Property Investment
Tax changes for investment property came into force on 1 April this year, forcing many existing investors to review the ownership structures for their investments and the viability of retaining their properties. In a nutshell, the effect of the changes is that investors will no longer be able to claim depreciation on their buildings, and fewer investors will be able to claim losses against personal income. The backdrop to these changes is a depressed property market with little prospect of significant increases in property prices for some time to come. The question many are now asking is whether investing in property is still a good idea.
One of the most prevalent mistakes made by investors in all types of investment assets is to base investment decisions on tax benefits. As they say, ‘there are only two certainties in life: death and taxes’. To that should be added a third certainty, and that is, ‘tax rules change’. Sound investments are those that stack up in their own right, rather than because they have tax benefits. Many investors made the mistake of purchasing properties in the expectation that future capital gain would offset losses and that the tax benefits would help their cash flow in the short term. This was not a sound long term strategy. The impact of the new legislation is that those investments which were soundly based will continue to be so, and those which relied on the benefits of tax losses are unlikely to stack up.
Investors without good cash flow will no doubt sell off properties over the next two years. The result is likely to be higher rents, fewer investors (but with deeper pockets) and more soundly based investment portfolios. In the long term, the increased stability will be a good thing for both landlords and tenants.
Your Financial Goals
There’s one significant difference between people who succeed in life and those who struggle; their ability to set goals and achieve them. To have what you want in life, you can’t just sit back and expect it to happen. Success means different things to different people and when it comes to setting financial goals, success is much more than having a lot of money in the bank. A big bank balance is only a good thing if you set out amass a lot of wealth just for the sake of it. Ideally, if you want to enjoy life the aim is to have enough money on hand at the time you need to spend it.
The purpose of goals is to give you a long term vision and to increase your short term motivation. Having goals focuses your mind on what you need to know and do to be successful, so that you can make the most of your life. Goals should be precise, clear, and meaningful. Set your goals too high and you will quickly lose motivation if you don’t succeed. Make your goals too easy and won’t be motivated either. You are much more likely to achieve your goals if you write them down and if you break them down into small steps so you can measure your progress.
When it comes to setting financial goals, it is hard to contemplate achieving long term goals if you find yourself unable to save or burdened with short term debt. In that case, you need to set goals in two stages. In the first stage, plan to get rid of debt and start saving. Once you have achieved that milestone, you will be in a financially sound position that will enable you to move forward and set longer term goals.
Suddenly Rich
Dreams sometimes come true! Occasionally some of us suddenly receive a large sum of money. For the luckiest, it might be a lottery win, for some it might be an inheritance and for others the sale of a business or property. Suddenly being rich is exciting, but for most people it is also frightening.
Fear comes from lack of knowledge about the options that are available for spending or investing, not knowing how to choose the best option, worry about making the wrong choice, not knowing who to trust for advice, and worry about the risks of losing the money.
What should you do if you are in the enviable position of suddenly having a lot of money? The first thing you should do is pay off any debts. If there are still funds left over, set aside a small amount to treat yourself and celebrate your good fortune. The remainder should be set aside safely in the bank until you decide what to do with it.
The circumstances, good or bad, that lead to suddenly having a lot of money are usually full of mixed emotions so it is best not to make big decisions for a few months. Find someone you can trust who can advise you and act as a sounding board. Next, spend some time thinking; not about what you could do with the money, but about what the important things are to you in life. Money is what enables us to get what we want out of life, whether that is helping our children, helping the community, having interesting and enjoyable experiences, living in a comfortable environment, or enjoying our retirement. Once you have established what is important about money to you, allocate part of your fortune to each of the items on your list.
Check your PIE
April marks the start of a new tax year, and is a significant month for investors. KiwiSaver members or investors in any other Portfolio Investment Entity (PIE) need to ensure they start the new tax year on the correct tax rate. These investments are taxed at what is called the Prescribed Investor Rate (PIR) and this should be confirmed at the beginning of each tax year. Set your PIR too low and you may be in danger of incurring a tax penalty. On the other hand, if your PIR is too high, you will not be able to claim a refund as tax paid in a PIE is final tax. Your PIR is based on your income in the previous two years and for most investors will be 10.5%, 17.5% or 28%. The income bands for these rates are income of less than $14,000, between $14,000 and $48,000 and more than $48,000. Investors whose income is close to these cut-off points, or who have had a substantial change in their income due to a promotion, redundancy or retirement, should pay close attention to their PIR. Investing in PIEs makes good sense for those on high incomes, as the top rate of tax for a PIE is 28% compared with the top rate of 33% for Resident Withholding Tax.
If you are a salary and wage earner and you think you may have paid too much income tax during the year, you should check to see if you are eligible for a refund. This can be done free of charge on the Inland Revenue website. In particular, you should check for refunds if your income is low, you have worked only part of the year, or you have expenses to claim. Don’t pay more tax than you need to!
