Taxation and legal structures

[BlueSky]

Based on professional advise on how to restructure going forward based on the LTC making a profit. I have being given quite conflicting advise which is starting to cause doubt on weather Trust is worthwhile other than I am paying too much tax!
Consider this as an example.
80/20 split 33/30 % tax rates respectively. Both anticipating quitting workforce in 5/2 years respectively.
no mortgage on either personal homes and very little in LTC. but have revolving facility for me to borrow and buy more IP's
Two children aged 16 and 10.
Based on the above I can form a discretionary trust, which means the Trustees have the discretion to allocate the income to the beneficiaries as they see fit.
or have a normal trust in which to hold all 3 properties.
or simply hold them under LTC's but allocate appropriate shareholding for tax etc.

Is there any downsides to this?
I was also told there will be a depreciation claw back $4k which was contradicted by another saying there is ways around this?

Are trusts too complex and expensive in the long term?
Is around $4k to setup reasonable ?

Thanks

[Rosco]

Hi Bluesky,

Really hard to give full advice or information without knowing your full situation. If you have paid for full advice from someone, why not go back to them with the conflict and get them to explain.

I will comment on some of the points in general

1) Cost - We don't form Trusts so not trying to sell you anything. Normally around $2,000 + GST to set up Trust, then normally review wills, power of attorney, so maybe $2500 to $3,000?

2) Trust? what is the main reason you want a Trust? Normally for asset protection, therefore need to consider what your risk is?
- there are ongoing requires for administration, minutes and trustees. So might cost you $500 extra per year.
- if Trust owns properties or owns LTC's, then can distribute income to husband/wife or children once 16 and over. So a Trust would give you some good flexibility
- don't want to do things just for tax advantage as could be viewed as tax avoidance. But important to know what tax saving could be. For say 4 years for each child, so 8 years in total, you might allocate them $5k(don't want to allocate too much as trust owes them this). This would be taxed at 10.5% if 16 and over, so tax only $500 approx. per year, of $4,000 over 8 years/times doing this. If instead you gave to person who quits in 2 years, probably 30% for first 2 years, then 17.5%, so tax cost $8,250. So saves $4,250 in tax to allocate to kids. Hardly worthwhile if costs your $4k, just based on tax benefits.
Overall I'm struggling with what is the real benefit to you having a Trust. You really need to think how much extra protection it is giving you and how risky you really are. If you are a director of a finance company, then yes, risk is a huge problem, but for most people, they have very small risk. You could allocate your children more, but I'm guessing you will want the cash going to the two of you to fund your retirement, so not great to allocate children large amounts if they aren't getting it.

3) From your thread, I gather your properties are already in an LTC? If so, often can rearrange shareholding with no depreciation recovery (deemed sale provisions apply, but there are some good exemptions that might apply to you). So can often move shareholding to 50/50 or to a Trust.

4) Depreciation recovery - if you are actually selling to a non related party, then can sometimes reduce depreciation recovery by stating the building sale value in the contract. But still need to be realistic. So if building is worth $500k, can't sell it for $200k to eliminate any building depreciation recovery. From your post and you seem to have owned the rentals for a while, I'm guessing the buildings are worth way more than the closing book value, so full depreciation recovery would be payable on the building

5) Another option with LTC - could look at oldest child owning %, rather than using a Trust. I'm not normally big on this, as you would have to wonder about a commercial reason for this.


Hope this helps

Ross

[PC]

Buy another "capital gain" property.
Subsidise the lucky tenants carefree lifestyle with the profits from the other properties.
Do the trust shuffle when you retire and income for that year is low.

Provisional tax - yippee - we're making $ now - oh so terrible.

[speights boy]

Labour proposes new top tax rate

Higher earners will pay a tax rate of 36 percent on income over $150,000.

"We will also raise trustee income tax to 36 percent to avoid trusts being used as tax avoidance vehicles," says Mr Cunliffe.

www.3news.co.nz/Labour-proposes-new-top-tax-rate/tabid/1607/articleID/350128/Default.aspx

[speights boy]

Labour reaffirmed its policy to remove the ability of landlords to avoid paying tax by offsetting rental property losses against their personal income.

"This measure targets negatively geared rental properties and means that losses may only be offset against future rental profits. This is expected to raise NZ$135 million a year once it is fully in place," it said.

https://www.interest.co.nz/news/70627/labour-proposes-new-top-tax-rate-36-those-incomes-over-nz150000-and-lift-trust-tax-rate-3#comments

[Davo36]

Hmmm that last one will bite. Many landlords are cashflow positive, but with depreciation etc. go into negative i.e. make a paper loss.

Pretty academic though as Labour will never get in with that smiling arrogant twit leading them.

[Leftette]

Possibly, but it's only a matter of time. I've said all along that the ring-fencing of losses on holiday homes was just the beginning. It'll come.

[BlueSky]

Folks , with ring fencing now in place, is it still worth puting it in Trust for LTC income?
Selling shares to Trust will trigger Bright line for 5 more years.
Understand Reno needs a separate Co but buying a development property in the LTC would be better ?

[Nick G]

Do you have a property specialist accountant? My setup will be different to yours since we do different things. My understanding of ringfencing is it is limited to the portfolio so if you are CF neg on a hold you want it in an entity that has (or will have in the future) a profit. Beyond that I don't know as I don't have any CF neg properties.

Folks , with ring fencing now in place, is it still worth puting it in Trust for LTC income?
Selling shares to Trust will trigger Bright line for 5 more years.
Understand Reno needs a separate Co but buying a development property in the LTC would be better ?

[Anthonyacat]

Ringfencing has created virtually no disadvantages to trusts. Losses were already ringfenced in trusts.

If it was worth putting it in a Trust before, then yes, it's "still worth it."

Folks , with ring fencing now in place, is it still worth puting it in Trust for LTC income?
Selling shares to Trust will trigger Bright line for 5 more years.
Understand Reno needs a separate Co but buying a development property in the LTC would be better ?

[Rosco]

Selling shares to Trust will trigger Bright line for 5 more years.

Get some advice from a property expert on this, as this statement isn't correct.

There are ways a share transfer can create a taxable activity for property companies, but it is not as your describe.

Ross