Hi Sam,
I’m due to refix my mortgage interest rate in September and am anxious about how high rates will be then. Add to that increasingly expensive groceries and higher cost of living in general, 2023 isn’t looking particularly fun. I’m trying to tighten my purse strings across all areas and boost my household income with a couple of side hustles. Can you suggest any tax-saving strategies that I can implement this year?
(Please note that any tax advice given in this article is practicable only in Aotearoa New Zealand and you may have to consult with your local tax adviser to see if they suit your jurisdiction.)
“How do I pay less taxes?”
I get asked that question — A LOT. So over the years spent studying tax laws, I’ve found there are ways to legally minimize your tax liability. But before we get into the specific bits of advice, let me share with you some universal tax truths:
1. Taxes are inevitable
As the saying goes, there are only two certainties in life — death and taxes. Unless of course, you live in a country that doesn’t have taxes, in which case, good for you. But the good times will come to an end, and eventually, everyone pays taxes one way or another. So given its inevitability, you should…
2. Pay your taxes
The taxman will always collect what is due to them. Don’t try to hide it. Just pay it. It’s not worth getting into trouble over taxes. Embrace taxes. Don’t fight it. That being said, it does pay to…
3. Be smart about paying taxes
Learn what is and isn’t a tax-deductible expense. Some jurisdictions are more liberal than others in allowing you to deduct things for taxes. Avoid non-tax deductible investments. Invest in tax-deductible education and/or training. Apply for tax-deductible insurance policies. And most importantly, remember to declare these deductions in your tax form!
With that out of the way, I’m sharing with you three tax tips to get you through 2023.
Let’s go.
Avoid residential rental investments
Yes, this. SO MUCH THIS.
Residential rentals are a very popular investment class here in Aotearoa New Zealand. However, recent changes to tax and tenancy laws have been making residential rental investments very, very unattractive.
Please note that if you are dead set on buying residential rental property, this article is for you and you can skip this tip. For those of you who are still on the fence, don’t do it.
Here’s why:
Interest expense is no longer tax deductible
So you’ve got rising interest rates in 2023 for the foreseeable future and the government of the day isn’t allowing you to deduct any interest for tax purposes (new builds are exempt from this). Now, interest expense easily forms between 50-80% of the total expenses for your average rental property.
This means that you are effectively increasing your taxable income from a residential property by 50-80%. This means you’ll be paying 50-80% more taxes on any residential rental income.
Rising interest rates + no deductibility = a butt-ton of taxes without the cash flow to service it.
Bright-line test shenanigans
Look, let’s call a spade a spade alright? The bright-line test is Capital Gains Tax, regardless of what some politician says. Bright-line tests have been steadily increasing from three to five and now ten years. Meaning that anyone looking to benefit from tax-free capital gains on selling their residential rental property will have to look at holding onto it for much longer.
Essentially this means that if you bought a residential rental property today and sold it four years later, the profit you make from that sale will be dumped into your personal income. This will take you from an average tax bracket, all the way to the highest tax bracket. Imagine going from the 30% bracket to the 39% bracket within a year. That’s also assuming that future governments won’t bump up the maximum tax bracket.
“Oh, yeah, I’ll hang onto the property for more than five years and then sell it”. Wow, you got a crystal ball or something? The future is uncertain. You may find yourself in a position where you need to liquidate your holdings, only to find that you’re going to get taxed out of almost half of your gains made in your investment. So do future you a favor and avoid residential rental investments.
Consider starting a side hustle
“What?” I hear you say. “The cost of living is increasing, interest rates are going up AND we’re facing a global recession! How can now be a good time to start a side hustle?”
There’s never a bad time to start a side hustle. Now when I say side hustle, I don’t mean getting yourself another job. No, I mean starting a small business. Give being self-employed a chance!
Here’s how to do it. You still work your full-time job as normal, but you do something small on the side. You can start by turning your hobby into a small business. If you like knitting, sell knitting goods. If you like dancing, start teaching paid dancing classes. If you like drawing, start selling your artwork. It doesn’t have to be making you a lot of money, as long as you are getting paid at least $200 a year for the provision of goods and services, you’re self-employed.
Once you’re self-employed, you can start claiming expenses against your income. In Aotearoa New Zealand, self-employed individuals can claim a lot more against their income than a salaried worker. So long as your expense is business related, you can claim it as a tax deduction.
Buying knitting supplies to sell? Tax deductible.
Buying dance shoes to teach dance? Tax deductible.
Buying art supplies for your drawing business? Tax deductible.
Suddenly money you’d be spending on a ‘hobby’ becomes tax deductible because you’re self-employed. If you have a hobby that you can, and want to, monetize – monetize it! And start claiming some tax deductions against your income.
But be sure to keep a record of your business’ ingoings and outgoings. Good record-keeping is important for all new business owners!
Learn deductions you can make if you don’t have a business
This is the simplest tip of all. In Aotearoa New Zealand, there are some basic expenses that all non-business owners can claim as deductions against their income.
Taken from the IRD website:
- Accounting fees: If you pay someone to file your tax return, that amount is tax-deductible.
- Income protection insurance: If you are on an income replacement/disability type of insurance, you can claim this as a tax-deductible cost if your payout is taxable. (generally speaking, income replacement payouts are taxable).
- Commission paid on interest or dividend income: If you invest via a broker, they may take a commission off your investment returns. You can claim this commission back as an expense.
- Interest on money borrowed to buy shares or invest: If your investment produces taxable income, you can claim the interest expense on any loans taken to finance that investment. Please note that residential rental properties are not included in this group of investments.
- Interest charged on late payments of tax to the IRD (seriously though, you don’t want to be in a position where you’re making late tax payments).
As long as you have the documentation for these expenses, you can claim them when filing your end-of-year tax returns.
Pay your taxes
Now after having shared some tips you can take to minimize your tax liability, as an accountant and tax agent, I do need to emphasize:
PAY YOUR TAXES!
I strongly condemn any form of tax avoidance. I also turn away prospective clients who ask me “how much they can get away with”. Taxes are important for the public services you enjoy and the standard of living we all have.
So yes, pay your taxes, but be smart about it.
Sam is the director of SH Advisory, an online accounting firm for small businesses and startups in NZ. He is also the creator of The Comic Accountant, an internationally-read finance comic blog. With 15 years experience in accounting and finance, he loves sharing quality financial advice with small business owners everywhere. In his spare time, he likes to nerd out over the latest board game launches and great PC gaming deals online. If you need help with your small business and startup, Sam is the person you want to talk to!
