.
The proposed legislation will not be retrospective. Taxpayers should review their existing land holding structures, especially involving trusts, and make any required changes before the proposed law becomes effective on 1.04.09.
In the last budget IRD was allocated $14million of extra funding to audit land transactions. IRD is compiling a list from Land Transfer Office with a view to identifying taxpayers who traded in land and made profits but did not disclose their income in the tax returns filed. The audit activity is expected in this year.
Last week the government announced a series of tax changes to make it easier for small and medium size businesses to manage their cash flows and to meet their tax obligations.
The main changes are:
In August 2008, the high court gave a landmark decision in The CIR v Boanas & Others.
In this case a couple had acquired 2200 ha of land for farming. Later another couple bought in to the partnership. The partnership applied to crown for freehold title to the land which was granted for 1400 ha of land.
The partners incorporated a family company and entered into an agreement to sell the freehold estate to the company for $4.32 million. The commissioner adjusted the partners’ respective income tax returns and added additional income in accordance with s CD 1(2) (a) on the basis that they had the acquired the land with the purpose or intention of selling or disposing it.
The evidence established the four taxpayers as users of the property they had freeholded to the best advantage, rather than being a partnership that acquired the land with a purpose or intention of disposing it. The taxpayers were not acquiring something new, but ownership and control of a major asset that was used in the business for the last four years. The evidence further established that there were substantial efforts made in exploring other forms of land use.
The court held the taxpayers were users of land and not traders in the land.
In summary low interest rates and deflated property market offers good opportunities for the buyers provided they have a stable income in this economic downturn. The banks have tightened the lending criteria. The proposed legislative changes to the definition of associated persons could potentially bring many property investors in the tax net. The government has announced a series of tax changes aimed at improving cash flows for most businesses and reducing compliance costs for small and medium businesses.
Written by Kuldeep Khetarpal
Withers Tsang & Co Ltd