Family & friends investing in my property business

[PC]

What about exchange rate risk plus all the fees to convert HK to NZ$?
A loan with security over a property rather than just company shares would be my preference if lending.
How will you handle repayment demands?
How soon could you repay it? Would you have to sell a property to do so?

[Rosco]

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

Hi Shane,

Sorry I have been lazy and haven't read all the responses. But, with this kind of thing you can really structure it smartly, so that you can pay less tax. For example, your Trust pays 33%, whereas it might be possible to pay interest to non residents at say 10 or 15% tax (don't know nrwt rate for Taiwan of the top of my head). Or your family might only be on the 17.5% tax bracket, so you might be able to distribute income at a lower tax rate.

I would suggest you seek some good advice and from reading what you are trying to do, you might find a limited partnership more effective with overseas investors. Regardless of entity, I would start a new one for the new investments, and I would presume your family and friends would want a percentage of the properties, not just a return on money loaned?

Good luck,

Ross

[Shane D]

Hi Shane,

Sorry I have been lazy and haven't read all the responses. But, with this kind of thing you can really structure it smartly, so that you can pay less tax. For example, your Trust pays 33%, whereas it might be possible to pay interest to non residents at say 10 or 15% tax (don't know nrwt rate for Taiwan of the top of my head). Or your family might only be on the 17.5% tax bracket, so you might be able to distribute income at a lower tax rate.

I would suggest you seek some good advice and from reading what you are trying to do, you might find a limited partnership more effective with overseas investors. Regardless of entity, I would start a new one for the new investments, and I would presume your family and friends would want a percentage of the properties, not just a return on money loaned?

Good luck,

Ross

Ross,

Thanks for the reply. Just to clarify, my family and friends would just be loaning money to my business. They would not have a share of the business. They would receive a 6% annual interest payment on the money they loan the business.

My biggest question still remains:

My business structure is a company which is the Trustee of the Trust that holds the properties.

Would my Dad loan to the company (trustee of the trust)? or the Trust directly?

Regards

Shane

[Shane D]

What about exchange rate risk plus all the fees to convert HK to NZ$?
A loan with security over a property rather than just company shares would be my preference if lending.
How will you handle repayment demands?
How soon could you repay it? Would you have to sell a property to do so?

PC,

Sorry for the delay in replying. sometimes the job and travel gets in the way of PT :-)

1: yes the exchange rate is a real risk for my overseas friends. The exchange rate has been trending in their favor for the last few years but only slightly. The Taiwan/NZ rates have been bobbing around relatively unchanged for years.

2: I am looking for the loan to be 5 yrs maximum. I would keep a buffer in the revolving credit account if one needed to exit. Worse case I would have to sell a property and they would have to wait until they property is sold to get principal back.

3: I am still not sure about security over a property for the loan. That I need to talk to my lawyer about. I am still working through the details of the structure. Its a work in progress and hence I am not comfortable accepting any loans (even from Dad) until everything is sorted out.

Shane

[Rosco]

Ross,

Thanks for the reply. Just to clarify, my family and friends would just be loaning money to my business. They would not have a share of the business. They would receive a 6% annual interest payment on the money they loan the business.

My biggest question still remains:

My business structure is a company which is the Trustee of the Trust that holds the properties.

Would my Dad loan to the company (trustee of the trust)? or the Trust directly?

Regards

Shane

full legal name is abc trustee ltd as trustee for abc trust. So could lend to this. Abc trust is the shorter way of writing this, and the trust is really who your investors would be lending too.

a few notes
1) why pay 6%, when you can borrow at 5% through a bank? Or 5.99% for 5 years with no family, friend hassles?
2) would have to deduct rwt or nrwt fro. Interest payments. If accrued interest, nz tax payer would still have to
pay interest on this in som cases.
3) why not look at investors having % of properties? Should enable you to buy a lot more properties with a lower risk. Say you are currently looking at getting up to 20 properties. If the investors own a percentage of sone future rentals, couldn't you then get a lot more , say 50. You might only own say 33% in extra 30, but would be little or no risk to you.

ross