Warning To Solicitors, Accountants and Trustees/Trust Advisors...

BEWARE THE APPOINTOR IN NEW ASSOCIATED PERSONS RULES

(11 August 2009)

While the Finance and Expenditure Select Committee managed to weed out much of the over-reach of the new associated persons definition there still appears to be a glaring problem in relation to the Trust to Appointor test in section YB 11.

In the Official’s Report to the Finance and Expenditure Committee on submissions on the bill, the Committee was made aware of the potential for s YB 11, when coupled with the tripartite test, to lead to otherwise unrelated Trusts being associated when professional advisors are nominated as Appointors. This valid concern was raised by Tomlinson Paull and whilst accepted by the Committee, not enough has been done to prevent the undesirable outcome of otherwise unrelated entities from being associated to each other.

As background, this is about association rules between dealers in land, developers or builders and other entities in the business of buying and holding property that are ‘related’ by the associated persons rules. The concern is that if associated, an entity buying property to hold will be taxable on capital gains on properties sold within ten years of acquisition, if at time of acquisition the buy to hold entity was associated to a dealer, developer or builder.

The rules are changing and are much wider than they were, introducing the prospect of:-

Section YB 11 in the new Taxation Remedial bill associates Trustees of a Trust with the person or people who hold the power to appoint and remove Trustees. In short, a Trust is associated with its Appointors. The tripartite test at s YB 14 associates two parties where there is a common associate of both provided that the common associate is not associated to the two parties under the same rule.

For this reason, if a professional holds the Power of Appointorship in respect of a Trust (being Trust “A”) and then holds the Power of Appointorship in a second Trust (Trust “B”), there will not be association between the two Trusts under the tripartite provision as the common associate (being the advisor) is associated to both Trust A and B under the same test.

The Select Committee held this limitation out as being the reason why there would not be unintended Trust to Trust association. Whilst it is true this will prevent an advisor who holds this power in respect of multiple Trusts from creating inadvertent association between the Trusts, the door is still left wide open for there to be association on a far wider scale than surely could have been intended.

To explain further, consider the situation where an advisor accepts a role as Appointor in relation to a Trust that is going to buy an investment property. The Appointor is related to the Trust under s YB 11. The same Appointor might also own shares in a development company, perhaps be Settlor of a second Trust (otherwise unrelated to the first) that is involved in property development or might even be deemed to hold shares in a company involved in development under s YB 3.

What this demonstrates is that there is a raft of other provisions that might associate otherwise unrelated Trusts or companies to the Appointor then leading to association between these other entities and the first Trust under s YB 14. This is obviously not a problem that is fixed by the exclusion of not being able to apply the same rule twice in s YB 14.

Negligence Prospect

Of course reading this you might say that the advisor in that instance would be negligent in accepting the role of Appointor given that they should be aware that they are associated to a development company, and you may be right. What taxes could arise from this on other client’s assets as a result of this oversight?

Thirty percent of capital gains in the next ten years, on assets acquired during the period of association would be an approximation of the answer. However, there might be situations that arise where the advisor has less control over the matter.

Whilst uncommon it is not completely unheard of for an advisor to be a “back up” Appointor in respect of a Trust when the original Appointors die. Or what if a client decides to start trading / developing / building property in their Trust that you are appointor in and does not tell you ? Or what if IRD deem such activity to have existed ?

Summary

It seems clear to us that this is a flaw in the associated persons provisions that was quite rightly raised before the Select Committee but their proposed solution does not work.

The moral of the story clearly is to be careful whom you nominate as an Appointor in respect of your Trusts both now and in the future. It can lead to unwanted consequences. 

A brief background on the new associated persons rule changes (if you are interested) is here.

Remember these blog articles address the general public and are therefore simplified in the blog for the intended reader.

If you would like help with understanding how this affects you, or have a question, we are here to help.  You can Request a Free Interview or use our Ask the Experts service.

Until next time,

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

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Many clients have been asking me if I think this is a better time to be investing in NZ. I think the answer is yes, but you need to be careful.

The Good news:

• Immigration is on the rise - annualising at close to 20,000 people, nearly double our 10 year average (which is closer to 11,000 average annual 'net' migration inflows into NZ). This means real demand for housing in NZ is picking up all around us as we speak. Great for rents, great for mopping up surplus housing stock and land.
• Building consent applications are at at rock bottom, - meaning supply of housing stock is slowing.
• There are bargains around - lots of distressed vendors and mortgagee sales.
• Short term interest rates are low, albeit the long term rates are up. Rents never get closer to covering interest and outgoings than they do at present.
• NZ is weathering the global recession 'better than most countries', with many feeling better than they did 6 months ago and a bit of business confidence returning. Perhaps one of the reasons is because one of our largest trading partners, Aussie, is doing so well. Perhaps another reason is our banking system is less sophisticated, so we have less subprime/derivative exposure fallout and corresponding stability in banking. Or perhaps its America printing cash, flooding liquidity into the global banking system. And perhaps, its the influence of the government underwriting interbank lending and deposits, which has kick started things. A lot has been done in the last 9 months globally, and business is recovering.

The Bad News:

• The government have last week announced immigration policy is to be tightened, slightly. ( Boo.)
• Everyone is asking how America and Europe can print all of this money, and not cause an inflation bomb in the next couple of years ? I am certainly concerned about that.
• Exporters are not getting a traditional 'recessionary' low exchange rate, which should prevail and produce much needed exporter relief. Why is our exchange rate staying so high at USD $63-65c, killing our exporters margins ? Because NZ is doing better than our trading partners - this is a global recession. The upshot is employment and recovery prospects are muted.
• We must seriously ask ourselves, is America delaying the inevitable paying interest and debts with printed money ? Or will they 'inflate their way through debt', with super high inflation undermining the value of debt over time ? Is this their strategy, - inflate asset values and erode the value of debt ? I don't know the answer, but it is an interesting question.
• Of course with high inflation will come high interest rates. Lock up your interest rates long at the first sign of inflation emerging globally.

Economists Comments Intrigue Me

What intrigues me is the economists view of things in the middle of quagmire. Statements like, " housing is down 12% and we think it has a bit further to go, perhaps another 5%" said one prominent bank economist 5 months ago. So his conclusion was don't buy, - where I formed exactly the opposite conclusion from the same information. I felt a falling market full of fear = great time to buy.

Economists assume you are going to achieve the average. So if the market is down 12%, you will buy at 12% off the 2007 peak, and lose 5%....right ? Well I guess that's right if you go about things in an average orderly way.

Buy At A Discount - Cliche But True

My clients know this is bargain season, - soon to be followed by recovery season ( whether it's a year, or 6 years, who cares. We are long term investors, right ?) So we know that if things are down 12%, we would be buying 10-20% below that...which means about 20-30% off the 2007 price. So then we are well below both the historic peak price of 2007, and well below current market value. Which makes us safe, if things go down that extra 5%.

Cashflow Is Always Key

If we buy properties with good cashflow ( there are plenty around at present that at the very least are positive cashflow post tax (refund), and some even positive cashflow pre-tax (refund)), - then the recovery period is free capital growth. You do not have to fund the property, - so the recovery to former peak value ( however long it takes ) is free growth. Then in the next boom, - we get real growth again beyond the former peak.

Be Careful Though

The auction houses are full of new home buyers and investors drunk on low interest rates and recently relaxed lending criteria....you need to buy at large discounts, or you will not get growth for a very long time. That means you need to investigate the peak value in 2007, then take 30% off. That may mean that 99% of the deals don't work. But when you finally get one, - well its worth the effort.

GRA clients are bringing in great deals all the time at present...so get back in the market and start bargain hunting.

My advice is get off the beaten track and stay out of the overly populated auction houses. Look for things that are outside the square, like leaky houses for renovation, properties to land bank ( if you have the cashflow to support there are some great buys), coastal property, and distressed development property. Knock on the door of finance companies and developers....they like dealing direct with no agent.

Associated Persons:  Update!

The much talked about new Association Rules are back before Parliament and unfortunately for those in the business of dealing in or developing property or erecting buildings, the Bill has not been substantially changed. The new expanded definition of association has largely survived the Select Committee process and the new rules are likely to come into force in August, potentially from early August.

We are currently working through the rules so if you are looking to buy a rental property in August please contact us for advice if you are concerned about potential tainting.

Holes In The Legislation Revealing Opportunity To Break Tainting

Contrary to previous media releases we have made about the new associated persons rules, we have found the latest rules released (which are expected to be implemented) do provide some opportunity to crack tainting. Talk to us if you are interested in how to break the new associated persons rules. There are some limited situations where this might be possible.

Important Note for Builders

If you are in the business of erecting buildings this is the one activity that could lead to tainting of existing properties. To explain, if you are a dealer or developer only (ie. not involved in the business of erecting buildings) any rental property that you own now and that was not tainted under the existing rules will not be affected by the new rules. Further purchases could be, but your existing rentals will not be.

On the other hand, if you are in the business of erecting buildings, existing rental properties that you have could be tainted if you carry out improvements on those properties. If you are in the business of erecting buildings and are looking at making improvements to a rental property then contact us immediately as you need to know the implications of this.

Changing Use on Existing Stock

The other major impact that the change in Association Rules has is for those of you who have property bought for dealing and development purposes where you are considering a change of use. If you have a property bought for dealing and development purposes and you are considering holding it (ie. making a complete change of use in respect of that property) you need to contact us urgently and consider restructuring the ownership of that property in the next two weeks before the new rules come into play.

Summary

In summary, the new Association Rules are coming in and as feared they are wide reaching and going to make it very difficult for those engaged in a business of dealing in or developing property or erecting buildings to prevent future rentals from being tainted. More immediately than that though, if you have property owned by your dealing and development entity that you now wish to hold long term you may need to take action within the next two weeks to restructure the ownership of that property before the rules change. If you are in the business of erecting buildings you also have to be extra careful if making improvements to existing rental properties.

If you want tax advice in relation to these issues please request an interview, contact the writer Matthew Gilligan (mg@gra.co.nz) or Anthony Lipscombe (anthonyl@gra.co.nz) or call 09 522 7955.

Thank you,

 Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

In case you missed it over the weekend, the NZ Herald article on a woman being awarded a share of her husband's 'inherited property' that pre-existed the relationship rewrote some relationship property rules.

What Happened?

The supreme court held that a woman whom helped maintain an inherited farm property (that pre-existed the marriage) was entitled to 40% of the growth on the property that occurred during the relationship.

Why?

Because she contributed to the maintenance of the house by performing domestic chores and by earning income.

Why is this a change ?

It was generally accepted before this case that inherited property that pre-existed a marriage is separate relationship property and not subject to 50/50 split on divorce.

Comment;

• Personally I think the case is fair, - she did contribute to the relationship so why should it not be shared property, given she contributed to the properties upkeep? The plaintiff's counsel noted the farm would have likely been forced to be sold, but for her income being used to support bank payments.

•  If you wish to avoid this happening, - put your property in a Trust and ask your spouse to sign a relationship property agreement. The latter ( relationship property agreement or S21 agreement) makes it very clear that the property is not intended to be joint relationship property. Such agreement is much easier than an expensive fight later on, and perhaps easier to put in place earlier than later.

•  The Trust is a great thing to do before the relationship commences, but is weakened as a defence to a claim if setup during the marriage and the property is transferred during the relationship. If you wish to do this during the marriage, the S21 agreement is essential to stop spouses 'tracing' their potential relationship property interest into the Trust.

Thank you,

 Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

The much talked about new Association Rules are back before Parliament and unfortunately for those in the business of dealing in or developing property or erecting buildings, the Bill has not been substantially changed.

The new expanded definition of association has largely survived the Select Committee process and the new rules are likely to come into force in August, potentially from early August.

We are currently working through the rules so if you are looking to buy a rental property in August please contact us for advice if you are concerned about potential tainting.

Important Note for Builders

If you are in the business of erecting buildings this is the one activity that could lead to tainting of existing properties. To explain, if you are a dealer or developer only (ie. not involved in the business of erecting buildings) any rental property that you own now and that was not tainted under the existing rules will not be affected by the new rules. Further purchases could be, but your existing rentals will not be.

On the other hand, if you are in the business of erecting buildings, existing rental properties that you have could be tainted if you carry out improvements on those properties. If you are in the business of erecting buildings and are looking at making improvements to a rental property then contact us immediately as you need to know the implications of this.

Changing Use on Existing Stock

The other major impact that the change in Association Rules has is for those of you who have property bought for dealing and development purposes where you are considering a change of use. If you have a property bought for dealing and development purposes and you are considering holding it (ie. making a complete change of use in respect of that property) you need to contact us urgently.  You should consider restructuring the ownership of that property in the next two weeks before the new rules come into play.

Summary

In summary, the new Association Rules are coming in and as feared they are wide reaching and going to make it very difficult for those engaged in a business of dealing in or developing property or erecting buildings to prevent future rentals from being tainted.

More immediately than that though, if you have property owned by your dealing and development entity that you now wish to hold long term you may need to take action within the next two weeks to restructure the ownership of that property before the rules change. If you are in the business of erecting buildings you also have to be extra careful if making improvements to existing rental properties.

If you want tax advice in relation to these issues please contact Anthony at GRA on 09 522 7955 or at anthonyl@gra.co.nz.

Thank you.

Matthew Gilligan

A recent article by the NBR concerning the wilful trashing of the former family home of bankrupt Merlot Homes director Stuart Herron, which recently sold at mortgagee auction, raises some interesting issues.

To summarise the story, in the four weeks between the auction hammer falling and the moving-in date by the new owners, the house was torn to shreds.

It seems the loss was not only limited to the removal of chattels (shower heads, carpets and stove hob for example), but also malicious and wilful damage including the poisoning of trees and other damage.

Who caused the damage? Who knows, it seems there could be a number of culprits from creditors to the Herron’s themselves – but that’s speculation - despite calls for the Police to get involved.

The new owners are now faced with the expense (both financial and emotional) of fixing the property.

Get Real & ‘Caveat Emptor’

So what does this mean for house-hunters looking for a bargain?

Each week there are pages of mortgagee auctions in the major newspapers and it's naïve to imagine that the former owners are going to walk away ‘quietly’. It’s well-know in the real estate industry and there stories around of how disgruntled debtors have done damage ranging from leaving rubbish to trashing the place.

And as a bargain-hunter looking to buy one of these properties, you too need to get real and be aware that it just might happen to you. It’s a risk that exists which is why you must build in a factor because you know that there’s a potential for this.

Remember, buying a house at mortgagee sale is like buying a car ‘as is – where is’. The normal rules don’t apply. All the usual warranties are taken out of the normal Sale & Purchase contract, so the vendor (the mortgagee) doesn't warrant that the place will have any chattels in it, or even be in a good state or even vacant when you settle.

The reason properties sell at mortgagee sales for typically 30% less than their open market value is that you are NOT buying the chattels and fixtures.

So as the purchaser, you buy knowing all of this in advance and take your chances in fact when you buy a house at mortgagee sale.

In the absence of any contract with the owners and with the Bank documents SPECIFICALLY EXCLUDING CHATTELS AND FIXTURES, any purchaser must be sure of what they are buying.

It is accepted law that chattels are furniture, drapes, dishwasher, microwave and any non hard wired appliances. Fixtures are chattels that have been attached to the property. For example this would include the kitchen the bathroom fittings all light fittings, TV aerials and any hard wired appliances.

At a stretch it could even be argued that doors, handrails and anything in the garden is a fixture. The Vendor clearly states that it is not passing title to any of these items.

The purchaser has contracted to buy the property with none of those items included in the purchase price. This is the legal reality.

Minimising the Risk

Arranging to settle with vacant possession on or as close to the auction day as possible will help to minimise risk as well as factoring the risk potential damage into the price you are prepared to pay.

As a structuring advisor to investors and business people, one very common mistake with many  business and property structures is a spouse being offered as a guarantor to the banks, landlords or creditors of a business.

Their personal guarantee is often not required to get a deal done, yet it is provided because the advisors around you do not stand up for you and say 'hey, don't let your spouse sign that - you don't need too'. The result is that if total business or investment failure occurs, both spouses are fully liable instead of just one.

Of course the creditor, banker or landlord requesting your spouses guarantee will insist it is necessary 100%, because it is in their interest.

But it is contrary to your interests.

My advice is NEVER give your spouses guarantee in business or property dealings if you can avoid it. I have developed over 80 million dollars in property, and guaranteed numerous business and banking obligations, purchased multiple investment properties, - and my wife has never signed a personal guarantee on the loans.

Why ? To shelter her from the obligations.

How did I avoid her being liable? By saying no to the banks and creditors when they asked. Did it hamstring her legal or matrimonial rights to recover the property if we divorced? No, - she still gets the assets because she jointly controls the Trusts and various entities borrowing. So this is not about stripping power off your spouse and potentially wealth, it is purely about minimising risk to your household.

Examples of this include:-

1. Borrowing money from the bank to purchase an investment property or even your home. If one spouse is a homemaker, has no income or their income is not required to meet debt servicing criteria of the bank, - then why allow the bank to take their guarantee? The only use of the guarantee will be to apply more pressure to your family if you have a problem, and both spouses go bankrupt instead of one ( which could be viewed as malicious in this light).
   
   One point to note here is that you may need to use a mortgage broker to manage the negotiation with the bank, - and the broker will have to work a bit harder to achieve this. If you deal with a bank direct, they will likely tell you 'no spouse guarantee is impossible in your circumstances'. It may be true if your borrowing position is not strong, but how do you know unless you have a lot of banking and commercial experience?
   
   The answer is use a broker who has the experience, and who is willing to try hard for you. I have found many brokers lazy, or unsophisticated - they are just not equipped for these sorts of discussions with bankers or do not value asset protection concepts. Remember they get paid on commission, and asking for tough things from the bank means more work and time for the broker, with no more money. For this reason it may be appropriate to pay your broker to deal with the complexities, if your affairs are complex. Otherwise they may put you in the 'too hard' basket. If you need a good broker, email me mg@gra.co.nz . We have contacts all over the country, and for the record we do not get commission from these relationships. We just want our clients better protected.

2. Dealing with landlords over commercial leases and guarantees: always try to divide leases out into separate 'tenancy companies' and make one spouse a director of this company, Your opening position should be no personal guarantee, and if 'no personal guarantee' is a deal breaker with the landlord, - then only the director/one spouse gives a guarantee. Try not to give an unlimited guarantee, - limit it to say 6 months rent, or a fixed sum as a cap.
   
   For example my rent is around $260,000 per annum for our premises, on a 3+3. If I guarantee it for an unlimited amount, that is a $780,000 personal obligation. Firstly, I limited the guarantee to 6 months rent ( $120,000) and secondly made sure that the shareholders (a Trust) and my spouse did not guarantee the loan. This turns a potentially disastrous obligation into a manageable commercial obligation.

3. Dealing with creditors over personal guarantees: creditors in business will generally ask for a personal guarantee. Refuse to give it if you can get away with it, and most of the time you can. Where you have to give one, just as with a landlord 'limit the guarantee'. Only this week I was arranging some advertising with Fairfax, and they asked me for two GRA directors personal guarantees over the obligations of our supply relationship with them for advertising. I was so annoyed, I told the salesman I did not wish to advertise with Fairfax if a personal guarantee was required. I told him clearly his company's view was that my company was unreliable in character, if they were not willing to deal with the company without the director's guarantee.
   
   He got the message - I really cared more about the guarantees than the advertising and they would not get our money unless they backed away from the guarantees. He rang later to advise the guarantees would not be necessary. To my knowledge, GRA directors have not guaranteed a single supplier obligation (apart from the limited guarantee to the landlord). So it can be done, but I do acknowledge that some suppliers just won't deal with you without providing a personal guarantee.

Summary

Keep your spouse out of the liability chain if you can. Personal guarantees and spouses should not mix.

If you are dealing with a landlord or creditor in business and have to provide a guarantee, try not to give a guarantee at all, or limit the guarantee to a fixed sum Eg: 6 months rent.

If your spouse has no income, you should be able to avoid their guarantee being given to the bank. Consider using a mortgage broker to achieve this. Generally the banks (if dealing direct) will be very hard to manage on this point, especially in this recessionary environment.

I hope you have found this information helpful.  If you require assistance with any financial matters, please fell free to request an interview.  We are here to help.

Have a good month!

As accountants we are often asked, what can we do to manage our exposure of our affairs to banks, as we increase our business or property borrowing?

There are lots of things you can do to reduce the effectiveness of bank securities and protect yourself from the banks. Ultimately the goal is to stop them taking everything, - just allow a bank to take the investments (and equity in them) that you allot them security over.

Gearing Rules Of Banks

You will need to work within their gearing rules to achieve what is discussed below - so as background generally banks will be happy if you have a 20% deposit on residential property, or 33% deposit for large or commercial investors. Of course you need cashflow to support the credit application, and interest cover of 2.5 to 3 is also required in NZ, rule of thumb. ( Interest cover is rent+ income / interest expense).

Strategies include to beat bank securities (stop them getting everything if you are insolvent):-

1 Use a 'Split loan structure'

Use two banks: Bank 1 lends to the LAQC, secured by the rental, and personal guarantee(PG); the other bank ( bank 2) provides the deposit secured by the family Trust asset. As soon as you can, revalue the rental and refinance with bank 2 to remove bank 1. You end up 100% financed with no Trust guarantee.

2 Put your home in a Trust

Obviously put your home in a Family Trust and complete a gifting programme. Don't give bank 2 a security over the Trust. They will ask, say no. If you do not put your home in a Trust, your personal guarantee exposes the home to bank 2.

3 Use a 'Hawkins Clause'

While you are conducting a gifting programme, if you go bankrupt you will have the ungifted loan called upon to be repaid from the Trust by bank 2. The process is bank 2 calls your PG ( because your company has failed and lost money leaving the bank unsatisfied, etc); the bank demands you pay - you don't and they apply to the court to bankrupt you; the official assignee examines your assets and finds the ungifted loan balance - and will call upon trustees to pay it out in full.

So to defeat a claim against an ungifted loan to your Trust, put a Hawkins clause and debt entrenchment clause in your deed of acknowledgment of debt. The former makes says the OA cannot call the loan, if you are bankrupted ( effectively) and the latter says if the loan is called ( say the clause is struck out at court of appeal, as our clause has high court support in case law), then you leave the remaining loan balance subject to a call notice of 8 years, slowing down the OA for that time.

Watch the video below for an explanation of the Hawkins Clause.

 4 Use the GRA one one one rule, being

* One company ( LAQC ) ( or Trust or whatever you are investing in)

* One bank

* One million dollars worth of debt

By doing this you quarantine all of the banks from each other; if one entity ends up in trouble with a bank, you do not lose all of your property at once - because the banks are ring fenced off from each other in separate companies. This gives you a timing advantage if you end up in a scrape with say bank one, because you can be moving the assets in company 2/3/4 etc and they will have no control over the assets.

It is all about what I call 'getting positional advantage' on a bank. IE Getting to a position where they do not have your entire life stitched up, so they can destroy your family and life savings if something goes wrong.

Strategy 5 No Spouse Guarantee

Don't give a banker your wife's or husbands guarantee. Only one of you should be a director and guarantor. Negotiate HARD to avoid both spouses giving guarantees.

We have more information on property structures and family trusts on this website as well as our family trust blog a www.familytrusts.co.nz.

In summary, you make it really hard for the banks, and they tend to give up. Do nothing and allow them to cross secure everything - you will lose the lot.

Try to ring fence them and manage them with a good broker, - you will be in a much stronger position if you have problems, and you should be able to defend your family home and contents of your Trust.

We have for years told people to do the above, and their brokers, and lawyers have said we are over complicating it, just allow cross securing. Well that is and was crap advice, and many clients are in trouble because they were led into short cuts by their lawyers or brokers.

Split loans take a bit of time to set up, and a bit more energy on your broker's part, - but they are really really effective in a recession. Problem is, in a recession, they are really really hard to put in place ! ( for weaker borrowers.)

Last point: you need a broker to do this - the banks will not want you to do it. Its not illegal, but no bank will help you defeat their interests with split loan structures - they will discourage it and say don't do it. Of course - that is best for them.

I hope this information has been useful.  For a free review of your financial affairs including how to best structure your assets, please request a call now.  We're here to help.

Til next time,

Partnership really means two or more people or entities coming together in a common undertaking or enterprise.

You can trade your partnership through various trading vehicles including companies/LAQC's, joint ventures, general partnership, special partnerships, limited partnerships, or Trusts. Each trading vehicle should have an agreement created between the partners to the investment defining their rights and obligations. In a company for example, this is done in the shareholders agreement. In a partnership, the partnership agreement. In a joint venture, the joint venture agreement etc.

Which Trading Vehicle ?

Choosing the right structure is a combination of assessing many factors and choosing the vehicle that delivers maximum benefits for your particular circumstances. While a more detailed discussion on these issues are explored elsewhere on this site, a brief review of things to consider would include the following (looking at partnerships from a property investor's context):-

1. Asset protection implications (including limited liability vs unlimited liability for actions of the partnership, and liability for the banking obligations of the partnership by the partners) LAQC's for example require shareholders that are electing into the LAQC regime to personally guarantee the IRD for income tax.

This can be managed for small shareholders, but is one asset protection consideration in the mix. Another thing to review, - is your proposed structure creating wealth outside of a trust, and if so is it possible to both have your losses accessible and contain capital gains inside your Trust for asset protection and avoiding future gifting problems ?

2. Flexibility of ownership; (Ccan you change partners without triggering depreciation recovered ? 'Yes' for an LAQC, 'No' for most partnership circumstances.

3. Flow through of tax losses: will the trading vehicle let you access the losses?

4. Flow through of capital gains: will the trading vehicle allow easy access to capital gains at the end of the investment, or do you have to liquidate (for example a company will require liquidation unless it is a qualifying company to access capital gains tax exempt in NZ).

5. Cross border tax considerations: for those investing off shore or cross boarder, have you thought through the complex tax issues that arise? Like capital gains tax, non resident withholding tax, the implication of the New Zealand Accrual rules and foreign exchange movements, and double tax on dividend income.

Generally there is a simple and effective structure for most circumstances. Contact me if you require assistance with any matter above.