• Login:
Welcome, Register Here
follow PropertyTalk on facebook follow PropertyTalk on twitter Newsletter follow PropertyTalk on LinkedIn follow PropertyTalk on facebook
Page 1 of 3 1 2 3 LastLast
Results 1 to 10 of 27
  1. #1
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,613

    Default Stupid Tax law - Be Very Careful With Nominations!

    STUPID TAX LAW - BE VERY CAREFUL WITH NOMINATIONS!


    Consider this: You buy a section off the plans for your personal home. You put your personal name or nominee on the agreement as you need to discuss with your advisors which entity to put the section under. You then nominate your Family Trust. Surely there can't be any tax issues? It's going to be your personal home too!

    Well, there could be unexpected tax consequences. If you are buying a residential property, and then nominating another entity, you need to consider the 2 year Bright-line test.

    We are finding this situation is coming up quite often and we think the rules around this are a joke!

    Bob signs a Sale and Purchase Agreement to buy a section for $200,000 in January 2016 to build his personal family home.

    In October 2016, Bob has now established a Family Trust. Bob nominates the Family Trust as the purchaser. The market has jumped in value and the section is worth $300,000 at this time (October 2016). Title is then available in January 2017, when Bob's Family Trust settles on the property.


    • IRD treat the nomination as a sale. So for the 2 year Bright-line Test - purchased January 2016 and sold October 2016, which is within two years.
    • You might be thinking 'No worries, there is personal home exemption'. WRONG. This is just a section, so isn't Bob's personal home yet, so NO EXEMPTION.
    • Or, 'Surely there is something in the rules to allow for related party transfers like this'. WRONG. There is no allowance in the Bright-line Test for related party transfers (this is an area where you have to be particularly careful!).


    SUGGESTIONS:

    If you are looking at purchasing a property, ideally put the correct purchaser on the Sale and Purchase Agreement to start with.

    If this isn't possible, then as soon as you are able to nominate the correct entity, get proof of the values (and keep this), and if there is no change in value, nominate the new party.

    If there has been an increase in value, then you might have to wait until you can transfer the property into the correct entity without being taxed by the Bright-line Test (either after two years or once personal home test satisfied - it is worth checking this timing with an expert!).

    See relevant excerpt below from IRD Tax Information Bulletin.

    Kind regards
    Ross Barnett







    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  2. #2
    Join Date
    Oct 2013
    Posts
    1,628

    Default

    This has got to be a joke. I mean, I can see how if they exempted it, people could use this as a way of selling property on without paying tax - but how can this be anything close to the 'parliamentary intention' argument they have been using to win all their cases?

    This one needs to be challenged. It's ridiculous.

    Care to share the TIB reference? Have been travelling home the last couple months and need to catch up.
    AAT Accounting Services - Property Specialist Accounting - AATAccounting.co.nz
    Lower fees for investors, traders & real estate agents!
    [email protected] for more information.

  3. #3

    Default

    Nice write up. Just to clarify - is this IRD's position or an educated opinion?

    Obviously buyer's agents and flippers need to be captured if they're onselling prior to settlement but family trusts are a different matter.

    Based on this interpretation someone living in the home who intends to buy a new house but keep the existing property and take advantage of tax benefits by moving the asset to a LTC may have the same issue?

  4. #4
    Join Date
    Apr 2005
    Posts
    2,719

    Default

    Well this whole thing is fascinating for a variety of reasons.
    So a quick backtrack with respect to the law.

    You need to be free to own things.
    You need to be a living person to own things.

    Non living entities like immiginary collections of people (companies) get given the right to own things under law, thus gaining some of the rights of a person.

    Non living things like trust's get given the right to own things.

    Trusts get subverted away from their original intention and used for tax advantages.

    A trust , seeming like a person in the eyes of the law, buys a property from an actual breathing living person, and has to pay tax.

    Seems ok to me, you want the rights of a person, you have the responsibility of a person.

    As a trust , you should be happy that you can live for thousands of years, while breathing real people are stuck with a century if lucky.

    As a trust, you have more of a vested interest in paying tax than a flesh and blood person, as tax pays for Government, and that upholds the other immiginary structures that you live within.
    I.e. Fleshies can go bush, you can't. (ha).


    No, I don't want to think about an Ai managed trust of the future.

    So, an odd take on it for a bit of perspective.
    Last edited by McDuck; 29-10-2016 at 10:53 AM.

  5. #5
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,613

    Default

    Is it IRD's position - the bottom part is from a Tax Information bulletin, so the nomination part being a slae is their position.

    Would they assess in this exact circumstance? Who knows. But as it is the law how it is currently written, and based on their position on nominations, you would think they would assess this as taxable income if they found it.

    Overall, is it worth the risk. Do you want to be the unlucky person who gets taxed on this, plus penalities and plus interest? The tax on the example in my blog is $33,000 if Bob is on a high income!

    If IRD taxed you , could you defend it. Probably not, as there is no related party rules in the Brightline test.

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  6. #6
    Join Date
    Sep 2004
    Location
    Hastings
    Posts
    14,917

    Default

    Quote Originally Posted by McDuck View Post
    Non living things like trusts get given the right to own things.
    Only sort-of. In the case of a property, it is the Trustees names which appear on the CoT - not the name of the Trust.

    A Trust is a 'legal obligation,' not a 'legal entity.'
    Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

  7. #7
    Join Date
    Apr 2005
    Posts
    2,719

    Default

    Quote Originally Posted by Perry View Post
    Only sort-of. In the case of a property, it is the Trustees names which appear on the CoT - not the name of the Trust.

    A Trust is a 'legal obligation,' not a 'legal entity.'
    That's a good point, its more like a caregiver, but can it still own property?
    If a trust ( not sure how many kinds there are ) can own property, then it is a person.

  8. #8
    Join Date
    Apr 2005
    Posts
    2,719

    Default

    (then it is a person, within the context of this argument)

    As I research the origins of trusts...hmm interesting.. Crusades...Courts of Chancery...split between legal and benifical ownership.. that's important.

    See, is there really a split between legal and benifical ownership, and without that, is it a legal trust?

    Ah, got it, Henry VIII , Statute of uses 1535.
    Still digging, and, Law of property act 1925.
    Last edited by McDuck; 29-10-2016 at 06:04 PM.

  9. #9
    Join Date
    Sep 2004
    Location
    Hastings
    Posts
    14,917

    Default

    Quote Originally Posted by Perry View Post
    Only sort-of. In the case of a property, it is the Trustees names which appear on the CoT - not the name of the Trust.

    A Trust is a 'legal obligation,' not a 'legal entity.'
    Quote Originally Posted by McDuck View Post
    That's a good point, its more like a caregiver, but can it still own property?
    If a trust ( not sure how many kinds there are ) can own property, then it is a person.
    I only know a little about NZ law. Ancient aspects like Knights Templar and so on might be of historical interest, but may not apply to today's world.

    As a Trust is not a legal entity, it cannot be the owner of a property, in NZ, in the sense that the expression ABC Trust could not appear as the (or an owner) on a CoT. However, if there was an entity called ABC Trust Ltd, which was wholly owned by ABC Trust, then ABC Trust Ltd could be on the CoT.
    Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

  10. #10
    Join Date
    Oct 2013
    Posts
    1,628

    Default

    Quote Originally Posted by Perry View Post
    However, if there was an entity called ABC Trust Ltd, which was wholly owned by ABC Trust, then ABC Trust Ltd could be on the CoT.
    Fascinatingly, or at least to me, such a company is apparently not allowed to own shares in listed entities! Well, at least to the letter of the Computershare documentation I've been provided. I'm sure in practice it's not enforced.


    But this all diverges hugely from what is the most stupid IRD briefing in quite some time. If challenged in court, this must be overturned. Just in the same way the IRD have used Parliamentary Intention to win cases (Alesco, etc) wherein the letter of the law was against them, they would have to lose this one. Not a chance the High or Appeals court would agree the govt wanted to tax people for their choice of ownership, prior to taking true ownership.
    AAT Accounting Services - Property Specialist Accounting - AATAccounting.co.nz
    Lower fees for investors, traders & real estate agents!
    [email protected] for more information.


 

Thread Information

Users Browsing this Thread

There are currently 1 users browsing this thread. (0 members and 1 guests)

Similar Threads

  1. Careful if borrowing over 60%
    By brokerman in forum Property Investment (NZ)
    Replies: 3
    Last Post: 06-10-2017, 01:24 PM
  2. Nominations and Brightline Test - update
    By Rosco in forum Finance, legal and tax (NZ)
    Replies: 2
    Last Post: 19-06-2017, 09:13 PM
  3. Be careful of Aura Apartments, Akld
    By Aura in forum Property Investment (NZ)
    Replies: 13
    Last Post: 05-03-2015, 10:41 PM
  4. Be careful when 'saving' money
    By cube in forum Property Investment (NZ)
    Replies: 9
    Last Post: 28-06-2014, 06:27 PM
  5. Replies: 7
    Last Post: 15-11-2010, 10:14 AM
  6. Be careful of accountants advice on LAQC/LTC changes!
    By Rosco in forum Finance, legal and tax (NZ)
    Replies: 2
    Last Post: 29-10-2010, 09:08 PM
  7. Careful what you wish for
    By PC in forum Forum Funnies
    Replies: 0
    Last Post: 10-12-2009, 08:46 AM
  8. Be Careful Where You Leave Your Cellphone
    By Perry in forum Forum Funnies
    Replies: 0
    Last Post: 22-11-2008, 06:40 PM
  9. Be very careful when using a building company!
    By SUB D VIDA in forum General (NZ)
    Replies: 20
    Last Post: 03-07-2008, 01:12 PM

Tags for this Thread

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •