GST, Capital Gains, Tainting.

[BamBam]

I am having an issue with a couple of properties owned in two LAQC's. We have had the opinion of an accountant but would also like to share this around and take comments and expertise.
We have a property owned in XX Ltd with a recent valuation of $280k and a loan of $140k.We have owned it for 2 years and its cash positive. This was our first property purchase. We had no intentions other than buying an investment property in the hope it would be cash positive once rented. We registered XX Ltd for GST and then claimed GST on the purchase price which refunded us for the renovations.
A year later we bought a property in YY Ltd. This property was a Buy and Hold from day one. YY Ltd is not GST registered.
Our accountant is advising us that as we have claimed gst on the XX Ltd property the IRD will assume it was bought with the intention to sell at a profit and is therefore subject to capital gains tax. This then has the knock on effect of us being classed as traders which could taint our buy and hold activities. A solution our accountant has proposed is the following. "Sell" the XX Ltd property to YY Ltd (YY Ltd states the intention is to buy and hold), pay back the GST and also capital gains tax on the "sale price". Close down XX Ltd. This has the effect of closing down a "trading company" and we are left with a single Buy and Hold. This will chew up either our cash or our equity by having to pay GST and the Cap gains tax and in turn make our next purchase that much more difficult.
We were hoping we could keep the XX Ltd property for 10 years or more which would cancel out any tax due if sold after that (obviously GST will still be due).
Does anyone have other suggestions.

Cheers

[cube]

Hi,

If you intended to keep Property 1 as a buy and hold, you have made an illegal GST claim.

If you intended to trade Property 1, the GST claim is OK, but selling it to YY Ltd will, in fact, 'prove' that you are a trader.

Tainting belongs to the person, not the entity, so shutting down XX Ltd. will have no impact on your trader status.

However, a single instance of trading may not be picked up by the IRD, and so long as you do keep Property 2 for a 'long' time, you may be OK. In this respect, maintaining the status quo may be your best option. (Keep under the radar)

After a GST claim has been made, the IRD can sometimes check up on you to ensure that you are trying to sell the goods - if you aren't, they may rule for a 'deemed' sale, and ask for the GST back - in this case, when you do sell, there is no or little GST to pay.

All this is lay-persons opinion, and if any of it is wrong, tough! (But if someone more knowledgeable can correct me, then please do, for everyone's sake!)

cube

[Dean@Massiveaction]

Unfortunately you shot yourself in the foot when you started. Registering a buy and hold entity for residential was most unfortunate. I would suggest you talk to Garth or Matthew and get specialist advice.
I would say you are currently tainted and need to get it fixed urgently.

[JohnL]

Your second purchase looks to be effected by the tainting. You also have the big problem of renting out long term a property you claimed GST on. Even if you pay GST on the rent or apply the Lundy ruling, the IRD doesn't like you keeping the 'trade' indefinitely.

Definitely need to see an expert about your options.

John

[whitt]

Ouch!!
Why would you have claimed GST on the initial purchase if your intention was not to trade it?

As stated above see Garth or Matthew urgently to try sort this out. It will probably hurt but if you leave it longer the pain will be even more.

Sorry I could not be of more assistance but you really need the Pro's to sort it out.

[Julian]

You may have claimed the GST back on the original purchase because you intended to rent it as a holiday rental, but have since decided to rent it as a residential property. In this case you may be able to pay the GST on the current value and then rent it as a normal residential property.

A good book on this subject is, "A practical Guide to Taxing Property Transactions" by Roger Thompson and Maurits van den Berg, published by CCH. It is not cheap but it is thorough.

As others have suggested you need professional advice.

Julian

[whitt]

You may have claimed the GST back on the original purchase because you intended to rent it as a holiday rental, but have since decided to rent it as a residential property. In this case you may be able to pay the GST on the current value and then rent it as a normal residential property.Julian

Yes possibly that is what they were up to.

[Gatekeeper]

You may have claimed the GST back on the original purchase because you intended to rent it as a holiday rental, but have since decided to rent it as a residential property.

Holiday rentals in a "dwelling" are GST exempt.

[Julian]

Gatekeeper,
I understand registering for GST is optional if turnover is less than $40,000 but is compulsory above this figure.
Julian

[Gatekeeper]

GST changes on Holiday Homes, Srvcd Apartments & Homestays

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Got this piece from the BDOSpicer 2006/07 Tax Newsletter


Quote:
The IRD have recently issued for comment a draft interpretation
Statement which will have significant implications for persons who
provide accommodation in holiday homes, home-stays and serviced
apartments. At present, the owners of holidays homes, home-stays,
and serviced apartments may in certain circumstances register for
GST on the grounds that such premises are considered to be
commercial dwellings.

The IRD are challenging that interpretation and state that in their
view, premises being primarily used to provide accommodation in a
dwelling fall within the residential accommodation exemption from
GST. As such they are not commercial dwellings and owners cannot
register for GST. This may have significant implications for
apartment developers as often the marketing to the public is on the
basis that the purchaser can get GST registered.

Although issued for comment, this draft interpretation Statement is
the IRD's considered view on the matter, and any reader
contemplating the acquisition of a holiday home, home-stay or a
serviced apartment should take professional advice before attempting
to register and/or recover the GST paid on the purchase price. The
Government has announced that if this policy proceeds, they will
change the law to protect existing owners who are already GST
registered to avoid them having to deregister and pay back a
significant amount of GST.

or

http://www.taxpolicy.ird.govt.nz/pub...les/IS0049.pdf

[BamBam]

Good Evening All,
Thank you for your comments and expertise. It seems we may have got ourselves into a sticky spot. Hopefully since our intentions were not to trade the property we will find a way to sort this out. Poomba/Whitt, I have friends called Matthew and Garth and have asked for their advice but they dont seem too clued up. Could you provide a contact number for the Garth or Matthew you are refering too. Once i have spoken with them i will let you know what the outcome is.
In case you are wondering why we claimed GST on the purchase price. Advice from a fellow investor who had done this for several years on many properties bought and sold.

BamBam

[whitt]

Garth
Company Solutions
09-489-9130

[MJU]

Whoops

Bambam,

I have just come across your posts and wonder if you took professional advice when you registered that first company for GST?

In doing so you took what is possibly some of the worst finance available. Your lender "Michael Cullen" gets to look into your affairs every two or six months and for his finance wants back one ninth of all your sale proceeds (whether that is near or far) and also up to 39% of the net economic gain of the enterprise when the property is sold.

Oh and then if any type of related activity regarding property can be found your lender will also have a slice of that at up to 39%.


I suspect more of us would be financiers if we could get deals like that.

Can I suggest you do the research on a suitably qualified and experienced accountant and then discuss things with them before you fill out forms. .

You now need to take careful stock of what you have tainted. You probably now need to consider selling out of everything and starting again!

[Rosco]

Income tax is different to GST

Bambam,

1) Mathew Gilligan from Gilligan Rowe and associates is the Mathew referred to. He is a structure specialist.

2) Income Tax and GST are two separate issues, so just because you have incorrectly claimed GST doesn't mean you are tainted. Tainting depends on your original intention. But claiming the GST does make it look bad!

3) Best solution would be to obtain a current valuation (as low as possible) and repay the GST based on this value and deregister for GST. Then at least as your property goes up in value, you won't have to pay GST on this gain when it is ultimately sold.

4) If XX Ltd is removed from the company's office (ie dead) then it will no longer taint the shareholders or the associated company.

Give me a ring on 021 715 707 if you want to discuss further

Ross