Article: Property Investment
That’s Fairly Interesting with Frank Newman
This week I dig into the “That’s fairly interesting” file on a range of property related topics.
• Did you know there were 411,915 active bonds registered with the Department as at 30 June 2011? For the year ended June 2011 the Tenancy Tribunal received 47,825 complaints. Doing the sums, that indicates 11.5% of tenancies, or 1 in every 8 or 9, end up in dispute. That’s a pretty high sum in my view, Of the 47,825 complaints that went before the Tribunal, 35,439 or three-quarters were for rent arrears. In other words, 1 in every 12 tenancies fell behind in their rent.
These statistics show why it is so important for landlords to do their homework about prospective tenants. After lots of lobbying by the NZ Landlord’s Federation, a few years back the previous government agreed to publish the Tenancy Tribunal orders online (see https://forms.justice.govt.nz/search/TT/). Now most decisions from February 2007 can be accessed. Searches can be done using the name of a landlord or tenant, the address of a residential tenancy, or you can also use the Tribunal’s application number if you have it.
• According the Department, 93% of landlords collect a bond and pay it to the Department of Building and Housing. This would suggest that 7% of landlords are either not charging a bond or not lodging it with the Bond Centre, which is a breach of the Residential Tenancies Act and could result in exemplary damages of up to $1,000. Bond money must be paid to the Department of Building and Housing within 23 working days of receiving it. The maximum bond that may be collected is the equivalent of 4 weeks rent. It appears that delays in the time it takes to have a matter heard before the Tenancy Tribunal is causing some landlords to require tenants to pay the maximum four weeks bond.
• Up to 75% of meth labs (or “P” labs) are found in rental or holiday properties. This poses special risks for landlords as the Tenancy Tribunal ruled that renting out contaminated premises is a breach of a landlord’s obligation to provide premises in a reasonable state of cleanliness. To meet those obligations property that has been used to manufacture P must be cleansed and decontaminated by a professional cleaning company experienced in hazardous substances and be tested by qualified chemists to establish that the level of contaminants is within an acceptable level. The Department of Building and Housing website (dbh.govt.nz/properties-manufacture) lists a number of tell-tale signs to look for when during property inspections, and affirms the importance of carrying out regular property inspections.
• Gift duty was abolished on 1 October. This is a significant change, not only because it’s a tax that was first introduced in NZ in 1885 as a means of blocking the avoidance of estate duties (which were abolished in 1992). It’s important because property investors who had “sold” their property investments to a company or trusts typically entered into a gifting program to “relieve” the debt at $27,000 a year (the point at which stamp duty applied).
This created a tidy income stream for lawyers but very little tax revenue. The government recognised as much when it said gift duty that raised little state revenue but cost Inland Revenue $430,000 a year to administer and the country an estimated $70 million a year in compliance costs.
With the tax issue removed from 1 October, gifting can now be done in one go. Some within the legal fraternity are still claiming there are “other” factors to consider like rest home eligibility and are recommending a continuation of the progressive gifting programme.
Indeed, a large gift may gain the attention of the Ministry of Social Development which has discretion to look back for as long as they like, even at assets put into trusts decades ago, but it’s debatable whether that should prevent a final one-off gift from taking place.
Most trusts nowadays are not formed for tax advantages or for gaining an entitlement to rest home subsidies. They are formed for the very same reasons they were first established in the Middle Ages - a time when absentee knights needed a legal mechanism to transfer their land assets into a safe pair of hands while they went off to make further conquests.
And so it is now, but without the conquests. Assets are put into a trust to distance the taking of those assets through financial misfortune or profiteering by rouge litigants pursuing the wealth of others. In this case immediate gifting delivers the desired result.
