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  • Change to LAQC share holding

    When we set up our LAQC it was a 50 - 50 split. However my wife's earnings have been a lot lower than mine, and probably will be for a few years because of Children etc.

    I'd now like to change the shareholding, but would it be frowned upon by IRD (i.e. seen as tax avoidance)?

    Thanks
    Gerrard

  • #2
    Hi Gerrard

    My accountant has advised me to do just this.

    I had split the shares 99% for me :P and 1% for my wife because my income is considerably higher than hers Actually I think it is most unfair she works alot harder than I do. Potentially I am very lazy.

    It worked well but we kept on buying and depreciating and all the other good things that Orion and others have told us all about. So now I am in the position where I have entered the lower tax bracket and she is still in the middle bracket. Time for a change.

    I logged onto the companies web site applied for the company key and after a little bit of to and fro have obtained it and will change the share holdings after I have had the chattels depreciation list for my latest purchase completed by valuit.

    So is it tax evasion ..... No! Is it tax avoidance.... Yes! but avoidance is not illegal. Whereas evasion is....


    Happy hunting
    Counter cyclic means always swimming against the tide

    Manawatu Property Investors' Association

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    • #3
      Exactly the answer I was looking for. Hopefully I too will be in the position of being a low income earner one of the days

      Cheers
      Gerrard

      Comment


      • #4
        Originally posted by janesco
        So is it tax evasion ..... No! Is it tax avoidance.... Yes! but avoidance is not illegal. Whereas evasion is....
        Tax evasion has a 150% penalty
        Tax avoidance has a 100% penalty

        Therefore sounds illegal to me.

        Structuring your affairs in the most tax efficent manner is not tax avoidance, it is tax minimisation. IRD likes to see commercial rational behind any changes that have a tax benefit.

        Comment


        • #5
          Hi,

          It is always a difficult question for tax accountants to answer. We try to help our clients, but we have to be wary to not misinform them. A tax agent acts for his clients, but also has obligations to the IRD. A tax agent has to keep up-to-date with the tax laws to ensure that he advises his clients correctly. Otherwise, actions can be brought against them under the Tort of Negligence. Serious breaches in advising clients can lead to the dergegistration of tax agents.

          Changing the ownership of the LAQC in the way mentioned, as if it were just a simple changing of the shareholding online at the Companies Office, is misleading. The decision should be recorded in the Minutes of the Company, and a Share Transfer should be prepared, signed and kept in the Company Register. With no documentation, what do you expect IRD to say? It appears to be tax avoidance as the only apparent reason for the CHANGE is a tax benefit to one person over another.

          It is true that the whole LAQC regime seems to be designed to obtain tax benefits. So you could say, "If I am allowed to specify certain percentages of share ownership when I set up the LAQC, what is wrong with changing the percentage later?"

          The differences may be subtle but they are real. When you set up an LAQC, you are allowed to specify other than equal shares ownership for up to 5 shareholders. And you do not have to give any reason for the proportions chosen. Later, when you choose to change those proportions, it is wise to document the reasons. That is where the Minutes of a Company can assist you and should be used.

          It is easier to justify a change where the shares of the LAQC are being transferred to a Trust, as it can be documented that the dominant reason is asset protection. And, as long as the beneficiaries of the Trust are the same persons as the shareholders of the LAQC, IRD can be expected to accept this reason. If other persons are introduced into the Trust as beneficiaries, and they are of legal age and on lower marginal tax rates, IRD could state that there is a tax benefit to be obtained and that this might be the real or dominant reason.

          Whenever a client presents to me and wants to set up an LAQC, I discuss their present and future situations, advise them of the tax issues at stake and try to arrive at a proportion of share ownership that suits them now and into the foreseeable future. In this way, I seek to avoid having to make changes and document reasons other than tax avoidance or minimisation as the reasons for the changes in share ownership.

          Tread carefully when contemplating changes. Do not assume that IRD has to see if your way and accept your view. You should take into account the relevant tax laws and IRD practice statements.

          Comment


          • #6
            Originally posted by masteraccountants
            The decision should be recorded in the Minutes of the Company
            What is it? Is it something we need to prepare at the end of the year to document all changes made to the LAQC structure and operation?

            Comment


            • #7
              Hi Fudosan,

              In a word, yes. Many people do not realize that owning and operating a company has obligations and requirements. A Company is required to keep various registers, such as of shares, directors, charges (loans) and shareholders.

              The Minutes that I referred to are the record of the meetings of directors and shareholders. Major decisions should be recorded. In the absence of those Minutes, the directors may be making themselves vulnerable to all sorts of risks.

              "Why was this investment made? How was this deal entered into deemed to be for the benefit of the company?"

              Minutes should be recorded whenever a decision is made. The Companies Act 1993 specifies that major transactions should be decided by a meeting of shareholders. Purchasing a rental property worth more than 50% of the company's assets is a Major Transaction. Did your accountant ask you about the activities of your company or LAQC and see to it that the property purchases were documented correctly?

              When you lodge your Annual Return with the Companies Office, and you state that an AGM has been held, are there Minutes to substantiate it?

              I can provide you with a 9 page Summary of the Companies Act that would open your eyes to most of what is required of directors and owners of companies, yet most people think that there is nothing to owning an operating a company. The Companies Act goes into more detail and more issues, but the 9 page Summary should alert you to most of what you need to know on a daily basis.

              Scary, isn't it? Companies have been a round for a long time and we think we understand them. But do we really?

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              • #8
                More questions to come...

                Is there any particular format we need to use when creating Minutes of the Company? Any example I can take a look? Also, are we required to have some sort of AGM, even when many LAQCs consist mostly of one or two directors?

                Comment


                • #9
                  Hi Fudosan,

                  You can look at some sample minutes from this link http://www.mycontact.co.nz/view?page...rnance/minutes.

                  AGM stands for Annual General Meeting. The company at general meeting is the shareholders. In the case of a two director/two shareholder company, it would be wise to record Minutes even of a deemed AGM, so that at least there is a record of a resolution not to appoint auditors - the minimal resolution that the Companies Office require.

                  Minutes should adopt the Accounts, recommend the payment or non-payment of dividends and the like. As mentioned earlier, major transactions should be recorded in a General Meeting of shareholders.

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