Tax matters on commercial property ownership.

[PT88]

We are buying a small commercial property which will be leased out. We do own other residential properties for which I am doing our own IR3R and IR3 returns as I do have some the knowledge of the how once I understand the what needs to be done. The rent is just not that much that we want dilute the returns with more expenses as we are retired. I am struggling to understand to find information on IRD website on commercial property tax returns for individuals(not a company). The returns on this commercial property is tiny $15,000 plus GST per year. I understand the GST side of tax eg need to be GST registered, collect the GST and then opt for how we will pay the GST to IRD. The questions I have is related to how we treat the rent from this commercial property on our personal tax return IR3

1) Do we fill the IR3R forms for the commercial property as we would with a residential property?
2) If not, what forms do we fill?
3) any links to share on tax matters for individual ownership of commercial property
4) any accountants that would provide consulting/advisory to help me learn the what needs to be done instead of doing it for me. eg teach me how to fish. I understand of course there will be a cost associated.

Thanks in advance

[Anthonyacat]

Hi PT88

To start with, for a rental at $15k + GST you don't actually need to be GST registered. I would still usually recommend you do, but it's not actually required as total income is under $60k. It's really important to consider though, because since you're owning in your own names along with other items, being in the GST net may affect other stuff, and get complicated.

I really would usually recommend people hold commercial property in a different entity to their other activities. But if you're adamant on holding in your own name, I'll just go ahead and answer your questions directly.

1) Yes, IR3R can be used for commercial property. For rents and expenses, you fill it in using the GST-exclusive figures (because you've claimed/returned the GST to IRD)
2) Alternative to an IR3R for each individual property, you could fill in an IR10 for the entire portfolio. This is my preference for most of my clients.
3) Commercial property taxes are basically exactly the same as residential, just with the added element of GST. There is a recent difference in that residential losses are ringfenced, while commercial ones aren't.
4) I'm happy to answer any specific questions you have, but am not interested in providing a blanket guide, shoot me an email [email protected]. I'll let you know if there's any charge involved prior to undertaking any work, but I enjoy discussing this sort of thing and don't like fiddling around with tiny invoices so don't expect there'd be any cost unless you're asking a lot!

[PT88]

Hi , Anthony. Thanks for the response. It is very much appreciated.We will have to register for gst as the business we rent to pays us gst and is a large corporate that is gst registered. We will also want the zero rated gst purchase. Very keen to understand what you mean by “being in the gst net may affect other stuff”. We are small time rental owners in it for the cash flow more so then the capital gains which is a bonus. I will contact you once I know if this purchase is close to materialising.

[Anthonyacat]

Hi , Anthony. Thanks for the response. It is very much appreciated.We will have to register for gst as the business we rent to pays us gst and is a large corporate that is gst registered. We will also want the zero rated gst purchase. Very keen to understand what you mean by “being in the gst net may affect other stuff”. We are small time rental owners in it for the cash flow more so then the capital gains which is a bonus. I will contact you once I know if this purchase is close to materialising.

Sorry for slow reply, the forum only just notified me of your post.

By other stuff I mean like if you have a residential property with a carpark, and decide to rent the carpark separately, and/or try short term AirBnB activity. This is then no longer an exempt residential activity. For a non registered entity theres no GST because under the threshold, but for a registered entity there are then complications.

[Rosco]

Hi PT88,

I would suggest you get some full advice.

Generally you would try to separate the commercial property from your residential rentals, and from yourself.

You have lots of issues with your structure, and I will give a few examples of possible issues below

Example -
You own a holiday home, residential rentals and personal home, in your personal name

You then buy your commercial property in your personal name and GST register

Example of issue 1:
You renovate a property and manage the renovation yourself. As part of the renovation is a new driveway.

There is a health and safety issue with the driveway, a member of the public falls of their mobility scooter and dies while passing by it.

You are found to be at fault and haven't managed the driveway risks correctly, and you are fined $1 million.

As rentals in your personal home, you are personally sued. You lose the holiday home, rentals and new commercial building.


Example of an issue 2 -

The holiday home cost you $500,000 (which you purchased from your parents) and is now worth $1 million.

You need some extra cash, so start renting the Holiday home out on Airbnb
- You have to pay GST on rent, as you are GST registered :-(

Then you decide to sell the rental. GST on sale $130k approx.

You then try to claim GST - But it only cost you $500k. BUT wait, you purchased from related party, so actually $0 GST refund.

You just lost $130k in GST


Example of issue 3 -

You start renting your personal house out on AirBNB

Again, have to pay GST on rent

Then you sell the property !!! As above what is the GST issues!


Example of issue 4:

The rentals are owned in both your names, in a 50/50 partnership.

You earn $100k and pay 33% tax

Your partner earns $0

Your rentals make $30k net profit per year.

Current tax
- 15k at 33% = $5,000 approx
- Partner , 14k at 10%, plus 1k at 17.5% = $1,645 tax
Total tax $6,645 approx

If better structure
- maybe 2 kids, so $2,000 tax free
- Rest to partner
total tax $3,920

Save $2,745 in tax per year.


A step further
Your children are 16 and 18.
Probably can get tax down to $3,150, ie 10.5% overall.

So could be very worthwhile spending a little on advice now to save thousands later. There are many other issues that could exist and could also be a lot of expenses you are claiming incorrectly, or expenses you are missing.

Ross

[JBM]

Very interesting ross love your work ...actually thinking about structural changes at present don't know if i have many options to get what I'm
after>>>

Currently got a trading company than I use to trades shares ASX/NZX , property and owns a small vending business with debt .... works fine

And a family trust that holds the debt free family home and a commercial property with some debt reg for GST....

Now the issue I have is around the family trust as one of the trustees is my lawyer so everytime i look to refinance (i.e change bank or just roll-over refixing) the bank demands signature from all trustees which then involves the lawyer which loves to clip the ticket $450-600++

thinking now I should have just set-up another company structure with my family as Shareholders tried to tax minimization that way like you can with trusts without the need to involve the lawyer as much ??

Or maybe I should just change my lawyer and trustee ?

[Rosco]

Best to get some expert advice from a specialist for your circumstances, and your future plans. I don't like the commercial property and GST, in with your family trust.

Ross

[Beano]

Best to get some expert advice from a specialist for your circumstances, and your future plans. I don't like the commercial property and GST, in with your family trust.

Ross

Why do you not like commercial property owned by a family trust either directly or through a company (holding the property with the trust being the shareholder) ?

[Beano]

Hi PT88,

I would suggest you get some full advice.

Generally you would try to separate the commercial property from your residential rentals, and from yourself.

You have lots of issues with your structure, and I will give a few examples of possible issues below

Example -
You own a holiday home, residential rentals and personal home, in your personal name

You then buy your commercial property in your personal name and GST register

Example of issue 1:
You renovate a property and manage the renovation yourself. As part of the renovation is a new driveway.

There is a health and safety issue with the driveway, a member of the public falls of their mobility scooter and dies while passing by it.

You are found to be at fault and haven't managed the driveway risks correctly, and you are fined $1 million.

As rentals in your personal home, you are personally sued. You lose the holiday home, rentals and new commercial building.


Example of an issue 2 -

The holiday home cost you $500,000 (which you purchased from your parents) and is now worth $1 million.

You need some extra cash, so start renting the Holiday home out on Airbnb
- You have to pay GST on rent, as you are GST registered :-(

Then you decide to sell the rental. GST on sale $130k approx.

You then try to claim GST - But it only cost you $500k. BUT wait, you purchased from related party, so actually $0 GST refund.

You just lost $130k in GST


Example of issue 3 -

You start renting your personal house out on AirBNB

Again, have to pay GST on rent

Then you sell the property !!! As above what is the GST issues!


Example of issue 4:

The rentals are owned in both your names, in a 50/50 partnership.

You earn $100k and pay 33% tax

Your partner earns $0

Your rentals make $30k net profit per year.

Current tax
- 15k at 33% = $5,000 approx
- Partner , 14k at 10%, plus 1k at 17.5% = $1,645 tax
Total tax $6,645 approx

If better structure
- maybe 2 kids, so $2,000 tax free
- Rest to partner
total tax $3,920

Save $2,745 in tax per year.


A step further
Your children are 16 and 18.
Probably can get tax down to $3,150, ie 10.5% overall.

So could be very worthwhile spending a little on advice now to save thousands later. There are many other issues that could exist and could also be a lot of expenses you are claiming incorrectly, or expenses you are missing.

Ross

Is the problem
1: commercial should be in a separate entity preferably ltd company ?
2 & 3: making a exempt (for gst) entity a gst entity ?
4: a trust ownership of a company that can choose to distribute income to the best advantage ?

[JBM]

Best to get some expert advice from a specialist for your circumstances, and your future plans. I don't like the commercial property and GST, in with your family trust.

Ross

Yes like you say if we ever airbnb are own house we would be liable for GST I understand that ..

Reason of course to have commercial property in trust is tax distribution to wife’s 17.5% min tax on income etc rather than my 33% .. and once are two kids are older to lower further (goal was to purchase more commercial properties going forward)

In talking with bank manager sounds like we wouldn’t have needed to get lawyers trustee signature had we just sorted Loan out on first notice months pre fixed loan coming due ..

But here is the crux as I was working with another bank with a very good offer I got a sharper rate this in turn helped get the same rate + cash incentive to stay with current bank..(but now must stay with current back for min 3yrs or pay back cash)

In hindsight should have just refixed well before fixed date expiry waited a year till old cash incentive contract ran out ...

Of course it didn’t help my business banker was away on holiday for weeks right when I wanted to sort weeks ago ...

Still think I might well need to change lawyers in turn changing trustee company which I’m sure will cost a mint