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[Matt Gilligan]

At this time, no one knows what will happen in April because we don't even have a Bill i place, let alone an Act of Parliament. It's all currently under discussion, and judging by the reports from the working groups, it looks unlikely at this time that anything will be in place by April - the current proposals are short sighted and create far more problems than they solve.

True enough.

But I think the LP proposals by IRD are clear in their intention, and clever in the effect that they have on the market. They close down loop holes without affecting the existing flow through benefits, - leaving a stable property market not affected by ring fencing.

That's not to say I would rather they leave the stats quo.

But I do believe the rule changes are coming through and they will be here on or about April 2011, - IRD policy people I have spoken to and cabinet people we knock around with say its definitely coming in.

In my opinion investors should plan with the current rules, to make the best of it before the changes come in. And there are clearly things you can do now that you cant do next year if the rules come in as expected, like:-

1. Changing the owner of a LAQC to a Trust without triggering depreciation recovered; ( viz building depreciation disappearing, making causing many LAQC's to become tax positive and be better held in Trust for asset protection accordingly.)
2. Changing the owner of an LAQC without crystallizing tainted capital gains;
3. Performing debt restructures ( shareholder to LAQC);
4. Declaring capital dividends to allow assignment of wealth to a Trust, - to allow gifting to continue.

The new LP regime also creates some nice new structuring opportunities for self employed that we are using. Not really creating any different tax outcome, - but we have found new ways of structuring clients that we find useful and beneficial.

If you wait until the rules are in to react, - its to late.

[Rosco]

What on earth are you doing up at 2am answering property talk questions for? Or have you managed to clone yourself, and there's secretly a second MG working all day and night while you play golf?

[Real buzz]

Current tainting situation, comments please

Comments please on current tainting rules please.

I have a client with the traditional buy and hold and trading trust structure popular with property traders etc before the 06.10.2009 change to the Associated Party rules

Scenario
Trust A - Trading Trust (GST registered etc)
Trust B - Rental Property Holding Trust (Owns a number of rental properties purchased before 31.03.2009 and the adjacent property (vacant section) to the trading property land bought on 23.07.2009)

Trust A and Trust B - became associated as at 06.10.2009 with law change
Trust B - bought the adjoining property, vacant section.
Trust A - purchased a trading property ( with the house on) on 23.07.2009, subdivided the land and sold on 12.04.2010 some to a 3rd party and transferred some land to Trust B (at market prices). The subdivision was approved by the council in September 2009 and works got underway before the law change
Trust B – continues rent the properties and is building additional rental dwellings on the land transferred to it on 12.04.2010. These are currently in progress and will be ready to rent in about November 2010

Questions
1.Does Trust A trade (23.07.2009 to 12.04.2010) taint the rental properties?
2.Would a trade now by Trust A taint the rental properties? If so which ones?
3.Would a trade in say December by Trust A (after the rental properties are all available for rent) taint the rental properties? If so which ones?
4.What is the impact of tainting on Trust B? Will holding them for longer than 10 years avoid having to pay income tax on any gains?

Thanks
Buzz

[foss]

Hi Matt

I take the point that one needs to make changes to LAQCs before 1 April 2011. The difficulty though is there are trade-offs and complications of doing so which is complicating the decision. I have a family trust (owns family home) and 2 LAQC (own PI).

1) I have worked out that we have significant (last year) of losses in each LAQC to claim due to building depreciation. But if I sell LAQC shares to our Trust, then I defer the cashflow as the losses are carried forward. This would have helpfully paid down debt. I know is not lost, is carried forward, but still is loss of cash-flow and higher interest to pay in short term.

2) In selling LAQC shares to trust is it a good idea to retain 1 each individually still (eg 98% trust, 1 % him. 1% her). Or is it best all 100% trust?

3) Sale of shares to Trust creates a large asset to us individually which not good from asset planning perspective. Do we get round this by assigning the benefit back to trust some how?

4) I have the issue of one LAQC having super yield and profitable now (before depreciation) and another LAQC not so good, but in couple of years with rent growth both will be cashflow positive. So cash in one and not in other. How can I transfer cash between the two coys, assuming both move under trust ownership? Likely one would be paying tax and other loss for few years too.

5) Looking forward, when both Coys have positive cashflow, how do I get money out of the company to trust without paying any tax on the cashflow? I have heard very difficult and capital distributions are taxable? Seems to me easier staying as LAQC?

Not sure if there are any other side issues of moving coys to Trust I haven’t thought of? Sorry has become a longer question than envisaged.

thanks

[Matt Gilligan]

Hi Foss

Working through your comments point by point

1) fair summation of the dilemma, but bear in mind no depreciation on buildings from 1 April 2011.

2) At this point looks like selling 100% is way to go. The 1% shareholding commonly employed to allow shareholder salaries to be paid, but under new rules an LAQC will be treated as a limited partnership so seems to me won't have shareholders for tax purposes to pay a shareholder salary to.

3) Yes there is a debt back, which is asset in your hands. Better to have that based on current market value, than retaining the shares which are an asset that will continue to grow in value.

4) Transferring cash is not the issue. You want to offset tax profit of one against tax losses of the other. Should be possible under new rules as drawn up at present as if both were LAQCs under trust, profit and losses flow through to the trust and offset there.

5) The companies should stay as LAQCs and accessing capital gains is not an issue.

Hope this helps. As always, please get advice on your specific situation before acting.

[CJ]

5) The companies should stay as LAQCs and accessing capital gains is not an issue.

If you are expecting the properties to be profitable in the short term (next 1 or 2 years) would it not be better to elect out of the QC regime?

This gives a tax deferral (company rate of 28% vs trust rate of 33%)

Any capital gain can be reinvest in the company rather than distributed to the trust and invested from there. In most situations there may not be a need to extract the equity (capital gain) from the company so the QC benefits are not needed.

[Matt Gilligan]

Good points CJ

In the end it all depends on the circumstances. If, as suggested above, you have 2 LAQCs one profitable, one loss making then moving the shares to trust and keeping LAQC status ticks a lot of boxes and given the losses you may not have any tax to pay at 33% in any case.

Your point about re-investing capital gains is taken, but it may also be that you want the money out to reduce private debt.

Finally, the issue with dropping out of the regime with the proposed new rules is that it will be a deemed disposal triggering depreciation claw back (as proposed). It is not clear if you elect out now with effect from 1 April 2011 whether this is caught under existing or new rules, but any issue to watch.

[Matt Gilligan]

Some thoughts on Buzz's tainting queries:

1. Get specific advice. All the details matter here. The parties to the trust, the date properties are acquired and sold, when activities commence and cease, whether you are dealing, developing or building etc.

2. As general comment, tainting is all about timing. You take a property by property approach and ask in relation to each property has it been tainted.

3. Generally property acquired pre-6 October 2009 will not be tainted if you were structured correctly so that there was no association between the investor and the trader.

4. Property acquired after 6 October 2009 is at risk of being tainted, but there needs to be a business of property dealing, development or erecting buildings.

5. Property acquired before any business of property dealing or development is commenced will not be tainted. This means the properties in Trust A seems safe from tainting as they were acquired before any business commenced in Trust B.

5. If there is a business of erecting buildings the rules are slightly different and there is a possibility of property that was acquired pre-October 2009 and acquired prior to the business commencing can be tainted.

6. Note that tainting is not the only taxing provision you need to be mindful of. There are provisions that capture land where it has been subdivided / developed within 10 years of being acquired.

As noted at the outset, tainting is all about the detail, so can't offer anything more than the general comments above.

[CJ]

In the end it all depends on the circumstances.

Agree

If, as suggested above, you have 2 LAQCs one profitable, one loss making then moving the shares to trust and keeping LAQC status ticks a lot of boxes and given the losses you may not have any tax to pay at 33% in any case.

couldn't you revoke and just loss offset.

Your point about re-investing capital gains is taken, but it may also be that you want the money out to reduce private debt.

Agree

Finally, the issue with dropping out of the regime with the proposed new rules is that it will be a deemed disposal triggering depreciation claw back (as proposed). It is not clear if you elect out now with effect from 1 April 2011 whether this is caught under existing or new rules, but any issue to watch.

Multiple submissions have been made on this point so hopefully it will be addressed when the bill is released.

My point is, as you say, it all depends on your personal circumstances. You need specific advise, not advice from a forum. Add to that you need specialist advise from someone of know of the new rules. Lots of small firm accountants wont have used the partnership rules before so may miss some of the fishhooks that the new rules will create.

Get specialist advice from someone who knows - like Matt.

[Matt Gilligan]

couldn't you revoke and just loss offset.

This creates other problems like locking up capital gains and unimputed retained earnings.

This would be my second choice, if profit flow through does not come in. ( it may not happen.)

[foss]

Hi Matt

Thanks for the comprehensive reponse. Certainly something to ponder and very helpful.

I was under the impression that an LAQC could not exist with trust as the shareholder? In my query I kind of assumed would need to cease being an LAQC? Particularly under proposals if treated as a limited partnership how could a trust be a supposed partner?

If one were to sell shares in LAQC from self to Trust and elect out of LAQC status is there any advantage in remaining as a QC or does that still have the same implications of a LAQC with sleeping timebomb of depreciation recovered if something happens?

When are we likely to see the outcome of the submission process?

Thanks
Foss

[foss]

Ask GRA a requestion

This creates other problems like locking up capital gains and unimputed retained earnings.

This would be my second choice, if profit flow through does not come in. ( it may not happen.)

It's the fear of locking up capital gains one day from revoking LAQC, where i'm coming from. Don't need to worry about that prob now, but will be issue one day. Can obviously be used to pay down debt, but utlimately comes a time when will want to take cash out of company and one of the great benefits of LAQC.

There is benefit as CJ states on tax rate coy @28% and trust at 33% that can benefit from by electing out of LAQC.

I also forsee that highest personal tax rate of 33% one day will be put up again (history repeating itself) which will make staying as LAQC punitive as well as the sleeping dog issue.

Is no perfect answer I guess is lesser of few evils.

[Matt Gilligan]

Any further discussion Foss on this requires a chat. Otherwise I just restate, and really we need a bit more information to be definitive. There is a right answer here if we can see the detail.

[foss]

have we got any idea on when report back on final submissions and changes will be announced?

[CJ]

have we got any idea on when report back on final submissions and changes will be announced?

not that I have heard.

It is expected to be issued as a supplementary order paper to the GST bill issued a couple of weeks ago but no timetable has been set. That is to ensure it is enacted by 1/4/11. It does mean however that the consultation period will not be as great had it been a bill in its own right.

I am sure Matt will let everyone know once we hear more.