Family & friends investing in my property business

[Shane D]

Dear PTers,

I know its the New Year and most of you will be on holiday but I hope someone is still around that can answer a couple of tax related questions

My family in NZ and friends in Taiwan have taken an interest in my property rental business. They have seen me make rock solid steady investment returns year after year and have recently asked if they can invest in my company. They are sick of the crazy low yield being offered by banks. Here in Taiwan, banks offer around 1% annual return.

I would pay them a 6% annual dividend on the money they loan me. I would make it all legit with a legal contract drawn up by my lawyer. I would also be looking at returning the original principal investment to them after 5 years, or earlier if that is what they agree on beforehand.

My business uses a Trust structure to invest and therefore the Trust will pay tax on the money my family and friends loan to me.

My Questions
- Do my family and friends need to pay tax on the 6% annual dividend or principal they loaned me? (Family is in NZ, friends are in Taiwan)
- Can I legally take my family and friends money and invest it in my company if I don't hold any qualifications such as registered financial adviser?

Thanks in advance for taking the time to read and reply.

Shane

[drelly]

Why not just have a loan to the trust then they pay tax on the interest.

[spaceman]

^ what he said......you borrow money off them and pay them back P&I ......you aren't the tax-man or his collector.....it is their responsibility to pay their own taxes.

Them investing by buying shares is an unnecessary complication IMHO

You can legally borrow money off anybody who is prepared to lend to you....... not paying it back is where it all gets a bit murky

Cheers
spaceman

[Davo36]

Shane, I can't answer all of your questions but maybe some.

Firstly, this is quite a big endorsement of you and your company, you are obviously doing well, so congratulations on that.

Secondly, 1%! Farout, no wonder they are looking elsewhere!

Right, yes they would have to pay tax on the 6% they are earning. It's income, so whether it comes from you or the bank, it's the same thing, it's taxable income. In fact you may have to get involved in this. Imputation credits and so on? I don't know bugger all about this, but you may have to hold some of the tax back and issue them with a tax paid dividend. This could get to be quite a lot of work your end.

I think the answer to the second question is yes, but I'm not sure at all.

Best of luck with it.

[gavinc]

If they approached you and asked if they could invest in your business then I would have thought you were not offering financial advice and therefore would not need to be a registered financial advisor?

[Keys]

Not being familiar with that legislation I can say that .................

If a tenant offered to accept a 21 day termination notice, freely without pressure, the law would still protect the tenant and support a 90 day notice.

It may be the same with the adviser legislation. I know not.

[Shane D]

Why not just have a loan to the trust then they pay tax on the interest.

Drelly,

Can you expand a bit on your reply above. Sorry but I don't really understand what you mean.

Can you run me through the steps. Use an example of my Dad loaning $100,000 to the Trust.

Thanks

Shane

[Shane D]

^ what he said......you borrow money off them and pay them back P&I ......you aren't the tax-man or his collector.....it is their responsibility to pay their own taxes.

Them investing by buying shares is an unnecessary complication IMHO

You can legally borrow money off anybody who is prepared to lend to you....... not paying it back is where it all gets a bit murky

Cheers
spaceman

Spaceman,

Thanks for the reply. I realize its not my responsibility to pay their tax but my question is

Are the people who invest in my business obligated to pay tax on the dividends I pay them?

How would they declare the dividends to the tax dept.? Show their bank statements to the tax department showing the monthly or quarterly dividends that I have deposited in their bank?

Shane

[Shane D]

Shane, I can't answer all of your questions but maybe some.

Firstly, this is quite a big endorsement of you and your company, you are obviously doing well, so congratulations on that.

Secondly, 1%! Farout, no wonder they are looking elsewhere!

Right, yes they would have to pay tax on the 6% they are earning. It's income, so whether it comes from you or the bank, it's the same thing, it's taxable income. In fact you may have to get involved in this. Imputation credits and so on? I don't know bugger all about this, but you may have to hold some of the tax back and issue them with a tax paid dividend. This could get to be quite a lot of work your end.

I think the answer to the second question is yes, but I'm not sure at all.

Best of luck with it.

Davo,

Thanks for the reply mate. Yes a 6% return looks pretty exciting to my friends in Taiwan.

So it sounds like my family and friends will definitely need to pay tax on the 6% dividend I pay them. I will talk to my accountant to see how this should be handled. Its not a straight forward case as my Taiwan friends are not NZ residents or registered with the IRD in NZ. Some of them have never even been to NZ.

Shane

[Shane D]

If they approached you and asked if they could invest in your business then I would have thought you were not offering financial advice and therefore would not need to be a registered financial advisor?

Cheers gavinc,

That clear up my second question conclusively. I can, at least put that one to bed.

Shane