Can my trust sell my property to my company?

[maggiesouthgate]

Hi

I bought a home 4 years ago for $280k with an interest only loan and put it into my family trust (my hubbie and I are settlors, trustees and beneficiaries). It's currently worth about $380k & we have spent about $25k on improvements to it. My trust has been renting it to my GST registered company (which is jointly owned with hubbie) at market rates.

If I get either a registered valuation or real estate agent assessment could I sell my home to my company, claim GST back on the value and use the refund to either do up the house or invest in a separate rental property. We are also considering renting or selling our home to move to a better school zoned area.

My accountant says there is no problem but she doesn't have her own trust nor does she have rental properties. She has told me that we would have to pay GST when I sell the property.

I know the IRD has been paying attention to property transactions at the moment so I'm a bit nervous about this.

I'd really appreciate your feedback. Thanks.

Mags

[CJ]

Who lives in the house, you or tenants?

Why is the company GST registered? Residential tenancies are exempt from GST.

[maggiesouthgate]

Thanks. Our landscaping company is GST registered because its turnover exceeds $60k. Our company rents a home office from our trust at market rates.

We live in our house as we do do not have tenants. The trust prepares a tax return based on the rental income it gets for the home home office.

[Viking]

MMM well I would have thought your are heading for a date with the IRD. Renting your own house. Specifically not allowed and considered to be tax avoidance. penalties very costly.
Course I could be wrong and others may correct me.

[Rosco]

Hi Maggie,

1) If your company buys the house, will you still live there? If so, then DON'T DO IT! IRD has a huge problem with people living in a home owned by their company that creates a tax advantage.

2) My quick thoughts are, the company could NOT claim GST, but would still have to pay GST on the sale. There are special rules for GST and related parties. Basically the GST is limited to the lower of the original GST or the GST on the transaction. In your case the GST would be limited to the original GST which is $0, as the Trust did not claim! Definitely couldn't claim GST on the $380k.

3) Aside from point 1 and 2, if your business used part for home office say 30% (I'd always be suspicous of anything over this and therefore IRD are too) and the other 70% is private or residential rental, so couldn't claim all the GST anyway! Most likely couldn't claim any GST, but maybe could claim adjustment, but it would be very unusual.

4) Related party capital gain. With new association rules, your Trust and company are related. Once again I would have to think a little harder, but generally if a entity sells to a related party, and makes a capital gain, this gain is NOT tax free.

Overall, get a new accountant! So many issues with this idea, its not funny!

Ross

[mjmarketing]

Agree with Rosco - his advice is totally sound. I have a very close fiend who works for the IRD in the property complience area and I ran this by him and his answer was a resounding 'don't do it!'.

[Dean@Massiveaction]

Terrible accounting advice Maggie, shift your business to someone competent and get professional advice before you do anything.

[Mark_B]

Overall, get a new accountant! So many issues with this idea, its not funny!

Terrible accounting advice Maggie, shift your business to someone competent and get professional advice before you do anything.

By far the best pieces of advice on this thread.

[maggiesouthgate]

Thanks to everyone who has commented...much appreciated. I'm not a little nervous that the IRD could be knocking on my door. Maggie.

[Mark_B]

I'm not a little nervous that the IRD could be knocking on my door. Maggie.

You're not nervous....

Is that to say you're:

a) not proceeding with the transaction, or

b) proceeding with the transaction and confident your current accountant is advising you correctly?

[kingkong82]

I am one to take risk...but well informed risk...unfortunately i believe your accountant has given you terrible advice... that may get you into trouble with the grim reapers....

[maggiesouthgate]

Thanks Mark_B

No, I meant to say that I am nervous. But I won't be proceeding with this transaction and I have told my accountant that they have lost me as a client. Mags

You're not nervous....

Is that to say you're:

a) not proceeding with the transaction, or

b) proceeding with the transaction and confident your current accountant is advising you correctly?

[Mark_B]

I think a few people reading this thread, myself certainly included, will be relieved to hear that.

Seriously, you just saved yourself a hostile date with the IRD.

[mjmarketing]

Thanks Mark_B

No, I meant to say that I am nervous. But I won't be proceeding with this transaction and I have told my accountant that they have lost me as a client. Mags

Glad to see you have made a very wise decision and best of luck for the future.

Cheers
Makaela

[Viking]

Test case rules out self-rent tax dodge



By JAMES WEIR - The Dominion Post Last updated 05:00 26/11/2009




Thousands of people who have been claiming back potentially millions in tax on losses through special property owning companies called LAQCs could face more heat from Inland Revenue after a test case.
Inland Revenue has scored its first victory against a "Loss Attributing Qualifying Company", set up to make a private home tax deductible. The owner in effect rented the home from herself and claimed tax deductions on her losses.
It is unclear how many LAQCs involve people claiming tax losses against the costs of living in their own homes, but tax advisers said it could be thousands.
For them, the game is up, although for others using an LAQC to own property rented to outsiders, the tax deductions are still acceptable. IRD seemed to accept deductions on beach houses, as long as people actively tried to rent them.
"But if it is your own home, [IRD] will go for it," Deloitte tax managing partner Thomas Pippos said.
Last year, Inland Revenue sent out about 40,000 letters to directors of LAQCs with a possible involvement in rental properties and later carried out an audit check on companies "at risk".
Residential property investment leads to tax losses of about $500 million a year, which if offset against other income at about 30 per cent, would cost the Government about $150m a year in lost tax, experts say.
The IRD has just won a case involving a "Mrs B", who bought a home with a $292,000 loan through an LAQC which "rented" it back to Mrs B.
She claimed losses over four years totalling almost $71,000 and as the LAQC's shareholder Mrs B set this off against her income tax.
Inland Revenue said the case was a tax avoidance arrangement, but the LAQC challenged that.
Taxation Review Authority Judge Barber agreed the effect of the arrangement was tax avoidance.
If Mrs B was on a 39 per cent tax rate that avoidance would have amounted to more than $25,000, which must now be repaid, plus interest.
There was no penalty imposed in this case.
IRD's assurance manager, investigations, Richard Philp, said the case clearly showed a taxpayer could not use a LAQC in order to claim deductions for expenditure that would otherwise be of a "private or domestic nature".
The case was the first "own-home LAQC" to be tested in the courts, he said.
"We are pleased the court agreed with this view and confirmed our assessments."
Deloitte's Mr Pippos said: "It is a bridge too far to use the LAQC or a similar structure to create a taxable loss from the home you live in.
"My gut [feeling] is that there are a lot of impacted tax payers.
"This goes down to the grass roots, mum and dad in New Zealand, and would have widespread application," Mr Pippos said.
Wellington tax adviser Brent Gilchrist said "Mrs B" was not a great test case because the arrangement was not cleverly executed, with no tenancy agreement or rent payment.


It would now be a "brave" taxpayer who took IRD on for a stand-alone private home LAQC, Mr Gilchrist said, even if it was set up properly.
But if the property was one of a few investment properties owned by the LAQC and the family was treated like an arms-length tenant, then there was still room to allow losses from such an arrangement to survive an IRD "attack", he said.


Always was bad practice.
IRD will attack Trusts as well, watch and see. A long time coming.