Trust Experts ?

[mals69]

Looking to set up a trust but want to find out as much as possible about how it all works before seeing accountant and lawyer

At present my 6 rental properties are my only form of income - last financial year after losses (depeciation, loan interest etc) earned round $4000 and paid around $800 in tax for the financial year.

Question ? Will all income earned by the trust now be taxed at 33 cents in the dollar or can it still be at the current 14% (cause income under $14000) if I choose to do as it says in the IRD note below and get the trust to pay the beneficiary (me) directly ?

From the IRD website:

The tax on a trust's trustee income is calculated at a flat rate of 33 cents in the dollar for all three different types of trust. Beneficiaries who are New Zealand residents are liable for New Zealand income tax on all their income, from any source in the world. Beneficiary income they receive from any trust will be taxable in New Zealand, at their normal income tax rates.

Note: The trustee and beneficiary can agree not to have tax deducted from trust income before the beneficiary receives it. This is called having the income "transferred direct". This may be useful when the beneficiary has tax losses to offset against the trust income. If the income is transferred direct and the beneficiary does not pay any tax on it, the trustees can still be held liable for the unpaid tax.

[jedimaster]

Hi Mals,

It is your choice as to how you deal with the 4k odd profit if the properties are in a Trust. Trusts have a flat tax rate of 33%, but have the ability to distribute income pre-tax to a beneficiary at the beneficiaries' own tax rate. So (and you are onto this) if you are earning below 14k you can distribute all of the profit to yourself (and it would make sense to do so as the tax rate is only 10.5% as you have picked up on).

[Lissica]

You may want to consider putting the properties in a company, which is then owned by the trust. Company tax rate is 28%, and you could also pay yourself as a director, without having to do distributions via the trust.

Less paperwork than doing trust minutes and keeping records of every distribution.

Also (I could be wrong on this), you have to have properties in the name of the trustees on behalf of the trust. If you change trustees, you'd have to change title on all the properties- as well as extra paperwork I think it also costs money to do so. Having the properties in an investment company (owned by the trust), gives you more flexibility.

Keep maybe 1% of the shares in the investment company in your own name (rather than the trust), then you can add shareholder capital and take drawings without having to go through the trust.

I'm not sure that it would save you anything in tax doing it this way, but the way I see it, trusts are there primarily to protect your assets, not reducing tax.

[mals69]

May the force be with you Jedimaster, it is how it reads in the IRD note


Lissica a company in a trust be great idea thanks for future endevours.


What happens when you sell property that is in a trust with tax on capital gains - is capital gain taxed at 33% ? Had my holdings for over 14 years so be no capital gain tax ? Or is capital gain time now from when property is placed in the trust ?

[Perry]

No CGT in NZ as yet.

[Lissica]

What happens when you sell property that is in a trust with tax on capital gains - is capital gain taxed at 33% ? Had my holdings for over 14 years so be no capital gain tax ? Or is capital gain time now from when property is placed in the trust ?

I'm not an accountant or lawyer, but I did do a bit of research into this before we set up our investment/assset protection structure.

From what I understand, it shouldn't matter whether you are a trust, company or individual investor- as long as the intent is for income, and not trading, you shouldn't be taxed on capital gains.

However, if you are changing your investment structure- you'll end up having to transfer the title of the properties. If you claimed depreciation in the past (before the Govt stopped it), you might have to pay back depreciation claimed when you place the properties into a company (not sure about gifting directly to a trust)- check with your accountant on that one.

It's worth going to an asset protection specialist because your circumstances are specific to you. Having said that, it also pays to know the answer before you ask them (they're more useful that way).

[mals69]

Cheers Perry

Lissica - you seem a wealth of knowledge, like someone who has done a lot of reading Done a bit myself of late.

Are you able to recommend an asset protection specialist please ?

Im looking to sell my rentals in two years and buy some commercial so then would be a good time to do the company in a trust Im thinking at this stage, as am enjoying a 10.50 tax rate at the moment.

[Lissica]

Cheers Perry

Lissica - you seem a wealth of knowledge, like someone who has done a lot of reading Done a bit myself of late.

Are you able to recommend an asset protection specialist please ?

Im looking to sell my rentals in two years and buy some commercial so then would be a good time to do the company in a trust Im thinking at this stage, as am enjoying a 10.50 tax rate at the moment.

Not sure where you're based but we use Ross Holmes in Auckland.

They closed their Wellington office which is a bit of a shame, but the guy is pretty approachable, and gave us a free follow up Skype session with him 4yrs after we set up our trust, just to make sure are on track. Recommended a friend use them and they've also been in contact via Skype, although personally for this sort of thing, I prefer face to face.

[mals69]

Based in the shaky city - Ross sounds like a good guy.

Cheers Lissica, you have given me some good additonal food for thought

[Rosco]

Hi,

Do you have depreciation recovery issues if you sell from yourself to a Trust or other entity? Just something to watch out for?

Also if you are a builder, developer, trader or associated to one, then watch association rules and possible taxation on profits.

Why do you want to set up a Trust? If it is for tax reasons, you are unlikely to pay any less tax through a Trust as your 10.5% is pretty hard to beat. A Trust does allow you to allocate $1,000 to each child, which is tax free to them. But this small tax savings will probably be eaten up in extra costs and hassle.
When setting up a Trust or asset protection strategy you need to look at the cost vs benefit? What is the real benefit a Trust will give you?
If you are thinking asset protection, then you need to think a bit harder, what is your level of risk and who exactly are you protecting from?

Trusts are fantastic in some cases, but in others they can be a complete overkill that results in extra costs and hassles.

Overall, if you do restructure, try to keep to the least amount of entities possible, as this will save costs and hassles in the future. In your case a company owned by a Trust(from the facts in the thread) would give you little extra benefit, and just another entity with costs attached.

Ross

[spaceman]

* 2 for Ross Holmes.....he has a couple of books out that are worth a read if nothing else......as already said, part of the "point" of having a trust is to be able to split income in a tax efficient manner.

@ Lissica, trusts should never be used to reduce your tax......that would be wrong.

The proper avoidance of tax is the only intellectual pursuit that still carries any reward......The economic consequences of the peace, John Maynard Keynes

Cheers
Spaceman

[mals69]

Hi Ross - thanks

I'm a single guy so the main reason for the trust is asset protection against it all going "pear shaped" with a future partner, and so any children
we may have will be left with an inheritance - not lots of it going to an old peoples home I may one day find myself/ourselves in.

At this point I'm of the understanding that I the beneficiary can be paid directly by the trust (Before the income to the trust from rents is taxed)
and still enjoy the current 10.5% tax rate.

Could you please tell me more on the depreciation side ? So the first financial year of the property being in trust I'll have to pay back the depreciation I've been claiming for the last 14 years ? Or is it the day the property is put into the trust ?

Cheers spaceman - yeah Lissica saying the same thing that a trust should not be used solely to reduce tax.

[Lissica]

@ Lissica, trusts should never be used to reduce your tax......that would be wrong.

Cheers
Spaceman

I never said it was.

Only addressing the thread authors concerns about the tax implications of their asset protection structure.

[Lissica]

Hi Ross - thanks

At this point I'm of the understanding that I the beneficiary can be paid directly by the trust (Before the income to the trust from rents is taxed)
and still enjoy the current 10.5% tax rate.

Keep enough money outside of the trust for your own living expenses. You don't want to burden yourself with unnecessary paperwork. You do need to keep good records/minutes when you make distributions from a trust.

Could you please tell me more on the depreciation side ? So the first financial year of the property being in trust I'll have to pay back the depreciation I've been claiming for the last 14 years ? Or is it the day the property is put into the trust ?

If you have been claiming depreciation in the past, then when you transfer the assets it is like a sale of the property (even if from one entity to another). So, say if you've claimed $50,000 in depreciation on a $300,000 property. If you sell the property for more than $250,000, then obviously it hasn't depreciated to that extent, or if you sold for more than $300,000, then it hasn't depreciated at all. You would add the $50,000 back to the income and you'd be taxed on that your marginal rate at the time.

If your tax rate is 33%, then you'd have to pay back $16,500 to IRD. But in the time you've claimed depreciation, that has essentially been an interest free loan from IRD.

[spaceman]

I never said it was.

Only addressing the thread authors concerns about the tax implications of their asset protection structure.

ummmm....sorry...... tongue was firmly in cheek when I said that.........not your fault you couldn't see

Cheers
Spaceman