A few questions

[Rizowz]

I have just incorporated my first company and am ready to purchase the company's first rental property. I am the sole director and sole shareholder. I have not yet filed the IR form to apply for laqc status.

NOW
I do have an appointment with GRA in a few weeks but rental number one goes to auction prior to this, and am just sorting my finances out now so cannot wait until then and don't want to make a catastropic mistake in the mean time.

I have arranged with bank to set up an account in company name and have given them company number and IRD number etc. I had planned to draw down loan amount in company's name and purchase, when somebody mentioned that because I am a company I will be subject to lending at the bank's business rates (currently circa 11% as opposed to 6.5ish floating for residential). Does that sound right? Surely every body else here borrows to purchase residential properties for rental at normal publicised 'home loan' rates regardless of whether they are purchasing in their own or a company name? I got the feeling the bank wanted to lend to me at the business rate. Or do we all draw down the loan in our personal names and lend to the company with interest payable to ourselves at the same rate we pay to the bank? This sounds silly and over-complex.

Next question - as I will be spending a bit of the banks cash on tidying up the place as well as the purchase price I thought the best method of borrowing would be using a revolving credit facility - until I read somewhere that interest on a revolving credit account isnt tax deductable, reason being it is classed an overdraft and not a loan (one and the same to me). Again, this doesnt sound right to me.

Thirdly, I will need to pay some things up front before I start collecting rent - e.g. a rates installment. If I pay for them from my personal bank account and keep the receipt can the company legally claim that as an expense? Or do I have to make the payment from the company account for it to be considered legit?
In this case, as the business account may have zilch dollars in it (if i draw down a normal loan and not a LOC) or if i have some cash i want to lower my lvr with, how does one make a 'capital injection'? If I just transfer money from my personal account (already subject to PAYE) into the business account is that not then counted as taxable income? Am I better to 'loan' the company money and not charge interest on it, then ask for repayment one day when the house/s become cashflow positive?

I have issued 1000 shares, but have not 'paid' for them as the business has no account yet. Do I have to document a value and an actual purchase? I guess I decided the value per share based on how much capital I want the business to have from the beginning correct? Is tax payable by the company on that amount? Say they are valued at 10c each, that's $100 worth all up. So I would just transfer $100 into the company's account from my own?

Sorry for the huge rant but I'm entering into uncharted waters and don't wanna make a monumental fcuk up!

Regards,
Rizowz

[Rosco]

1) Loans should be at normal rates,ie 6%ish. Whether it is a normal company, LAQC, Trust or individual should be the same

2) LAQC election needs to be filed with IRD before the first tax return is filed (most likely may 2010 approx). BUT i would always suggest doing this now so that it is not forgotten

3) If own a profitable business, LAQC is probably not the best structure, so hold off on the election until your GRA meeting

4)Overdraft or revolving credit interest is deductilbe if used for business (rental ) purposes. If used for private and business, then have to work out % that is deductible. IT IS MUCH EASIER if you keep the revolving credit soley business, as then all interest is claimable.

5) Share capital - normal shares $1 per share, so you should pay $1,000 to the company to pay for the shares. NO tax consequence.

6) If you introduce personal money into the company, this is called capital introduced and has no tax effect. This is similar to a loan, so the company owes you back this money. No point charging interest!

7) It is easiest for the company bank accont to pay for everything, as this keeps a real simple track of anything paid. But if paid personally still claimable, just harder to keep track of.

Ross

[Rizowz]

Thanks for that ross . Not sure what part your number 3) answer was aimed at? Just to confirm at this stage I only have one income which is wages from my full-time job. This is my first 'business' and i expect with depreciation and other factors, I'm likely to run at a loss for a bit, paper-wise or in real terms (actually having to inject my own money).

If I introduce capital, the company will owe the money to me the shareholder - If the company makes a profit and has sufficient funds to pay me back - does it pay tax on this? I would think it would but I had already paid tax on the money i loaned to it, so it still needs to pay tax on the money that it pays me back right?

How do I purchase/pay for the shares as far as documenting it goes? i.e. do i need to write down that I have purchased x shares for $y and transfer that actual amount in?

Down the track (i'm just a young'un) I may form a trust and wish to transfer ownership of the company's shares from my name to the trust, how does one place a 'value' on them? Does the trust just pay me the original price I paid or does something else happen, e.g. value of business assets/number of shares?


Cheers!
Rizowz

[Rosco]

Yeah number 3 was just incase you weren't just a wage earner.

The company pays tax on profit. So if it made $15,000 profit, it would pay $5,000 tax in approx terms, then could use the $10,000 left to repay you. You would then not have to pay tax on this.

So debt repayment is with tax paid money.

Any company should have opening minutes. Who the director is, what the share capital is. So I would include in the opening minutes, that you have (not really purchased, more allocated at start) 1000 shares at $1 each. When you put this money into the company, your accountant will normally record what this is.

When transfering to a Trust, needs to be done at fair market value. So company assets, less company debts (including shareholder loans) = company value. So purchased prperty for $200,000, borrowed $200,000 and no other assets or liabilities. In 10 years, hopefully property worth $300,000 (or more) so company worth $300k - 200k presuming no other debts to shareholders etc = $100k. You have 1000 shares, so each share is worth $100. You could sell any number of shares to the Trust.

Ross

[MoatMaster]

An LAQC is just a tax efficient structure - very effective if partners incomes are significantly different. As mentioned, without it, losses must be distributed 50/50. There is also the added advantage that if want to sell all or part of the property later, costs are significantly reduced as just need to sell shares i.e. no requirement for change of ownership. It can be very common for one partner in the relationship to be earning very little, & the other to be on quite a high income, therefore losses offset would result in lower personal refund than legally possible.

If raising loan(s) required for property investment, secured by residential property, then standard home loan rates should apply - if not, you are being had (but not unusual).

Regardless of which account investment costs are being paid from, provided you can provide a paper trail, and they are from owner-related accounts, they are fully tax deductibe. It would be far easier for you & accountant to account for if they were through LAQC account. If not possible for any reason, then best to reimburse personal account for amount(s) involved from the investment account to make paper trail/accounting a whole lot easier. Should reduce your accounting costs as well.
Most efficient structure whereever possible is to set up a line of credit/revolving in LAQC name to cover contingencies/shortfalls (interest fully deductible) - and any topup required from your personal funds is done via transfer of funds - ie capital introduced.

Down the track you need to take care in selling shares/money changing hands. Actual value of property/shares needs to be considered to avoid such things as gift duty. But this is simply dealt with and very compliant.
If you are dealing with a property that has a GST component, then you will have far bigger issue to consider & should take advise from a suitably skilled accountant beforehand.

[Rosco]

Being a "youngie" is great. It's great to see young people out their trying things. Ask lots of questions and gather information, as it is always better to learn from others mistakes then make them yourself.

I used to be young once, but I turned 30 a few weeks ago, so I'm probably old now.

Good luck with your investing

Ross

[MoatMaster]

Being a "youngie" is great. It's great to see young people out their trying things. Ask lots of questions and gather information, as it is always better to learn from others mistakes then make them yourself.

I used to be young once, but I turned 30 a few weeks ago, so I'm probably old now.

Good luck with your investing

Ross

Oh great - thanks Rosco - I you are old I clearly need to have undertaker on speeddial

[Rizowz]

Lol! Put it this way, you've only got 9 years on me Ross, and the thought of 30 makes me feel old already!

Thanks for the replies both of you. Opening minutes has hit the nail on the head Ross, I have an accountant relative who should be able to help with that in the meantime.

I assume that say if myself and partner were in this together (we are not) and we had a company here running at a loss (setup as laqc obviously) then the partner on the highest income would wise to have the highest allocation of shares possible to maximise any paper loss against their high personal income tax, right?

I feel rather noob asking all these questions, but the dumbest question is the one that I don't ask

[Rizowz]

Would you guys recommend funding the entire purchase + 'room to breathe' via revolving/LOC or perhaps regular table loan and organise an overdraft of a few k? Maybe I might split some of the money to be floating/LOC and some fixed, I'd hate to think what a few percent higher interest rates could do to me :'(

"Down the track you need to take care in selling shares/money changing hands. Actual value of property/shares needs to be considered to avoid such things as gift duty. But this is simply dealt with and very compliant.
If you are dealing with a property that has a GST component, then you will have far bigger issue to consider & should take advise from a suitably skilled accountant beforehand."

Can you explain a bit more about this? What I think you might mean is that the trust will have to buy the shares off me for their market value. So the trust needs to borrow the money from myself, then pay that money to me for the share price, then I 'gift' the money to the trust? So now the trust owns the shares and eventually has the money gifted from me to it, whereby it can divvy it out to me, the beneficiary?

I know somebody who is doing something similar at the moment and it is a slow process ($37k a year max without penalty or something?)

[MoatMaster]

Actual loan structure is dependent on your own circumtances/cashflow - if you have your own home and a loan against that, then any principal repayments you can or choose to make should be directed at that first because that interest cost is not deductible. Past paying your own home loan off, the it's about creating more stability around your asset/loan structure.

[Rizowz]

I still live with parents so no worries there, I do have a mortgage on a section thats in my own name, I owe just under 25k still and it should be paid in full soon - payments are nearly all principal and it was only a small loan (under 50k to begin with) so not much benefit there. Cant up the payments without big penalty so I'm happy to try and pay down principal on IP with the rent wherever poss, infact I'll even throw spare income at it. My parents house is security so want to bring down lvr asap!

[MoatMaster]

Given the indications as to where short term rates are heading, I personally would not be looking to fix long term. If however you need some certainty, then maybe a fix is right for you - or split your loan up the middle to hedge your bets. Once you have made a decision though, I would advise against watching the rates so closely. As long as you have what you have, decided on because it's the right decision in the longrun for you - take no notice of what might be, or more importantly has not proven to be. In short - if you are getting what you know is comfortable for you, what difference should it mean what everyone else might get.
And - if you do have a personal home loan left to pay - then advised you negotiate interest only on investment loans, & increase the home loan payments by the amount you would have payed in principal towards the principal - unless your cashflow is so far strapped that you are unable to do so.

[MoatMaster]

I still live with parents so no worries there, I do have a mortgage on a section thats in my own name, I owe just under 25k still and it should be paid in full soon - payments are nearly all principal and it was only a small loan (under 50k to begin with) so not much benefit there. Cant up the payments without big penalty so I'm happy to try and pay down principal on IP with the rent wherever poss, infact I'll even throw spare income at it. My parents house is security so want to bring down lvr asap!

Suggest check with your lender as they all have their own limits on increased payments before penalies imposed. Most have a stipulation that to avoid penalty, any increased payment must be adhered to.

[Rizowz]

Yeah cant see much point in fixing lately either, especially with bollards comments last announcement.

I pay about $2000p.a in interest at the moment, so I have about $3000 interest left to pay all up. it's going to cost me $1000 to break the loan just so i can up my payments - the interest rate drop from 8.7 to 6 is marginal on these dollars. Plus its nice to have some spare money to put into, well this company for example. They wont let me up my payments any further without breaking the loan otherwise I probably would.

Any comment on my previous post regarding the trust/gifting stuff?


Cheers,
Rizowz

[MoatMaster]

I assume this is what you are referring to:
If company repaying capital introduced - no tax payable (yes you are right that someone has already paid tax) - capital repaid is not deductible by LAQC - and you are not liable for this this amount received either.
If selling sells shaes to trust fair market value must be adopted in the sale (but funds need not change hands - gifting allowances can be taken into account).

Thanks for that ross . Not sure what part your number 3) answer was aimed at? Just to confirm at this stage I only have one income which is wages from my full-time job. This is my first 'business' and i expect with depreciation and other factors, I'm likely to run at a loss for a bit, paper-wise or in real terms (actually having to inject my own money).

If I introduce capital, the company will owe the money to me the shareholder - If the company makes a profit and has sufficient funds to pay me back - does it pay tax
on this? I would think it would but I had already paid tax on the money i loaned to it, so it still needs to pay tax on the money that it pays me back right?
How do I purchase/pay for the shares as far as documenting it goes? i.e. do i need to write down that I have purchased x shares for $y and transfer that actual amount in?

Down the track (i'm just a young'un) I may form a trust and wish to transfer ownership of the company's shares from my name to the trust, how does one place a 'value' on them? Does the trust just pay me the original price I paid or does something else happen, e.g. value of business assets/number of shares?


Cheers!
Rizowz