I am interested to see if it is legal for some one to have a part share or ownership in a peoperty and then rent the property back off e.g a trust or a company and how best this can be set up or what the boundries are?
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Originally posted by Swoosh2 View PostI am interested to see if it is legal for some one to have a part share or ownership in a peoperty and then rent the property back off e.g a trust or a company and how best this can be set up or what the boundries are?
The costs associated with this alone anyway (trusts, structures etc) would even negate the purpose of the end result!
Why bother!
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There is nothing even remotely illegal about renting
a home from (say) a Trust in which you are a beneficiary,
or of which you are a Trustee - or both.
Placing ownership of houses in Trusts can be for many
reasons, but I suspect the primary one is to sequester
the asset. Whether a Trust or any other 'structure,' it
is an axiom of PI that the safest involvement is where
the PI does not own the asset[s], but controls it/them
through another entity.
When doing so, combined with the possibility that you
describe, in NZ, one usually becomes an "associated
person" (an IRD definition) which places extra responsibilities
on those involved. The nexus of that is that the value of
the product or service being traded between associated
persons must be at a fair market price - the price that
would've been appropriate if it was an "arms length" trans-
action. I.e. an action between a buyer and a seller who
were 'strangers.'
An illustration may help.
If you rent a warehouse off an entity that you control and
pay a rental rate that's either well above or well below the
'market rate' of the time, and that action creates a taxation
advantage somewhere within the arrangements, then the
arrangement can be voided by the IRD and tax re-assessed,
plus penalties and interest.- 'Your' company owns a warehouse
- Your partner has 99% shareholding
- Your partner has no other income
- Your business (you) pay double the market rent
- Your business makes a loss
- You offset that loss against other income to reduce your tax liability
- Your (company) partner gets 99% of the company's income
- The 'collective income' of the associated persons in this hypothesis is therefore taxed @ 19.5% to each partner
- Accordingly, you have avoided paying any tax at a higher rate.
is usually frowned upon by the IRD and can have nasty
consequences. The IRD will tolerate losses for quite some
time if they gradually reduce and all the evidence indicates
that it is a 'genuine' business, set up to make a profit.
(Why else would one credibly set up a business?)
There is always more to it than that simple hypothesis,
of course. But it may serve to illustrate a point, especially
that renting off one's 'own' company is perfectly legal,
when done the right way.
As usual, get expert advice from a competent professional.
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I disagree
Originally posted by drelly View PostLegal? Yes. Can you claim expenses? No.
Can you claim expenses = yes.
Another guy and myself invested in property together and formed a company to do this....... some years later his family is now bigger and he wants to move to a bigger, nicer house..... Company buys new house, he and his family move in and are paying market rents. All expenses are claimed as per normal.
Cheers
Spaceman
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Betcha $50 he'd be screwed if he was ever audited. You can do anything until you're caught. The sole purpose in doing it is to evade tax.You can find me at: Energise Web Design
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Originally posted by drelly View PostThe sole purpose in doing it is to evade tax.
The IRD has got people scared. The only clearcut tax avoidance is where you sell your existing house into an LAQC (even then, if you can prove a non tax purpose and intention, it would be ok).
I am still waiting on a test case to show what is legit and what isn't.
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There has been no test case, and I can't understand the IRD's concern about renting a property that is owned by an associated LAQC. There is nothing wrong with that. In fact, you can even rent a property from yourself.
The issue is the rent you pay to yourself (or your LAQC) as the landlord. If that's the market rent, then I can't see anything wrong with it. As for the alleged tax avoidence, where is it? I can't see opportunity to reduce your tax by doing this, so how can it possibly be tax avoidance?
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But how does it reduce tax?
The rent paid by X, an employed person, to the landlord, obviously, gives X no right to any deduction.
As for the landlord (X's LAQC), there is no material difference re the identity of the tenant. The LAQC pays the same tax, or gets the same tax credit, whoever the tenant might be.
The IRD appears to be attempting to rewrite 150 years worth of company law. It can't work. X is one taxpayer. The LAQC is another. They have to be examined independently - like they have always been examined.
There is no tax advantage for either - so how can either be avoiding tax?
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Well to you and me they are different entities but when IRD are involved there will fish hooks unless you know absolutely what you're doing which most people don't.
I don't have the energy to wage blitzkrieg against the IRD, I don't even like calling them on the phone. One less reason for me to help them 'with their enquiries.' As Perry mentioned, this is a matter for an expert.
If I rent off my LAQC I could win on both counts. Perfect tenant. No property manager. 15-20% tax rate on my salary to reduce the burden of my 'market rent'. And I'm sure for a while everything will be rosey. But I won't.
K
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Originally posted by Green Fish View PostThere is no tax advantage for either - so how can either be avoiding tax?
Whether what you do is a tax avoidance arrangement is another matter but you cant claim there is no tax advantage.
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I think that I can claim that there is no tax advantage:
Situation One: X has a rental property owned by his LAQC and rented to Y.
Situation Two: Y moves out, and X moves in, paying the same rent.
The tax positions of both X and his LAQC don't change. The fact of X moving in has no effect on the tax situation. So how can X's moving in be tax avoidance?
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