Tax #4 – Council rates

Local council rates are paid directly to councils. They are different depending on where your property is in New Zealand.

We currently have 67 territorial authorities (councils) around the country. Each sets its rates – some are higher, some are lower.

But a lower rate doesn’t always mean you’re better off when it comes to tax.

It’s not the total amount of tax that matters, but how high those tax bills are compared to rents within the area.

For example, Grey District has the cheapest rates in dollar terms, at $1,739 per year. But rents are so low it will take 5.9 weeks of the average rent to pay them.

But if you invest in a rental property in Lower Hutt, yes the rates are higher but so are rents. In that area, it only takes 4.6 weeks of rent to pay off the rates.

And it’s good advice for property investors to research the data. This means factoring in all essential costs you’ll pay as an investor, not rates on their own.

Here’s how to work out what bright-line tax you might pay.

Let’s say you bought an investment property in June 2024 for $500,000 and sold it 1 year later for $600,000. Because you sold it within the 2-year bright-line period, the $100,000 gain could be taxable.

But you do not pay tax on the full gain. Because it might have cost you money to realise that gain. That could be money spent on renovations or on a real estate agent. 

Let’s say you spent $25,000 on agent fees and $35,000 on renovations. That’s $60,000 in total.

So you’d pay tax on $40,000, not $100,000. If the property was owned in a trust and taxed at 39%, the bright-line tax bill would be $15,600.

The bright-line test generally does not apply to:

• your main home
• inherited property
• property sold outside the 2-year period
• commercial property or farmland

Use the calculator below to estimate whether your property is caught by the bright-line test and how much tax you may owe.

#4 – GST

GST is mainly an issue for investors who rent their property as short-term accommodation. For example, if you rent your property on Airbnb. 

Long-term residential rent, on the other hand, is exempt from GST.

The GST rules in New Zealand are complicated and differ depending on whether you are GST registered or not. 

Stick with me on this, because even if you are not GST registered, all Airbnb owners now pay GST.

Do I need to register for GST?

According to Inland Revenue, you need to register for GST if your income from taxable activities is more than $60,000 in a 12-month period.

Let’s say that you rent your property for $300 a night (on average). And it’s rented for 80% of the year. Your expected revenue is $87,600. So, you would need to register for GST.

How much GST do I have to pay?

This means that you need to pay 15% of your pre-GST income to the IRD. This is in addition to all the other taxes. 

The current GST rate in New Zealand is 15%. You calculate the pre-GST price by dividing your nightly rate by 1.15.

For instance, if you rent your property out for $300 a night, dividing that by 1.15 = $260.87. So each night a person stays at your house, $39.13 goes to the IRD as GST.

But, keep in mind, you can claim back GST on other costs that you pay (e.g. rates, maintenance and insurance). 

This gets complicated. So make sure you use a property accountant to make sure you get this right.

What if I am not GST registered?

Airbnb owners need to pay GST even if they are not GST registered. 

Let’s say you rent your property for $210 a night (on average) and you list it on Airbnb. And it’s rented for 70% of the year. In that case, your expected revenue is $53,655. You would not need to register for GST. 

However, after a law change that came in on 1st April 2024, Airbnb collects GST from all guests. 

For instance, if you rent a property for $230 a night on Airbnb, the GST-exclusive price is $200 a night. Airbnb will charge the customer $230 a night. 

But, if you are not GST registered, then you don’t get to claim back the GST you pay on other costs (like your rates).

This is why Airbnb will pay you 8.5% of the 15% that they charge as a rebate. This is to compensate you for the fact you’re not GST registered. 

In that case, you get $217 a night. The other $13 is paid to the IRD as GST. 

More from Opes:

• Do I really need a chattel valuation? (Article)
• Trust vs company vs own name - How should I set up my investment property? (Article)
• How do I pay less tax on my investment properties? (Articles)

How can I decrease the amount of tax I have to pay?

There are two key ways investors can limit the amount of tax they have to pay.

#1 – Depreciate chattels correctly

Over time parts of rental properties become worn out and need replacing. These are called chattels. And that decrease in value is called depreciation.

If it’s not nailed down, glued in, or directly part of the building, it’s a chattel and you can depreciate it. This includes letter boxes, carpets, curtains, light fittings, appliances and even driveways.

Doing this the right way helps you save on tax.

Investors who depreciate the chattels of their rentals can minimise the amount of tax they pay.

For instance, if you own a property that has $50,000 of chattels, you could save as much as $16,500 in tax (over time). That assumes you’re on a 33% tax rate and depreciate the chattels correctly.

#2 – Use the right ownership structure

Investors shouldn’t pay more tax than they need to. Otherwise, you’re just tipping the tax man.

But, if you own your properties the wrong way, you will likely overpay.

How you choose to own your property impacts the tax you pay.

Usually, most investors will own their properties in:

1. Their own name (owning the property directly)
2. a trust
3. a “look through” company (LTC)

You won’t realise how individual your situation is until you talk to an accountant. Let’s quickly go through these options:

Holding property in your own name

This is the simplest option – it’s just owning the property yourself “in your own name”. That means you don’t use a trust or company.

There are no fees to set this up and no ongoing costs other than preparing and filing your income tax return.

But this also means profits and losses are on you. There is very little tax flexibility and unlimited legal liability.

So, if you get sued, the buck stops with you.

Here’s an example to give you a sense of why choosing the right tax structure is important.

Let’s say you earn $40,000 a year and your property earns a taxable profit of $5,000.

If the rental profit is taxed at the trust rate, you could pay $1,950 in tax (39%).

If you owned it in your own name, you would be taxed at your marginal tax rate (17.5%).

That means you would pay $875 in tax ($5,000 x 17.5%).

In this case, owning a property in a trust could mean you pay an extra $1,075 in tax.

Do I really need to use a property accountant?

Tax rules for property investors are complicated and they’re changing all the time.

So what was a good idea 5 years ago might not work today.

It’s a good idea to talk to a property accountant to help you better understand those rules.

It’s also important to treat your property investing as a business.

Think about it: Most Auckland properties are worth over a million dollars. So if you have 4 properties, you might have $3-4 million worth of debt. You’re running a decent-sized business.

So it’s a good idea, from a conceptual mindset, to treat your property investment like a business. Set up a good structure, keep good records, and keep a good accountant who specialises in what you need.

If you need a recommendation, you might like to speak to me or my team at Opes Accounting.