McLEAN AND CO. Chartered Accountants

Accounting          Taxation         Business Advice and Development Assistance           Audits                             

 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email                                  Website


Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  Any feedback would be welcomed.

McLean and Co. is a home based chartered accountancy practice based in Clive, Hawkes Bay.    Readers are invited to peruse the practice website lists services provided, gives contact details and indicates how to become a client, contains an extensive base of articles on business and taxation matters,  and has links to other websites that may assist your business.    Being a small firm itself,   McLean and Co. strives to provide a personal and professional service largely to a self employed person and small business client base.  Enquiries are welcomed.



We are happy to accept new clients.  Please contact ourselves at the contact points highlighted above if we can assist you in your accounting and taxation requirements. Our website lists information required for this in the following link:



  1. Residential Rental Property- Features.

  2. The Four Ways to Make Profits in Property

  3. Capital Growth vs Rental Return

  4. Typical Property Investment Structures

  5. Borrowers Using Trusts Warned

  6. Other Property Articles





capital appreciation ( not guaranted but occurs more than not)

no capital gains tax- unlike Australia or the UK, New Zealand has no capital gains tax.   Wealth, profit or estate equity created through personal or business investment is not taxed. 

no interest clawback

no stamp duty on residential property- in 1999 the Stamp Duty Abolition Act amended the Stamp and Cheque Duties Act 1971, stating that instruments executed after 20 May 1999 no longer attract conveyance duty or lease duty, and do not need to be submitted to the department for stamping.

no financial transfer taxes- unlike Australia, the New Zealand government doesn't tax the transfer of funds through the banking system.

no wealth or death duty- unlike many other countries, New Zealand has no indirect taxes on wealth.   Inheritances on death can be passed to beneficiaries without estate duties applying.

personal tax rate-  New Zealand has low personal tax rates compared to the western world.

no limit on losses available

favourable depreciation rates.   Tax deductible depreciation allowances may be carried forward indefinitely and be offset against future tax income.  It should be noted though that depreciation should be declared back as depreciation recovered income when the property ceases to be a rental property or is subsequenly sold at a value higher than cost

stable government policies

allows easy entry into the Investment Property owning field

provides a service which has a high demand

is the best security for lenders

it is easy to spread your risk over several properties with several points of income

it provides instant and consistent cash flow

it protects the value of your investment (hedge against inflation) assuming property values increase at rates equal to or higher than inflation

it provides an asset that is easily tradeable

it is not time consuming

many taxpayers derive more satisfaction and feel more comfortable with an investment which is  bricks and mortar and which they  can see, touch and take pride in as opposed an investment with a certificate.



only rental earned is treated as assessable

capital gain (the excess of sale price over original cost) is not treated as income

can claim all costs involved

the opportunity to keep the property in good repair and claim these costs throughout the years which may improve the resale value

no interest clawback when the property ceases to be a rental property

if there is a loss (i.e. expenses higher than assessable income) this can be deducted against other income earned by the taxpayer which will reduce the income tax liability



In New Zealand, well located properties tend to have good capital growth but poor cash flow, and those properties offering good cash flow tend to have poor capital growth.

Many beginning investors get involved in positive cash flow properties.  They are much easier to buy and keep because you don’t have to put your hand in your pocket every month.

That is all well and good if you want income.  But income alone doesn’t make you wealthy, it just provides you spending money and after tax there isn’t really that much money to spend. 

Many beginning investors have also purchased property that barely shows positive cash flow.  This possibly will create problems for them in the long term. A  number of other investors have also done this and this has pushed up prices in some areas giving these investors a false impression that they have bought well, that their properties are performing well and they are becoming rich. 

The problem arises as some of these areas are experiencing no growth or negative population growth.  Some of these new property owners are having difficulty finding tenants and their properties remain vacant for many months. They also find that when their properties require repairs it takes a large chunk of money.   

This is not to say that positively geared properties are bad.  A property investor should be well informed about where you buy and why you buy your property.  There are other ways to get money out of property than positively gearing. 

Investors must understand there are four ways to make money out of property investments and most of the time they only look at one or two of these. Let’s look at them.

1. Passive Appreciation
That’s when the property value goes up in line with the general property market, and over time well located properties in New Zealand  in good positions double in value every 7 - 10 years.

2. Active Appreciation
This is when you add value to your property. For example if you buying well, when you buy below market price and revalue at the correct figure, or when you renovate or redevelop your property.

3. Rental Return
Rentals from property provide cash flow, but this is only one component of your overall investment return.

4. Tax Benefits
It has often been said that its not how much money you make that is important, but how much you keep after tax. In their simplest form these are things like depreciation allowances.

To invest in a top performing property you need a balance all four of the above elements. Don’t focus too strongly on cash flow. This is because well located residential properties are inherently high growth, low yielding investments. You really can’t get high growth, high yielding residential properties without taking a risk.



When discussing property investment there are two somewhat conflicting philosophies of property investment. Some suggest you should invest in property for high rental return (the income earned over a year represented as a percentage of the value of the property) while others feel you should invest for capital growth (the increase in value of the property.) 

We would all like to buy properties that have both great capital growth and a high rental yield. But if you buy good property, that's just not the way it works.

Throughout New Zealand there are locations for the purchase of property investments (usually the lower value property areas) where you  can achieve higher rental returns but get poor long term capital growth. And there are also locations (usually the higher cost poperties) where  strong capital growth usually goes with a lower rental yield .

From the above definition alone one can see why this inverse relationship exists.

As the value of a property increases, then it follows that its rental return decreases. This is of course unless the rent increases by the same proportion, which does not normally happen. Rents eventually go up but these increases lag capital increases by a number of years. 

So the situation during any extended period of high capital growth as has happened in the recent New Zealand  property boom is that rental returns fall. This is just the way the property market works.

And now in the slower phases of the property cycle as we are experiencing in New Zealand, when interest rates are rising and affordability of properties is decreasing, more potential home owners are turning to renting properties. This is the stage of the property cycle that rental growth starts to catch up.

Many investors would prefer a higher yield. They feel they need the higher rental returns to pay their mortgage. They also believe they cannot buy many properties because they can't afford to service additional loans.  

It would be true to say that  the property investors who have been the most successful in the long term, and have done so safely and without speculating, are the ones who bought quality properties in good locations and allowed them to grow in value. They bought them for their strong capital growth and they never or rarely sold their properties. Instead they would refinance their investments as their equity increased.

The lesson one can learn from these successful investors is to buy the best quality properties you can, in the best location you can reasonably afford and never sell them.

Your investment property will perform better when you take advantage of the opportunities created by purchasing at the right time in the property cycle. A great time to buy is at the end of the property slump and the beginning of the upturn stage of the cycle.  

You further boost the returns on your investment by purchasing well. Never overpay – buy at or below ‘fair market price’. 

You then add even more value to your investment properties by renovating or redeveloping your properties.

Strong capital growth is the key to a successful property investment. Even though the first year or two of holding an investment property can be challenging, remember that capital growth builds your equity much faster than loan re-payments and rental income will. 

It is suggested that property investors should seek a balance between growth and income and view their investment as medium to long-term and be prepared to ride out the cycles.  The rental income needs to be high enough to help with your holding costs such as loan repayments, insurance and rates.  But it should not be the main reason for investing, unless you are retired and are just looking for income to maintain your lifestyle. 

If you have any doubt about the importance of capital growth, the calculations in the table below may change your mind.

Imagine you bought a property worth $400,000 in a poor growth area delivering 5% capital growth and 10% gross rental return; in 20 years your property will be worth just over half a million dollars.

On the other hand, if you had purchased a property for $400,000 in a high capital growth area showing 10% per annum capital growth and only 5% rental return the property this property will be worth $2,691,000 at the end of the same period.

That is a massive difference in the final value of your investment property.

In the meantime the rentals on your property would have grown substantially in line with its capital growth and they would catch up to the rentals you would achieve on the first (high return) property.


Capital growth vs rental income on a $400,000 purchase



capital growth



rental return on property value


capital growth


rental return on property value

Year 1





Year 5





Year 10





Year 15





Year 20






The real bonus for the investor who bought the high growth property is that he will be able to access the extra equity in this property and borrow against it to buy further properties.

It is very hard to do this with properties that have high rental return but poor capital growth. It is very difficult to save that deposit to buy your next property. 

And the other significant advantage is a tax advantage. If you are a passive investor (which is the case for most in New Zealand) the capital gain achieved is not regarded as taxable income and is tax free. And therefore the investor who purchased the highr growth property would enjoy a far greater tax free capital return on his investment.



Property investors should structure their property investment in a way which is most suitable for them and in a way which can create worthwhile tax incentives.   Typical investment structures are:



This is where you purchase property in your own name.  This is advantageous where you have property investments that are making losses, as these are available to offset against personal taxable income from other sources in the income year when preparing Income Tax Returns.    Long-term holders of several properties should probably consider investing in other structures.



This is where you purchase property in joint names, normally with a spouse.   It is a separate entity for tax purposes and allows for efficient use of income splitting of profits particulary where one spouse is in the lower tax bracket.   A share of the profit or loss is added to  personal taxable income of the partners from other sources in the income year when preparing Income Tax Returns.



This structure is a separate legal entity for tax purposes and will generally be used by the serious investor.  Typical company structures are:

Ordinary company- gives you the ability to split income similar to a partnership or retain profits within the company.  This is useful where the shareholders are already taxed at the highest individual tax rate, therefore taking advantage of the lower company tax rate.    If a loss is made on the property/properties, this loss must remain in the company and accumulates until it is offset against future assessable income, and is not available to offset against personal income of the shareholders
Loss Attributing Qualifying Company-  losses are  attributed direct to the shareholders  in the proportion of their shareholdings, and added to their personal income tax when preparing Income Tax Returns.  Profits can be retained in the company and tax paid by the company if the tax rate is tax effective when looking at the taxable income of the shareholders. Is suitable when the property investments are achieving a taxable loss overall.



This is a separate entity and any profits that are made by the Family Trust can be retained and taxed at a trustee rate or distributed to beneficiaries at their marginal rate, which will reduce overall tax if this is lower than the trustee rate.  The Inland Revenue Department has recently adjusted the law to stop the tax benefits available by distributing profit to minors.  This vehicle offers the best asset risk protection of all these structures, as the value of the assets are not personal to individuals, and therefore not available for distribution in cases of bankruptcy, marriage or relationship dissolution of the individuals, and are not regarded as personal assets when considering  eligibility to obtain rest home subsidies, provided gifting programmes have been completed within certain timeframes. As in the ordinary company, taxable losses cannot be transferred to the beneficiaries of the trust.  Instead, these losses are carried forward for the trust to offset against taxable income in future years.




(Acknowledgement- Integrity Trust)

Thousands of mortgage customers with trusts are creating gift duty liabilities for themselves without even realising it, the chief executive of a trust management company says.

Mark Maxwell of Integrity Trust says these people are often unwittingly increasing the chances of their trust being challenged as a sham.

Splitting mortgages between a fixed rate mortgage and a revolving credit facility has become an increasingly popular trend over recent years. These facilities work by allowing customers to deposit money as it is received then withdrawing it as required. As well as providing the flexibility to redraw from ones mortgage there can be significant interest savings over the term of a mortgage for those disciplined enough to manage them well.

With billions of dollars worth of fixed rate mortgages maturing over the coming months it is likely that some of this borrowing will be switched to revolving credit mortgages. When the mortgage involves a trust, care needs to be taken to structure things correctly and ensure that deposits and withdrawals are managed appropriately.

Customers need to be aware that every deposit made to a revolving credit facility operated within a trust can be assessed as a gift unless it is documented otherwise. Gift duty becomes payable when total gifts exceed $27,000 each year and progressively increases until it reaches 25c per dollar gifted. For people already involved in gifting their home to the trust the duty liability can mount up very quickly.

“The lack of education by advisers around how trusts need to be managed after they are established is creating these risks and many others,” Maxwell says.

In addition to gift duty risks, trustees may also find they are providing those seeking to challenge a trust exactly the type of evidence they need to have the trust ruled a sham. This could prove to be far more costly than any duty liabilities.



We have included a number of property investment related articles on our web site.  For your information, these are:

Residential Rental Property- Features and Taxation

To Invest in Commercial or Residential Property?

Property Development

Rental Property Income and Expenses

Beating a Housing Bubble

What is an LAQC?

Taxation Requirements and Keeping of Financial Records for Rental Properties


Obtaining a Business Loan- Key Steps

Building up Wealth through Investing in Property 

Fixed or Floating Mortgages?

Principal and Interest Debt or Interest Only?

Negative Gearing

Rental, Capital and Total Yields

12 Steps to Save on your Mortgage

Taxation on Land Transactions

The In's and Out's of Buying A Home at Auction

Obligations of a Landlord

Obligations of a Tenant

McLean and Co provides an accounting and taxation service to a number of property investors.  If we can assist you, please contact us.





The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
All text must be copied without modification and all pages must be included.
This document must not be distributed for profit.    


If we can assist further, please email McLean and Co as follows: