Uh Oh! Personal home in company - FBT questions

[Neongreen]

I recently purchased my first house; I was thinking of moving everything into a trust at a future date, so I thought I'd be smart and put it into a company(that way I could transfer the shareholding as opposed to $1200+ for conveyancing). I believed that this would significantly reduce the conveyancing costs. I also will probably rent this place out when I move into my next place, in 1-3 years. I had a brief chat with someone who does accounting and was advised that this may cause a serious headache and FBT to be payable, due to receiving a fringe benefit from the company.

My thoughts are I'm not trying to claim any expenses; I'm paying the mortgage out of my pocket, paying all expenses out of my pocket, etc, so there's no tax avoidance going on.

Can someone give me a rough idea as to whether I should go to my accountant? What am I in for? I was just under the impression I would just have to note the transfer of money into the company and keep records of that, pay the yearly $45 fee, and that's about it. My accountants are only signed up for my business so was hoping to avoid going through the whole new client process if I could help it just to check this one little thing.

[Leftette]

Why would you even consider NOT seeking professional advice? Their costs may be dwarfed by the hole you might have made with the taxman if you don't sort it out pronto.

[Neongreen]

Why would you even consider NOT seeking professional advice? Their costs may be dwarfed by the hole you might have made with the taxman if you don't sort it out pronto.

Of course, thank you. Not quite on the ball this weekend.

[Anthonyacat]

As Leftette says, 100% go see your accountant.

if possible though, can you provide their answer, here?

I've had this conversation with a number of parties, and there is an exception to the FBT rules for things called "flat owning companies", but I've never actually seen it in use.

Would be very interesting if your accountant suggested this.

[Harvey Specter]

Yes, not good. You need to get it transferred out of the company.

If you are an employee of the company, there are likely to be FBT issues. If you are not an employee and are a shareholder only, there will be income tax issues for you as you will be deemed to have received a dividend from the company, as the company is providing you with value (i.e. the rent free home). You may be able to avoid this by paying rent but then you will be in the ridiculous situation of paying tax (in the company) for living in your own home....on the other hand, if the rent is less than the expenses there may be tax avoidance issues as you are claiming deductions for what is effectively private benefit and creating a loss in the company.

Of course Spaceman may come along and congratulate you for such a ingenious structure

[spaceman]

^ LOLZ...At least I can read.

You should try sticking to the axiom that it's better to keep your mouth shut and be thought a fool than open it and remove all doubt.

Ready to tell us all what those secret tax rules are yet that favour property investors???

Cheers
Spaceman

[Neongreen]

Thanks Harvey - that's what my accountant said. Total cost was one title change which I managed to offset by negotiating a nice rate with the bank.

[spaceman]

^ I think your accountant is as deluded as Harvey (remember Harvey said that there are special tax rules that favour property investors despite the fact that the IRD disagree with him.....he knows what they are but he just doesn't want to share......LOLZ)

If as you have stated you were meeting all of the expenses .......I'm not trying to claim any expenses; I'm paying the mortgage out of my pocket, paying all expenses out of my pocket......exactly what Fringe Benefit did your accountant say you would be getting????

It's pretty obvious Harvey can't read as he said

as the company is providing you with value (i.e. the rent free home).

Which is in direct contradiction to what you told us, in that you were meeting all of the expenses.......so I would think you would want to pretty much ignore everything Harvey has to say.

Though I would be interested to hear his explanation on how I'm paying the mortgage out of my pocket, paying all expenses out of my pocket, = rent free ......I wait with bated breath

LOLZ....predicting a long wait.

Find a better accountant

Cheers
Spaceman

[Rosco]

Thanks Harvey - that's what my accountant said. Total cost was one title change which I managed to offset by negotiating a nice rate with the bank.

Hi Neongreen,

It's not just a simple title change. There should be a full sale from the Company to you.
- ie sale and purchase agreement, valuation to establish market value, settlement statement, possibly some kind of distribution from the Company to you or liquidation of the Company.

Also you would have to take out a new mortgage to buy the property.

It does not sound like you have done this transaction correctly, and there could be implications for tax in the Company.

Ross

[Rosco]

^ I think your accountant is as deluded as Harvey (remember Harvey said that there are special tax rules that favour property investors despite the fact that the IRD disagree with him.....he knows what they are but he just doesn't want to share......LOLZ)

If as you have stated you were meeting all of the expenses .......I'm not trying to claim any expenses; I'm paying the mortgage out of my pocket, paying all expenses out of my pocket......exactly what Fringe Benefit did your accountant say you would be getting????

It's pretty obvious Harvey can't read as he said


Which is in direct contradiction to what you told us, in that you were meeting all of the expenses.......so I would think you would want to pretty much ignore everything Harvey has to say.

Though I would be interested to hear his explanation on how I'm paying the mortgage out of my pocket, paying all expenses out of my pocket, = rent free ......I wait with bated breath

LOLZ....predicting a long wait.

Find a better accountant

Cheers
Spaceman

It's not great to have your personal house in the Company long term, but as spacemans says (I hate agreeing with Spaceman, especially publicly), if you are paying all the costs and not claiming any tax benefit, who is going to have an issue?

If you are doing this in a dodgy manner to create an artifical tax benefit, then yes IRD will have a big problem.

Ross

[Rosco]

Hi Neongreen,

It's not just a simple title change. There should be a full sale from the Company to you.
- ie sale and purchase agreement, valuation to establish market value, settlement statement, possibly some kind of distribution from the Company to you or liquidation of the Company.

Also you would have to take out a new mortgage to buy the property.

It does not sound like you have done this transaction correctly, and there could be implications for tax in the Company.

Ross

I missed the start of your thread. If this is really recent, then might have less issues, but still needs to be sold at fair market value.

So if you originally purchased at a big discount, then Company would need need to sell to you at a profit (likely to be capital profit but depends on your circumstances and intention). You would then owe the Company this gain, and the Company woudl have to charge you interest.
Or if the property has jumped in value since purchased, there could also be an issue.

Normally building depreciation recovery is an issue, but I presume you haven't claimed any building depreciation, as you would have purchased well after building depreciation stopped (1/4/11)

Ross

[spaceman]

^ I hate you too......

Cheers
Spaceman

[Neongreen]

Hi Rosco,
It was incredibly recent. As in, less than a month recent. My accountant said in this case he doubted the IRD would particularly have much of a problem due to the very short timeframe.

If as you have stated you were meeting all of the expenses .......I'm not trying to claim any expenses; I'm paying the mortgage out of my pocket, paying all expenses out of my pocket......exactly what Fringe Benefit did your accountant say you would be getting????

My understanding is that as a shareholder or director living in a property, this is deemed as a fringe benefit(or a 'deemed dividend') generally valued at market rent. Paying the mortgage expenses etc is great, but in a loss scenario, the IRD gets unhappy with this structure(tax avoidance), in a neutral scenario - why bother with all the book keeping? and in a positive scenario, tax needs to be paid. It's pretty much lose-lose.

[spaceman]

^
IMHO you need to be more clear on what a fringe benefit is.

Lets say market rent is $500/w and expenses are $600/w ...so at market rents the IP would be negatively geared.

1. If you pay $700 rent to the company are you getting a FB??
2. If you pay $600 rent to the company are you getting a FB??
3. If you pay $500 rent to the company are you getting a FB??
4. If you pay $400 rent to the company are you getting a FB??

The mere fact that a shareholder/director is living in a company property doesn't automatically mean there is a FB involved....IMHO opinion only in example 4 is there a FB.

This is supported by the CCH Master Tax Guide which says

The taxable benefit is the difference between the value of the benefit provided and the amount (if any) paid by the employee.....

Example:
Market value of accommodation $250/week
Less rent paid $100/week

Value added to wages and taxed $150/week

CCH NZ Master tax guide (2011) pg 164

Cheers
Spaceman

[Neongreen]

I feel I may lack your tax knowledge, this is purely my understanding of the matter when speaking to my accountant.

I believe the IRD only really accepts market rent being paid in this instance because of the 'related party' nature of the situation. Therefore I believe your presumption that you can simply choose which rent to pay is incorrect. It would be fine in terms of an employee, but since I stand to gain from the amount rent being paid only impartial market rent would be acceptable.

Therefore if we assume that each of your scenarios is market rent:

1. $100 profit pw($700 rent for $600), taxed as a fringe benefit(I'm paying $600 but am getting $700 worth of accommodation)
2. No benefit, just paperwork
3. $100 loss pw, IRD views as tax avoidance
4. $200 loss pw, IRD views as tax avoidance.

In every case, it seems silly to invite complications down the line. It's a fairly simple mistake to fix right now because it's just been done. Why not change?