Accountants cost investor over $200K in taxes

[David_W]

An unfortunate example of why not to see a "specialised property investment accountant":

I had a client whose self-proclaimed "rental property specialist" accountant advised him to not worry about the hassle of trusts, and to hold long-term rentals in one company, and quick-flicks (developments, trading, renovate and resell) in another company.

The Inland Revenue taxed the quick flicks (no surpises there), but because of the "associated persons" provisions, they taxed the sale of my clients long-term rentals! Owing to the success of the capital growth strategy of my client, the profits were large. Unfortunately the tax bill with interest and penalties was just about as huge; amounting to $200K ==> the well known Auckland accountants who shall remain nameless stuffed up my clients, and through their disclaimers in their cover letter they were not liable for this atrocious but unfortunately common error!

When I first met him it was too late - he had unconditionally sold the properties.

Two companies that you control are "associated persons" and are going to be tainted. The clever use of trusts is the only way to avoid tainting, and in particular use of trading trusts may have cost this investor a few grand initially, BUT really who cares if you are saving $200K in taxes and all the stress this gave!

David Whitburn LL.B BSc
Property Investment Lawyer

[drelly]

Wow nasty! So (in general) what are you meant to do if you're buying properties to renovate and sell as well as buying and holding?

[David_W]

The laws are pretty nasty in their effect. If you are renovating then onselling you are best to establish a trading trust structure to hold these properties in.

Then for your long-term buy and holds I would advise holding these in either an LAQC or a Trust structure (depending on the tax profile of these properties and your personal tax position {ie. salaried/waged or self-employed}).

Kind regards

David Whitburn
Property Investment Lawyer

[drelly]

Thanks! I've already got the LAQC for my buy and holds but haven't done any do ups to sell yet.

[David_W]

No worries Dave - always keen to help out.

[murray-spi-investments]

fortunatley, It was not me.

Not being aware of the facts of the case it does highlight the importance of always telling your professional advisor the full picture of the activities you are undertaking as the advice we can give is only as good as the disclosure given. Here though it appears the advice was based on some knowledge of the activity being undertaken and the accountant made a basic error in not seperatng the taxable and non taxable activites.

[fudosan]

David,

Thanks for the warning. Is business trust the same as trading trust? Also, do you always favour setting up a corporate trustee (e.g. LAQC) for a trust, whether it is a family or trading trust?

[David_W]

Structures for self-employed people

In terms of structures for self-employed persons, using my terminology, a business trust is not the same as a trading trust. The business trust structure for self-employed persons comprises a Trust holding the vast majority (or all) of the shares in a company.

For example the self-employed person would own a company and still hold 1 share (perhaps also 1 share would held by their partner too). This gives the freedom and flexibility to take a shareholder employee salary/wages. The business trust would be a discretionary trust and hold 999 ( or 998 ) shares in the company.

Then if the self-employed person (or indeed if any other person) purchased properties with a purpose of resale at the time of acquisition (this includes developments, trading properties, renovate and quick-sells), to prevent the enormous and costly risk of tainting, these properties should be owned in a trading trust. This trading trust should have one trustee which would be a limited liability company (not a LAQC).

These structures should ensure that you get the maximum tax efficiencies, as well as asset protection and the absolutely vital protection from tainting your long-term investments under current tax laws.

Kind regards

DAVID WHITBURN
Property Investment Lawyer

[fudosan]

Re: Structures for self-employed people

Hi David,

In terms of structures for self-employed persons, using my terminology, a business trust is not the same as a trading trust.

Are you saying the structure to use is different depending on whether a person is salaried or self employed?

Then if the self-employed person (or indeed if any other person) purchased properties with a purpose of resale at the time of acquisition (this includes developments, trading properties, renovate and quick-sells), to prevent the enormous and costly risk of tainting, these properties should be owned in a trading trust. This trading trust should have one trustee which would be a limited liability company (not a LAQC).

I just read "Property Dealing and Developing" by Matthew Gilligan in th Articles library and he seems to suggest to set up a business trust with corporate trustee for salaried persons. Therefore, do I understand it correctly that if you are salaried use business trust (with corporate trustee), and if you are self-employed use a trading trust (also with corporate trustee)? What are their differences anyway?

Regards

[David_W]

Yes - the best structures to use do indeed vary as to whether you and salaried or self-employed, and obviously individual circumstances are highly relevant and variable too.

The difference you are referring to Fudosan appears merely to be one in terminology. What I am saying is if you are salaried and the tax profile of the property is that it is loss making, then the LAQC is likely to be the best holding vehicle for a long term investment property, depending on your circumstances.

If you are self-employed a Trust is likely to give you good advantages in terms of tax optimisation, creditor protection, asset planning vehicle (and much much more) and you should strongly consider with your specialist advisers using a Trust to own the vast majority of the shares in the company, apart from 1 share to give the freedom of taking shareholder employee salary (or 2 if you have a partner). This again depends on personal circumstances, but is very likely to be the best vehicle.

For properties that you will sell (no matter what you do to them), use a TRADING TRUST (which is a Trust structure with one trustee that is a company - ie, a "corporate trustee").

Hope this clarifies matters.

Thanks

David Whitburn
Property Investment Lawyer

[Perry]

Who To Ask?

Not sure if any of the original contributors are still watching
this thread, but I wonder if the original post by David doesn't beg
the question that accountants may not be the best vocational
group to ask about structure?

[drelly]

Something else I don't understand is how it is *ever* possible to consider two entities that are essentially controlled by the same person to be unassociated.

I have to be the beneficiary, trustee or director of any structures that in some way hold properties for my benefit, so they're obviously associated... no?

cheers,
Dave.

[fudosan]

If the government introduces capital gain tax to sale of properties other than your PPOR, will the need for family trust and trading trust vaporize?

[GO DO IT]

Trading Trusts

Hi,

We were very fortunate to get advice to set ourselves up correctly. We went and saw Garth Melville of Company Solutions in Auckland. He set us up as you describe David, he seems to have extension knowledge particularly when it comes to tainting rules and regulations.

Cheers
Robyn