Argument Against LAQCs

[Winston001]

On one thread it was argued that the tax advantages of an LAQC disappear after a short time when the property owned becomes profitable. The implication is the LAQC structure doesn't give property investors an unfair advantage.

However my observation of people who own rental houses is they sell them for a capital profit after a few years. I'm thinking of mum and dad investors. So, using an LAQC they make tax deductions over say 5 years, get refunds, then sell the property for a capital gain - which isn't taxed. Win for them - loss for the general taxpayer.

That is the sort of thing the TWG is focused on.

[dandan]

1 Argument against LAQC's - Finance Companies can rip you easier

Some Finance companies like borrowers to be LAQC's because When a finance company rips off an LAQC, the Commerse Commission won't assist as they only help individuals in these cases.

In saying that, the Commerse Commission have been strugling for a year trying to work out a if Westpacs break fees are fair so they would probably be too busy to help anyway.

[speights boy]

Some Finance companies like borrowers to be LAQC's because When a finance company rips off an LAQC,

can you give examples of how they rip the borrower off ?

thanks
SB

[Keithw]

Winston, your observations are obviously limited to some Southland Mum's & Dads and you clearly do not understand that tax deductions can be made regardless of whether you have an LAQC or not.
Its like saying, I see boy racers driving Nissan skylines, (i'm thinking of under 25 year old drivers) and annoying the hell out of everyone by cruising the streets with their noisey exhausts and doing burnouts, Thus ALL Nissan Skylines should be confiscated and crushed just in case ONE owner might be thinking of doing burnouts !

Untaxed capital gain is a fact in all areas - property, shares, art, gold, stamps, vehicles ........
If items are being traded then they are already subject to tax
If they are bought with the intention to resell at a profit then they are already subject to tax.
If they are bought with the intention of keeping and generating an income from rent then they are not generally subject to tax

All the above apply pretty much irrespective of the vehicle used -Company, LAQC, Trust, personal ownership, sole trader etc

If property is to be taxed on capital gains then ALL other areas must also be taxed on capital gains.

[dandan]

can you give examples of how they rip the borrower off ?

thanks
SB

Break fee looks like $100 to borrower and bulk independant advice. Borrower gets billed 30k break fee. Legal costs of 50k to challenge break fee calculation interpretation make it uneconomically viable.

Happens all the time.

[CJ]

On one thread it was argued that the tax advantages of an LAQC disappear after a short time when the property owned becomes profitable. The implication is the LAQC structure doesn't give property investors an unfair advantage.

However my observation of people who own rental houses is they sell them for a capital profit after a few years. I'm thinking of mum and dad investors. So, using an LAQC they make tax deductions over say 5 years, get refunds, then sell the property for a capital gain - which isn't taxed. Win for them - loss for the general taxpayer.

That is the sort of thing the TWG is focused on.

The same would happen if the property was held in the investors name. Tax deductions for the first 5 years, tax free gain on sale.

There is no tax advantage to LAQC's. All it does is level the the playing feild for a corporate entity compared to a sole trader 9ie, held personally).

[Winston001]

Winston, your observations are obviously limited to some Southland Mum's & Dads and you clearly do not understand that tax deductions can be made regardless of whether you have an LAQC or not.


Untaxed capital gain is a fact in all areas - property, shares, art, gold, stamps, vehicles ........

All the above apply pretty much irrespective of the vehicle used -Company, LAQC, Trust, personal ownership, sole trader etc

Agreed. Believe me, I'm no fan of a CGT or a land tax although I could reluctantly accept the land tax because it is simple, if it meant more over-all taxation fairness.

I do realise that personal tax losses on property are available with other ownership structures. In fact in 25 years I've seldom seen people use LAQCs although they have become flavour of the month lately. Family trusts are the preferred structure in my experience.

[Winston001]

There is no tax advantage to LAQC's. All it does is level the the playing feild for a corporate entity compared to a sole trader 9ie, held personally).

So why all of the verbiage and angst both in this forum and from the TWG over LAQCs? I do understand what you are saying, I don't understand why LAQCs are specifically talked about?

[drelly]

Winston - LAQC's are talked about by people who need a target but don't realise they provide absolutely no tax advantages. There's a lot of things that the media and Bernard Hickey repeat over and over that are just plain wrong.

[CJ]

As Drelly said, they are an easy target. It is infact worse (for the govt) if you own in your own name as you may increase your WfF credits.

The benefit of an LAQC over personal is:
- limited liability: but is a tenant really going to sue. Banks will have a personal guarantee
- portability: move ownership without triggering deprecation claw back.
- trendy/cool - you can pick up girls at bar's by talking loudly with your friends about your LAQC (works best on Cougars - see AIRNZ ad on youtube)

[dandan]

The same would happen if the property was held in the investors name. Tax deductions for the first 5 years, tax free gain on sale.

There is no tax advantage to LAQC's. All it does is level the the playing feild for a corporate entity compared to a sole trader 9ie, held personally).

Income splitting based on shareholding could be a tax advantage as for example: 2 people with 90k salaries have a 40k in the 38% bracket (income over 70k) to off-set against. ??

[One]

You can do income splitting with a partnership.

[Son of G]

Splitting hairs and other things

You can do income splitting with a partnership.

I think that it would be harder to document the change in a partnership ownership percentages. With an LAQC you can document the transfer of shares. This is easy to do if one partner stops working for example.

So, using an LAQC they make tax deductions over say 5 years, get refunds, then sell the property for a capital gain - which isn't taxed. Win for them - loss for the general taxpayer.

In this situation I think you will have a tough job arguing that the capital gain was not income. Unless there are very good personal reasons such as a change in circumstances or a forced sale, I think the capital gain would be treated as income by the IRD.

I suspect that after cleaning out up the traders who did not pay tax, the next target will be sales by those who only made a loss (excluding capital gain) while owning the property.

[Rosco]

A Limited Partnershp (LP) can easy split losses similar to an LAQC, yet LP's are not in IRD or governments sights.

Lots of investors have purchased long term rentals, taken losses for 5 years and then sold for large capital gain and small depreciation recovery. This is very very commen over the last 5 or so years. Some of these are trusts, some standard companies, some LAQC's, some partnerships and some sole traders.

IRD would struggle to prove or even argue these gains are taxable as often the investors have only owned and sold one rental, so no trend and five years is actually a reasonable period of time. If 6 months, sure they would be looking a lot harder. Lots of these investors do have reasonable reasons for selling.

Overall the law is written based on your initial intention. Technically if you purchased a long term rental today, and sold it tomorrow, the capital gain should be tax free. Obvioulsy this would look very suspicous, but it still comes down to the initial intention, and if this can be proved. Say I found the perfect positive cashflow rental today for $250k. If a few days after I settled some idiot offered be $500k, I'd probaby sell. This could be a legimate reason and case!

Ross