Structure options: pros and cons?

[Branca]

Hi all,

I have received varying advice from different people so would appreciate your input on the pros and cons of various structure options.

We are a family with husband earning 43,000 p/a gross, wife earning 20,000 p/a gross. We receive some Working for Families tax credits as we have 2 kids.

We own our family home almost debt free. We plan to move overseas in 2 years and our home will become a rental property. We would like to purchase 2-4 more rental properties before we leave for overseas. These would need to be cashflow positive or at least break even across the portfolio.

We have been advised by one person to buy our next property in our own names as it is still tax effective (as we are on low incomes) and much cheaper accountancy/legal costs, and with the idea that subsequent properties could be purchased under a different entity if needed.

Another person says if we intend to buy more property that we are better off long term to set up a trust now, start gifting our family home to it, and purchase properties in a company within the trust.

Another (cheaper) option would be to purchase property in a limited liability company without the trust.

What would be the pros and cons of these options for our situation?

Thanks!

[Dean@Massiveaction]

If you are young use trusts. Otherwise it doesn't really matter although your own name offers zero asset protection so is always the worst option. As you are leaving the country I would use trusts. Provides good asset protection and you don't care about accessing losses as you won't be earning here

[Branca]

Young? hmmm. Early 30s, so young-ish! Being 'old' or 'young' seems to be quite relative!

[Dean@Massiveaction]

Definitely trusts

[Padeha]

If you definitely plan on moving overseas then you will need to consider the impact of the other country's tax system on the NZ rental properties (both income and capital gains). There is no point in setting up a structure now that will not work or cause you difficulty or costs to unravel in two years time when you leave NZ. It is likely that owning the properties in your own personal names will cause you the least difficulty on migration. Most countries other than NZ do have capital gains tax on gains on sale of investment properties so you may need to factor this into your plans/expectations. You should get advice around your exact plans.

[Dean@Massiveaction]

Sorry Padeha but this is nonsense. Own name is always worst structure, trusts are best. Own name is always bad idea

[Padeha]

A trust may well be best structure but as I said it totally depends on how the NZ property/income/gains are treated in the other country. That is the point of my post.

[Dean@Massiveaction]

If they ARE OFFSHORE AND HOLDING PROPERTY IN nz TRUST ALWAYS BEST STRUCTURE

[Padeha]

How can you even say that if you dont know which country they are going to live in - LOL!

[Dean@Massiveaction]

Because trusts give the best asset protection. If they are earning no money n NZ trusts are best.

[Padeha]

That is just silly to say that a trust is definitely the best structure when you dont know the exact circumstances or even if asset protection is a key issue for them. If for example they were going to Australia only individuals can avail of certain exemptions for capital gains so trust ownership might not be ideal. Also if there are tax losses from the properties they cannot be offset against their other income in Australia if the properties are held in trust. There is no one size fits all as you suggest - otherwise there would be never be any discussion on structure.

[muppet]

That is just silly to say that a trust is definitely the best structure

Dean is quoting from experience in dealing with a large number of clients.
Your experience is, Padeha?

[Padeha]

Well if he is an advisor on these matters then it makes it even stranger that he would say definitely a trust without any idea of the exact circumstances or even the particular country that is involved. Most experienced advisors would not reach that definite a conclusion without further information. I also speak from experience of these matters and I was just trying to be helpful to the person who posted the original query by simply pointing out that if they are moving to another country then before they implement any structure they really need to consider the rules in the other country not just NZ. That is all.

[Branca]

Perhaps I can clarify things here. We're not going to Australia, but a country in South America. I haven't yet found out their exact tax situation, but they are trying to attract foreign investors and expats to come home, so are trying to make their tax system attractive to those groups.

Ah heck, no point trying to remain totally anonymous. We're going to Guyana. Ever heard of that country? It's a poor country with a small population and overburdened, inefficient systems, I doubt they will be too concerned about tracking us and our piffling offshore tax losses or gains... I will do some homework and try to find out what the exact situation is before we make a decision.

[Rosco]

Hi Branca,

A relatively new structure is limited partnership's, and it could be worth while for you to look into these further.

In some cases (not sure on tax rules for the country you are going to, I've never even heard of it) that rental losses from NZ can offset your taxable income in the overseas country.

A LP is similar to a company, in that you can change the ownership longterm without selling or incurring depreciation recovered (if this continues for long?) So LP could initially be owned by highest earning individual and long term by Trust for asset protection.

LAQC is no good, as can't be owned by overseas investors. But, could you use your parents?

This is just a couple of things to think about. I would suggest you get expert advice as a little money spent now can save thousands later.

Also think about long term. Will you be coming back to NZ? If so how will you get cash to buy new personal house? If borrowing, will your structure allow this to be tax deductible?

Good luck

Ross

PS - Just curious, what will you be doing in this country?