Do you have a rental property that is currently not occupied? This loss of rental income may affect benefits you are receiving through Working for Family Tax Credits (WFTC), but how it impacts assistance is not always clear-cut.
Working for Family Tax Credits
Family assistance or WFTC is based on how many children are in your family, the amount of income for your household, and how many hours are worked each week. Generally speaking, a family of five with an income less than $105,000 will qualify for this entitlement.
Rental Losses and WFTC
So the question is: Are rental losses eligible to be deducted from your income for the purposes of qualifying for WFTC benefits? The answer depends on your specific situation.
If you own a Loss Attributing Qualifying Company (LAQC) through which the rental property is managed, then no, rental losses do not affect your household income levels. Whilst it does affect the amount of taxes you owe, the loss cannot be subtracted from your income for the purposes of WFTC entitlement.
On the other side of the coin, if you are the personal owner of the rental property in question, then you can, indeed, subtract a loss of rent from your annual household income. The amount of your WFTC benefits will increase as rental income decreases.
One more issue that arises is whether or not you own a business. If the rental property is part of your personal business and it experiences a loss, then this does not affect your income as far as WFTC support.
How Does the IRD Define a Business?
Does your rental property qualify as a personal business? The answer seems to be in the numbers; one rental does not a business make but two or more, even outside of an LAQC structure, will probably be viewed as a commercial enterprise. In the former case, rental loss can be deducted from household income; in the latter case not so.
Whilst it is impossible to determine exactly what rationale was used to create this policy, it is doubtful the government wished to eliminate depreciation deductions on rental properties as a determination of WFTC benefits. If so, rentals would not be taken into consideration at all. Instead, the IRD seems to be discouraging entrepreneurs with investment real estate from qualifying for the family entitlement.
What is perhaps the most confusing policy is that child support assessments are based on losses from an LAQC. Of course, these are two different policies, yet the similarities beg the question of why the rules vary in each instance.
Is it best to manage rental properties personally or through an LAQC if you are seeking WFTC benefits? There are other factors to take into consideration, such as whether the risk involved in personal investment is greater than the Family Assistance support. Tax liability, payroll concerns, and debt structure are additional issues.
Clearly, the structuring of your rental properties in regards to WFTC benefits is dependent on many factors. The rewards of one must be weighed against the negative impact of the other.
Author Resource:
Paul Easton is working with Gilligan Rowe & Associates are New Zealand Accountants and are a specialist Accountant firm and experts in property and family trusts.
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