The GRA Blog

WHAT DO THE BUDGET TAX CHANGES MEAN FOR PROPERTY INVESTORS?

Thu, 24 Jun 2010 10:41:00 GMT

Now that the dust has settled on what was one of the most anticipated Budget announcements in recent memory, now is time to reflect on the impact of the announced and proposed changes on property investors. In doing so I am going to focus on the specific impact of the tax changes and leave aside for the moment the wider macro effects of the impact of this Budget on the economy. Broadly speaking there are five areas where the tax changes will impact on property investors. They are as follows:

The drop in personal marginal tax rates;
The removal of depreciation claims on buildings;
Proposed changes to the LAQC regime;
Raising GST to 15%;
Extra funding for audit activity at the IRD.

For advice on how the changes impact you, please contact us.

Depreciation vs Tax Cuts

Let’s take an example of a typical property investor who has taxable income from their job of $75,000 per annum and owns two rental properties that are currently worth circa $700,000 but were bought in 2002 and 2006 respectively for $550,000. For the 2011/12 income year if depreciation was still able to be claimed on buildings,. they would have been expecting to make a circa $6,800 depreciation claim which would have a maximum tax benefit of circa $2,200. At the same time due to the cuts in personal tax rates there is an increase to their after tax income of circa $2,400. Following this rationale, the investor would have been $200 better off (from a cash flow perspective) in the 2011/12 year. It is also worth nothing that of course depreciation is usually claimed on a diminishing value basis so the amount that would have been claimed on the building moving forward would be reducing over time. Finally, there is also the fact that in many instances depreciation claims produce a timing benefit only in that any depreciation claimed is then recovered on the sale of the corresponding asset.

Following this, we see the removal of depreciation claims as being mitigated by the drop in income tax rates (of course there will be additional private GST costs).

LAQC Regime

The budget announcement also signalled that there will be changes from the 2011/12 year to the LAQC regime. At the moment the proposals are at “Issues Paper” stage only which means they are open for public submission until early July 2010. The philosophy behind the proposed changes is to align the tax treatment of qualifying companies and loss attributing qualifying companies with limited partnerships. This means that some of the same aspects that LAQCs have now will be retained, in that tax losses will continue to be attributed to shareholders in proportion to their relative shareholdings. However, it also means a number of changes to other aspects of the LAQC regime. It will mean that taxable profit is attributed to shareholders rather than taxed at company level and there is also a proposal to limit the amount of tax loss that can be claimed to the shareholders’ exposure in the investment.

If you have an LAQC that may become tax profitable, then contact us for advice.

At this point in time the rules are not finalised but we will be watching this closely and it may well be that many investors who currently have properties in an LAQC will need to consider whether this is the appropriate structure for them moving forward.

If you have an LAQC with property in it, contact us for advice on restructuring prior to the rules changing.

The fact that depreciation on buildings has been removed, which may lead to a decrease in the tax losses (or perhaps even some properties even becoming profitable), along with the proposed changes to the LAQC regime, means that a review of structures is necessary. If the changes continue to proceed as proposed, affected investors would be best placed to restructure prior to 1 April 2011.

If you are selling property and want to know about the impact of depreciation recovery then contact us.

Likewise if you are buying property and want to know if the LAQC is still the right structure then contact us.

The rise in the GST Rate & Audit Activity

The rise in the GST rate will not have a discernible effect on residential property investors other than expenses that they currently incur that attract GST will increase without the ability for the GST to be recovered. There will however be an impact on property traders and commercial property investors.

If you are a property trader you will need guidance on transactions occurring around 1 October 2010 when the rate changes. Please contact us for advice.

It is also worth noting that extra funding is going to be provided to the IRD with one of the focuses being the property industry. As a result we encourage property investors to make sure that they are involving professionals in the preparation and filing of their tax returns and making sure that they are getting appropriate tax advice in relation to property transactions.

If you are concerned about tax treatment on past transactions or need advice on current ones, then contact us

Overview

Overall we think the Budget was a largely positive one for property investors even in respect to the tax changes. Certainly leading into the Budget there was talk of ring fencing of losses, which has not come to fruition. This would have had a much more significant impact on the property investment sector. As it is, the removal of depreciation claims on buildings from the 2011/12 year will definitely impact on property investors, but perhaps for many property investors any impact of this will be matched by gains resulting from the drop in personal tax rates.

Matthew Gilligan
Director

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

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New Tainting Rules By Matthew Gilligan

Wed, 14 Oct 2009 22:14:00 GMT

The long awaited new associated persons rules have finally passed into law. On 6 October 2009 the legislation received Royal Assent. The new rules apply to land acquired on or after 6 October and in certain instances to improvements made to buildings after that date. More on that later, but to begin let’s briefly revisit what these rules are about.

In the context of land transactions, up until now, it has been possible to arrange your affairs so that if you wanted to carry out property dealing / development or building activity you could separate this from your investment properties and prevent the former from tainting the latter. The IRD have long seen this as a weakness in the legislation and a loophole and for the last couple of years have been pushing for reforms to be enacted. The end result is that there is a new series of associated persons tests that are extremely comprehensive.

They include new tests that associate two Trusts, new wider tests to associate two companies and companies to shareholders and a tripartite test whereby two parties can be deemed to be associated, even though not directly associated to each other, but where they have a common party to which they are both associated. Where a property is tainted, a gain that otherwise would not be subject to income tax, is subject to income tax if sale occurs within 10 years of acquisition (or in some instances within 10 years of completion of improvements).

The new association rules are so comprehensive that if you are engaged in the business of property dealing or development and you wish to acquire an investment property post 6 October 2009 it is highly likely that the property will be tainted. In fact the rules are designed to be so comprehensive that it is likely that the IRD would view any attempt to structure around them as tax avoidance. That being the case, if you currently run property dealing and development activity via a Trading Trust for example, it might be tempting to wind up the Trust and trade via a different structure, but in our view this might be “throwing the baby out with the bath water”. That is, while a Trading Trust might not necessarily prevent association anymore, it does not follow that it is automatically the wrong structure. There are other beneficial aspects of using Trading Trusts such as flexibility in distributing income and good asset protection.

Another aspect of tainting that taxpayers need to bear in mind is that the association to the property dealer or developer has to exist on the day that the investment property (that you do not wish to be tainted) is acquired. Taxpayers who cease their property dealing and development activity no longer have a tainting issue and can then acquire rental property free of tainting risk. This means if you have entities that have been involved in these types of business in the past, you should consider winding them up to cease any tainting risk.

We also note that you have to be engaged in a business of property dealing and development. There may be instances where somebody has conducted one or two property trade transactions but is not necessarily engaged in a business such that they would have a tainting risk.

Finally, you should also recognise that even under the new comprehensive association rules, the 10 year test still applies. This means in a worst case scenario where a property is acquired and tainted as a result of association to a property dealer or developer you can still break the tax impact of tainting by holding the property for 10 years. As a technical point you should note that if you are in the business of erecting buildings then tainting only applies if you make improvements to the rental property, but then applies to sale within 10 years of completing the improvements.

The moral of the story is if you are acquiring property or just concerned about the impact of these new rules on you, you should seek advice. Please contact the writer at mg@gra.co.nz or 09 522 7955 to discuss.

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.

Recession, Relationships & Family Trusts

Tue, 13 Oct 2009 23:14:00 GMT

Recessions bring about all sorts of changes. For example, in the legal beagle world, frequently people stop purchasing houses, so lawyers run out of conveyancing work. Conversely, money starts to get tight so people start to sue each other. This of course means extra litigation work for the lawyers.

Recessions can also bring about some pretty dramatic personal life changes. For instances, people can be made redundant which in turn, creates financial pressure. Frequently, this pressure spills over into their personal relationships.

Sometimes, facing financial pressure can bring a couple closer as they bury down in the trenches together. But often, the strain can lead to a couples’ relationship breaking down. When this occurs, people separate. We know this because in ordinary times about 42% of Kiwis do just that – separate.

When a couple separate they usually divide up their assets. If their assets have been placed in a Trust the inevitable question arises: What happens to the assets in the Trust? This question is of great importance because when a relationship breaks down, there can be a lot of fighting happening and frequently the only thing left standing is “The Trust”.

An Ounce of Prevention is Worth a Pound of Cure

First, before assets are placed in a Trust, all individuals should obtain good legal advice. This is absolutely essential in my view because when assets are moved from an individual to a Trust, an individual’s property rights are affected.

Secondly, the legal advice obtained by the parties will usually include a very strong recommendation for the parties to enter into a legal Property Relationship Agreement. Again, in my view, this is essential because it will set out the basis for future reference. Should a relationship breakdown after the assets have been transferred through to the Trust, this Agreement will become invaluable.

The individuals will be saved a huge legal bill as they will not have to go to Court to argue over the assets. Additionally, and most importantly, those same individuals will not have to suffer the enormous emotional burden going to Court places on a person.

Thirdly, an actual Agreement should be entered into between the parties. This seems almost a moot point considering we have just discussed the absolute need for the Agreement but you would be surprised how many people talk about getting an Agreement but never actually do it.

The Agreement, if prepared and executed, is likely to set out a variety of matters including an acknowledgment of what assets belong to each of the parties before those assets are transferred to a Trust. It may also set out what will happen to those assets when they are transferred through to a Trust should the parties ever separate.

Lastly, if an Agreement has been entered into by the parties and assets have subsequently been transferred to the Trust then the issue is pretty easy. This is of course providing the Agreement stated what was to occur should the parties ever separate. The Agreement is just placed before the Lawyers and hopefully everyone can agree to implement what the Agreement says.

In the normal course of events what this means is the assets of the Trust are sold, loans are repaid and the balance of the sale proceeds are put into the Trust’s bank account, ready for division between the parties.

Often at this point in time the existing Trust is made into one of the individuals own Trust and another Trust is set up for the other remaining party. So in effect, each of the parties ends up with their own Trust.

Then half the sale proceeds are sent to the new Trust and the other half of the sale proceeds simply remains in the existing Trust (which was previously turned into one of the individuals Trust).

two is better than one

It’s no secret that many smart people have two trusts. One each. Each Trust will hold its own assets and frequently a half share in the family home. Why have two Trusts rather than one? Again the answer is simple. If you have two Trusts you have the ability to deal with property that was solely your own before it went to the Trust. This could include family heirlooms.

Also, your own Trust can be the recipient of any inheritances you might receive, such as money from your own Parents. Overall, having your own Trust means you can deal with the assets in the Trust as you and your Trustees wish. You can do this without the consent of your spouse (assuming they are not your Co-Trustee).

Lastly, a very large advantage of having your own Trust is you then have the ability to leave particular assets to specific beneficiaries such as children you had prior to your relationship.

As mentioned above, another great benefit of having two Trusts is that both Trusts can own a half share in the family home. When two Trusts are involved they are also very likely to have entered into a legal Agreement which would have set out the steps to be taken if the parties ever separated.

So overall, a two Trust structure is frequently far superior to one. You do have to be aware that you will have double the set up and running costs of course, but this disadvantage can be far outweighed by the benefits a two Trust structure can confer.

when prevention hasn’t been taken

Here’s where all the trouble begins. The parties don’t ever enter into a legal Agreement and cannot agree on what is to happen with the assets that are in the Trust.

When this occurs only the lawyers win as the battle royale begins and legal fees start to mount. When I see this happening I call both clients. I try to give them a bit of a reality dose. This includes reference to the movie “War of the Roses”. If anyone has ever seen this movie we all know who the winners are and that is the Lawyers. A couple can spend literally thousands of dollars in legal fees as they fight over the assets of the Trust. Let’s face it ... a house worth say $500,000 isn’t worth a couple spending $100,000 on legal fees fighting over.

Often, when you look at what is really going on, the individuals aren’t fighting over the house at all. They are fighting because they are hurt. The trouble is, that fight costs lots and lots of money if it goes on for a long period of time. It is also emotionally draining.

I’m not advocating that an individual shouldn’t engage lawyers when and where they are needed. All I’m saying is a little common sense needs to prevail in these situations. As a Professional Trustee I try hard to calm the parties and seek some form of agreement that I can send through to their Lawyers.

But if you can’t get an agreement, then what happens? Well the matter just has to go to Court. Which means the Courts look at how the Trust was established, how the Trust has been run over the years, who has control of the Trust, what assets have been transferred to the Trust and what loans the Trust owes back to the individuals.

Other matters can also come under scrutiny but in the main, these are the points the Courts will look at. Once the Courts review the matter they may make a variety of Orders. These can include putting an independent person in to run the Trust (act as a Trustee) as well making a monetary award.

I guess there are 3 main points to take from this article.

1. Get great Trust advice when setting up a Trust from a professional who really understands asset protection, estate planning, tax minimization and financial accounting. Get the very best advice you possibly can.

2. Seriously consider a two Trust structure and if you do decide to go down this route, make sure both Trusts have a legally binding Agreement as discussed above.

3. Get good solid legal advice and enter into a legal property relationship agreement.

Remember, if you want your assets to be protected, use a Trust. But do the right thing ... get the right advice, from the right people and chose the right Trust structure to ensure that asset is truly protected.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +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.

P.P.S. Check out our sister website, www.familytrusts.co.nz for more family trust information.

Our Opinion: The New REINZ Agreement for Sale & Purchase of Property

Tue, 13 Oct 2009 01:43:00 GMT

Dear Clients

You may have read in the National Business Review or elsewhere that the Real Estate Institute of New Zealand is proposing to launch a new agreement for buying and selling property in New Zealand.

We understand that the agreement will be made available to real estate agents in New Zealand for use over the forthcoming months.

For over twenty years, the buying or selling of property in New Zealand has been recorded using a standard agreement produced jointly by Auckland District Law Society and the Real Estate Institute of New Zealand. The agreement is now in its 8th edition having been improved over the intervening years to take account of changes in the way in which property is bought and sold in New Zealand and to take account of changes in the law over that time.

The ADLS/REINZ 8th edition Agreement is tried and tested. It has been the subject of many court cases in which its provisions have been scrutinised and upheld. It has been taught in our law schools and been the subject of much academic commentary.

The ADLS/REINZ 8th edition Agreement has a proven track record, its provisions are easily understood and it helpfully regulates the way in which practitioners deal with each other and third parties through the course of a sale or purchase of land. It is a “no surprises” agreement.

On the other hand the new REINZ agreement introduces new concepts, rules of interpretation and time frames which may be unexpected, particularly if you have previously bought and sold property using the ADLS/REINZ 8th edition Agreement.

So, if you are planning to either buy or sell property in the near future, please contact us for legal advice prior to signing any agreement.

In most situations, we will advise the continued use of the ADLS/REINZ 8th edition Agreement until such time as the provisions of the REINZ agreement become well known, judicially interpreted and well settled. This may take a considerable period of time.

Don’t be persuaded to use the plain English format of the new agreement. Plain English wording can be just as problematic as complex legal wording, particularly where the agreement has not had the benefit of many years of use.

Remember that all agents have access to both forms of agreement so this should not present any difficulty or delay in the buying and selling process.

Please contact our team if you have any further queries about this letter or you require any further detailed information.

Thank you,

Dad, Where's My Inheritance?

Tue, 13 Oct 2009 01:44:00 GMT

An interesting case has recently been handed down from the Courts. This case now provides Parents with the rights to strip their children of inheritances.

The judgment goes against what was previously believed good law.

To date, we have all thought that parents owe a duty to their children to provide for them in some way upon their deaths. The Courts have been littered with cases where children have brought claims against the estates of their parents when their parents failed to leave them a little something...

By and large the Courts have been sympathetic and have awarded children something out of their parent’s estates, even, in some cases, stating parents have a duty to provide for their children, irrespective of the child’s age.

Well that reasoning may go by the board if the latest case is anything to go by.

The Case

The case goes something like this. Dad, mum and two daughters lived happily together but when mum died and left her estate to dad, the two daughters fought over the estate. The result was the daughters ended up with $56,000 whilst dad received $20,000. The ultimate outcome however was the daughters fell out with their dad. This is a huge cost – far more than the money involved that’s for sure.

Dad decided that he would place his affairs with the Public Trust and so he completed a Will in which he left nothing to his daughters. He also left instructions with the Public Trust that they were not to tell his daughters about his death, his funeral or his Will.

Dad’s statement to the Public Trust went along the lines that his daughters gave him nothing, not even respect and that is what he intended to give them on his death - Nothing.

When Dad died the Public Trust actioned his instructions. Herein lies the problem. No death notice was published. The Public Trust did however advertise for creditors of the estate to come forward but none ever did. This is standard policy when dealing with a personal estate.

The Public Trust did not inform the daughters and the estate, valued at circa $250,000, was passed to his de facto partner, in accordance with the Deceases wishes expressed in his Will.

The eldest daughter, learned of her father’s death, about two years after the event. Two years is a long time in legal beagle land and time had run out for her and her sister to lodge a claim against her father’s estate. This however didn’t deter her. Instead, she sued the Public Trust, citing they had a legal duty to advise her of her father’s death. If she won the claim, she would likely received approximately $62,000.

The Judgment

The Court however didn’t quite see the daughter’s side of the story. Instead they issued a judgment stating that executors (the Public Trust in this particular case) did not have a general duty to inform potential claimants about a death or even a general duty to advertise for claimants. Rather, executors have a duty to tell a person only when they know that person wishes to make a claim. So, executors have to have actual knowledge of a potential claim rather than pre-supposing someone might make a claim.

The Court finished up by saying that the Public Trust did not have actual knowledge that the daughter would make a claim and therefore, was not liable.

Lessons for Us All to Learn

So what does all this mean for parents and children?

Well to start with, we want all families to play together and stay together. The emotional cost of falling out with each other is huge.

Secondly, we would like to see all assets held in a Trust not in a person’s personal name and personal legal capacity. Why? Because Trust assets can be passed from Trust to Trust meaning they can be passed from a parent’s Trust to a Trust established for their children upon that parent’s death. This protects those assets from creditors and the Official Assignee and of course, negates gift duty.

Thirdly, everyone should have an up to date Memorandum of Wishes. This document will tell your surviving Trustees what you want done with the assets of the Trust when you are dead.

Lastly, everyone should have a current Will which deals with the assets that you do actually hold in your personal name at the time of your death, such as tools, jewellery, etc.

Of course, asking your parents what they intend to do with your inheritance is often a difficult subject to broach. A way of opening up this type of discussion with your parents is to tell your parents what you intend to do with your own assets for your own children. Alternatively, you could always watch our DVD on the subject with your own parents and discuss the matter after looking at the DVD. It can be a difficult topic of conversation but there are ways to handle it and as always, open communication is the best policy.

One of the lessons to be taken from this case is if you want to protect the inheritances you are going to receive from your parents and if you want to protect the inheritances you intend to leave to your own children, ensure you take action.

Don’t leave assets in your personal names but put them into Trust and ensure you have current Memorandum of Wishes and Wills in place. Also make sure you have a good discussion with your parents about the topic and get them to transfer their assets to a Trust, later to be transferred on their death to your own Trust.

As always, if I can be of help with any of these conversations, just let me know. You can request an interview for a no obligation and confidential chat.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.P.S. Check out our sister website, www.familytrusts.co.nz for more family trust information.

What’s Your Game Plan when YOU die?

Tue, 13 Oct 2009 01:44:00 GMT

Last week a friend of mine unexpectedly passed away.

His passing left behind many family members and friends in great pain. It also resulted in quite a nightmare when it came down to dealing with his business and his personal assets.

Since this is a personal matter, you may be asking...Why am I writing this blog post and sharing this with you? Well I’m hoping that by telling this story, you will put in place the steps to ensure your affairs are in order - to ensure continuity for the people left behind when you die.

You see when someone dies, its hard enough having to deal with the loss. Having to try and take action to protect assets and run a business at the same time just makes a bad situation even worse.

Within two hours of death all Gilligan Rowe & Associates Partners had gathered and pledged help. The deceased was my friend, not a GRA client. But when a Partner at GRA needs help, all GRA partners stand together (that’s the wonderful thing about this firm).

Within 4 hours I had visited my friend’s business and spoke with his staff. Every staff member was in shock but every one of them agreed they’d help.

The Game Plan

The first job was to secure the technology in the business. This was not easy. No one in the business had any idea of the passwords the deceased used. This of course made our second job harder.

The staff (all 58 of them) had to be paid the following day. So now we had a situation where we had no access to money because we had no access to technology. If things weren’t bad enough, word was spreading within the industry and we had staff asking us what was going on, were they still employed, should they still go to their jobs tomorrow and would they get paid.

We had to come up with a solution quickly. We scrambled and managed to deal with the computer issue but it was pretty stressful at the time.

The next issue we had to deal with was the staff. All human beings like some semblance of order and continuity of staff was a question on everyone's mind. So we called a staff meeting and amongst tears, told all the staff it was business as usual.

A serious issue that we had to deal with was how to protect the deceased’s business. One of the competitors was already visiting the businesses clients and offering his services. We dealt with this by putting in a temporary CEO and getting that CEO and the lead salesman in the business out visiting the clients, assuring them that despite the awful set of circumstances before us, the business would go on.

The last really urgent issue we tackled was trying to ascertain what assets the deceased actually had. Turns out he had a Trust, but that Trust contained both his personal assets and his business assets, and debt was completely cross-secured. Our investigation revealed that there was life insurance. We were all thankful for this because that would at least take care of some of the debt.

On closer checking however our hopes were dashed... The deceased had cancelled his life insurance because he was in the midst of taking out new policies with another insurance provider. We looked at this issue and decided to brief his lawyers on what we felt had to be done.

At that point, we all thought we’d done what we could, so we returned to our own company and got down to the business of dealing with our own clients’ affairs.

Lessons Learned and Checklist

A couple of days later all three Gilligan Rowe & Associates Partners discussed what could have been done differently. You see, we often look at situations in an attempt to improve the services we offer to our clients. We came up a few points and think that if these things had been done, dealing with this death would have been so much easier.

1. Write down somewhere the name of your bank account numbers and passwords. Keep this document secret. Put it with your lawyer or your accountant or better still, both professionals. Stipulate that the document is only to be opened and read upon your death.

2. Write a note to either your spouse, your lawyer or your accountant. Tell them what steps should be taken on your death. For example, does someone owe you some money which hasn’t been recorded in say your financial statements but which you want collected on your death? Do you want to be an organ donor? Write your wishes down so they are clear. Again, stipulate that the document should only be opened and read upon your death.

3. Ensure you have a current Will and that your lawyer, accountant and your spouse have a copy of that Will. Let me help you if you do not have one or need it updated.

4. Never cancel a life insurance policy without having another one in place.
5. Keep a copy of your life insurance policy with your lawyer, accountant or spouse.

6. Ensure the life insurance policy is in the names of the Trustees of your Family Trust.

7. Have a Trust but make sure personal and business assets aren’t mixed up. For example, put personal assets such as your family home in your Family Trust and keep your business assets, such as the shares in your business in your Trading Trust.

8. Have a current Memorandum of Wishes for each of your Trusts. Tell your surviving Trustees in your Memorandum of Wishes exactly what you want done with the assets of the Trust when you die.

9. Leave a copy of your current Memorandum of Wishes with your lawyer, accountant and survivor.

10. Have a game plan for your business. What exactly should happen on your death? Who should be put in the driving seat until your Trustees or your Executors can handle things? Write this down in detail, because if you have a thriving business, this plan is going to be absolutely invaluable in ensuring your business survives after your death.

11. Leave a set of house keys, business keys, etc with a friend so that someone has access to your business and your home to feed your pets and water your pot plants. You might have passed on but your pets and plants are still here and still need care.

I’m sure that there are many more tips we could follow. The above isn’t meant to be a comprehensive list. It’s just a list of suggestions to make life a little easier for those left behind so that we can get on with the business of grieving.

Of course we at Gilligam Rowe can help with any or all of the items on this checklist. For a confidential and no-obligation discussion on any of these points including trusts, wills, insurance or asset planning advice, please contact us.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.P.S. Check out our sister website, www.familytrusts.co.nz for more family trust information.

THE TAXATION OF LAND TRANSACTIONS: WARNING!

Tue, 13 Oct 2009 01:44:00 GMT

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:-

Tainting professionals ( and their private assets) if they act as appointors or hold an equivalent power; and
Tainting other client’s assets inadvertently through such association. This raises the potential for negligence, and the prospect of uncertainty in enforcement.

Tainting Detail

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,

Going Down - IRD reduces rates!

Tue, 13 Oct 2009 01:44:00 GMT

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

BEWARE THE APPOINTOR IN NEW ASSOCIATED PERSONS RULES

(11 August 2009)

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

Tainting professionals ( and their private assets) if they act as appointors or hold an equivalent power; and
Tainting other client’s assets inadvertently through such association. This raises the potential for negligence, and the prospect of uncertainty in enforcement.

Tainting Detail

Negligence Prospect

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,

Is it A Good Time To Buy Investment Property?.. PLUS Associated Persons Update

Wed, 14 Oct 2009 22:16:00 GMT

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.

Get the low down on your Competitors - Benchmark

Tue, 13 Oct 2009 01:44:00 GMT

As in sport, we improve our performance by competing against others. If you run by yourself you will never know if you will win a race. The same applies to business. For example, suppose you operate a Paint and Panel shop. You might think your business is doing well by achieving a gross profit percentage of 30 percent, but what if similar businesses in the industry are achieving a gross profit of 45 percent? That would suggest there is significant room for improvement. Benchmarking gives you the goals to aspire to.

Benchmarking is an important component for business development because it allows you to understand what it takes to be the best in your field, and what it means to be a leader in your industry.

Benchmarking allows you to:

Search for innovative ideas and highly effective operating practices and then apply these to your business.
Look at your own organisation and make the necessary improvements to match or better your competitors.
Recognise your business’ shortcomings and develop business strategy to eliminate them.
Acknowledge others are doing a better job in some areas, learn how they are doing it and then implement and adapt those practices to your business.

PricewaterhouseCoopers “Trendsetter Barometer Survey” noted that “fast growth companies who used benchmarking information to measure business performance against their peers achieved 69% faster growth and 45% greater productivity over those who did not.”

Planning / Analysis

This element of business management is poorly understood, largely neglected but can generate huge rewards. Without over-simplifying it, analysis allows you to identify what strategy will generate the largest return, and then quantify the impact of your decisions on cash and profitability prior to implementation.

Top managers systematically review and analyse financial results, key performance indicators and benchmarks prior to making strategic / key discussions. Good analysis allows you to:

Identify key performance measures that drive your business
Use information to develop sound financial and business strategies
Learn to communicate and measure your business financial performance clearly
Clarify the impact of changes to the bottom line
Communicate effectively between your business coach, accountant and bank
Understand how banks measures business performance
Learn the most effective methods to improve your cash flow

While analysis is very rewarding it can be very complex and is best left to specialists.

Please contact us if you would like help to learn more above Benchmarking and understanding what's going on in your business.

John Rowe
Director Business Accounting Services

Learn More about John
Contact John at jr@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.

Supreme Court Awards Spouse 40 percent Of Inherited Pro

Tue, 13 Oct 2009 01:44:00 GMT

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,

Kiwi Saver - Changes

Tue, 13 Oct 2009 01:45:00 GMT

KiwiSaver is a voluntary, work-based savings initiative to help New Zealanders with their long-term saving for retirement.

It's designed to make it easy for people to get into the habit of saving regularly.

Effective from 1 April 2009, changes were made to the KiwiSaver Scheme. These changes are:

The Compulsory Employer Contribution maximum has changed from 4% to 2%.

The maximum employee contribution rate has changed from 4% to 2% of the employees gross pay

The Default employee contribution rate at sign up time is now 2% (previously 4%)

The $40 annual subsidy fee ceases

Voluntary employer contributions will be liable for employer superannuation contribution tax.

Please contact us if you would like help to understand how these changes affect you personally and your business - if applicable.

John Rowe
Director Business Accounting Services

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

Associated Persons: Update

Tue, 13 Oct 2009 01:45:00 GMT

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

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

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.

IRD: New Rates for Vehicle Mileage

Tue, 13 Oct 2009 01:45:00 GMT

Inland Revenue has recently advised the new mileage rate for motor vehicles is 70 cents per kilometre.

This rate applies to self employed taxpayers with up to a maximum of 5,000 kilometres of work-related travel each year. This applies to all motor vehicles (except motor cycles) irrespective of their engine sizes or whether powered by petrol or diesel and applies from the 2008-2009 income year.

The rate may be used by employers reimbursing employees for the business use of an employee's motor vehicle. This entitlement extends to shareholder- employees as well.

However, there are other options may be used to establish a fair and reasonable rate for claims or reimbursements (for example, AA rates).

If you would like to discuss how these measures may affect you, please contact us.

Why is Property Investment A Good Thing?

Tue, 13 Oct 2009 01:45:00 GMT

Why the obsession with property as an Investment?

Everyone has their own ideas on investing and their own theories on what makes a good investment for them. I have my theory of why I love property as an investment and if you'll permit me, I'd like to share it with you.

So how does it all work.......and why?

For me as a home owner (with good equity in my own home). I can take out a line of credit (extra mortgage) on my own property and use it as a deposit on my next purchase. The Bank will lend me 80% (providing my income is sufficient to service the loans) of the purchase price of my Investment Property.

I start by looking for properties that I can get at a discount (less than they are worth) and that are positive cash flow (returning more in rent than I will have to pay out in expenses).

What Would be a Good Property Deal Look Like?

Purchase Price $300,000

Registered Valuation $375,000

Rental Assessment $475 per week

As I said above, the Banks will lend me 80% of the purchase price of my Investment Property, so in this instance they will lend me $240,000 (and the additional $60,000 I have mortgaged against my existing home), so in effect I have borrowed 100% of the value of the property with 2 separate loans.

However once I have owned the property for 6 months or more the Bank will refinance me and allow me to borrow 80% of the valuation. So at this stage I will go back to the Bank with my registered Valuation of $375,000 and borrow 80% of this which is $300,000. I now have the whole mortgage under one loan and I return the $60,000 back to my own property (called recycling your deposit). For this reason my target is to buy at least 20% below valuation because then I know I can recycle the whole deposit back as above.

Consider Rental Returns

The other consideration then becomes the rental return. In this example the rental assessment on the property is $475 per week, or an annual rental of $24,700, or a return of 8.23%. This shows that I have paid $300,000 for the property and each year I can earn 8.23% back in rent.

This figure is important because I know that the Bank is going to be charging me Interest on the $300,000 I have borrowed ($240K + $60k, then $300k when I recycle the deposit). For me on this property I want some surety so I decide that the loan I take out with the Bank is a fixed loan for 3 years at 6.99%....

Mortgage $300,000 @ 6.99% = $20,970 pa
Council Rates = $1,300 pa
Insurance = $500 pa
Maintenance = $1000 pa
Total Costs - $23,770
Rental $475 per week = $24,700
Property Cashflow positive by $930 pa (or $17.88 per week)

As well as this individual property showing me a cashflow positive return (more income than expenses) I will also run this property through my LAQC and get a tax refund, mostly thanks to the depreciation allowance from IRD.

So the property stacks up over time which is good, but the real excitement is that I have used 100% of the Banks money for my investment. My tenant has paid 100% of my costs of ownership, and IRD have sent me a cheque for the privilege of this ownership.

Then there is capital growth, statistical history tells us that property has doubled in value in approximately every 11 years. There are always peaks and troughs in the property market over time, but every 11 or so years a property will double in value. For me it means that in approximately 11 years my property will be worth $750,000 and even paying interest only with the Bank I now have equity of $450,000 (mortgage still $300,000).

So, what is the Grand Total of my Investment Over Time?

Banks lends me all the money

Tenant pays all my costs

IRD gives me a tax refund

I build $450,000 in equity thanks to all of the above.

First Steps

Taking the first step is easy, but it can be just as easy to put off, especially if your experience or knowledge is not high. And even if it is, the time involved to put in the spade-work to find the exceptional deals (yes, they are around), can often halt progress and action even for the most motivated.

That's where we can help!

From the clueless...to the highly capable - we can match our service to your exact needs and experience.

So, if the idea of having a professional available to you, to guide you and save you time and money appeals, then contact me right now.

By the way, if you're not experienced or lack the time to research and put in the spade work to find the exceptional deals (yes, they are around), is as simple as contacting me for a free, no-risk chat.

Finally a question for you: Do you invest in property? If not, why not?

Thank you for reading this.

Declan Wyndham-Smith
Manager
Property Procurement
Gilligan Rowe + Associates Ltd

Learn more about Declan
Email: declanw@gra.co.nz
Direct Dial Ph: +64 9 522 7948

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.