Lets talk about entity structures

[Volatile]

I searched and could not find the answer to my specific question.

I'm looking at undertaking a combination of Buy and Hold and property renovating for trade. Do I need two separate entities (ie an LAQC and a Trust) or can i undertake both activities through an LAQC. Why or Why not?

[EDIT : I have removed comment regarding tainting until i have researched it further.]

This question should be directed at an expert I know, but I wish to discuss it openly a little.


Cheers

[xris]

James,

Not sure I undersatnd the question.

If you don't care about tainting of paying tax then why not just do everything in one entity, whatever that might be, even in your own name - it's a lot easier.

xris

[Josko]

James,

You can not talk about combining a B&H strategy with the Trading strategy without realising the implications of "tainting". You may not be interested in the discussion of tainting in this thread however the issue of tainting determines the best structure.

Your question is covered previously and extensively in many previous threads, just do a search on "structures" or "trading structures".

The simple answer to your question and now a common practice is set up a "Trading Trust" with your B&H being in either an LAQC, or B&H Trust or a combination of the two.

Finally you should get specialist advice on pursuing such a strategy.

Cheers,

[Dean@Massiveaction]

Hi Volatile. The forum has truckloads of stuff about entities but the answer to your question is you need a buy and hold entity and a trading entity.
Any competent accountant/structure person can explain why.
Your statement re tainting indicates you may not understand the significance of it. The fact that you think you will never sell a buy and hold is a bit naive but more importantly if YOU get tainted then your entire family also gets tainted. So are you sure that none of your immediate family will never ever sell a property they purchased as a buy and hold or even their own home? Unless you can answer "Yes I am certain that no one in my family will ever sell a property they own" then you need 2 entities.

[FreezingHot]

Hi James

I have an LAQC set up but these are generally done to offset any losses you may have with the property such as renovations, maintenance, interest charges. I have also set up a trading trust for the obvious but you do not have to go to the expense of doing this but it has been advised from specialists that this be set up, especially if it is going to become a frequent activity.

So in short (and I am no expert, YET) it has been advised
that you should keep the entities separate, that way it is easy for the IRD to see what your intensions are as far as buy & hold or trade. I am no expert but this is the way I see it from the expert advice I have been given.

Hope this helps.

FH.

[Volatile]

First thanks for the replies people, I do see how it would be beneficial to keep the two strategies seperate and make sure intentions for each property are duely stated/provable.

Sorry my question was not entirely logical.

I will do more searching

[Volatile]

on a side note, does anyone use a LAQC for trading instead of a trust?

[cube]

The reason that Trusts have the potential to protect you from tainting is that they put some (paper) space between the entity doing the trading and the entity doing the B&H.

Because 'related persons' rules apply to anyone holding a significant interest in the two entities, having two LAQCs with you as 50% or 100% shareholder would not put enough space between the two entities.

Having said that, some people have done their first trade/reno inside their B&H structure, just to see if they have a liking for it. If they do, then they can set up the more protective structures. If not, its hard (but not impossible) for the IRD to taint based on a single transaction - remembering that intention at time of purchase is the important thing to have documented.

cube

[Volatile]

The reason that Trusts have the potential to protect you from tainting is that they put some (paper) space between the entity doing the trading and the entity doing the B&H.

Because 'related persons' rules apply to anyone holding a significant interest in the two entities, having two LAQCs with you as 50% or 100% shareholder would not put enough space between the two entities.

Having said that, some people have done their first trade/reno inside their B&H structure, just to see if they have a liking for it. If they do, then they can set up the more protective structures. If not, its hard (but not impossible) for the IRD to taint based on a single transaction - remembering that intention at time of purchase is the important thing to have documented.

cube

This is the part im strugglying with, wouldn't the courts just see through the "sham" and see that you really control the trust and the LAQC?

Sounds like alot of shuffling papers to me.

From my basic reading of the income tax act, it seems thats if you can prove what your intention was then you don't have a problem.

[FreezingHot]

I think that is pretty much it.

Circumstances in life change, why should property be any different.

FH

[cube]

The problem is 'prove'.

You could set up a paper trail that 'proves' that your intention was to B&H the properties, but due to a 'change in circumstances', you had to sell. 12 times in 12 months. Honest!

The IRD is able to use patterns of behaviour as well as the paper trail when determining whether or not you are a trader, but only by looking at entities associated with the B&H entity (assuming that it is the B&H entity that they are looking at).

Due to some obscure, and as far as I know, UNTESTED, quirks of the law, the BELIEF is that by having a suitably structured Trust that carries out the trading, you MAY be able to protect yourself.

There are no hard-and-fast rules (which is one of the reasons why it seems to cost several arms and several legs to get set up, but the cost is small compared to the potential benefits of being a successful trader).

cube

[FreezingHot]

Right with u there on that one cube.

Well stated.

New there was a reason for setting up that trust.

FH

[Dean@Massiveaction]

Not wanting to state the obvious but one can explore numerous ways to try and protect oneself and do things differently, but why bother? Why not simply do what is the best, easiest and safest mechanism that the specialists recommend and have 2 entities. Clearly document your intentions in the minute books of those entities and then you can sleep at night. If circumstances change there is no problem. There are no horror stories of people being prosecuted or penalised for doing trading in a correctly set up trading trust, or people getting prosecuted for selling buy and holds out of buy and hold entities for legitimate reasons. So why bother with all the "is there a way around teh system stuff?" If it is to save a couple of grand on structures then forget property investing. Find something that doesn't affect ones scarcity mentality.

[Volatile]

Not wanting to state the obvious but one can explore numerous ways to try and protect oneself and do things differently, but why bother? Why not simply do what is the best, easiest and safest mechanism that the specialists recommend and have 2 entities. Clearly document your intentions in the minute books of those entities and then you can sleep at night. If circumstances change there is no problem. There are no horror stories of people being prosecuted or penalised for doing trading in a correctly set up trading trust, or people getting prosecuted for selling buy and holds out of buy and hold entities for legitimate reasons. So why bother with all the "is there a way around teh system stuff?" If it is to save a couple of grand on structures then forget property investing. Find something that doesn't affect ones scarcity mentality.

I completely agree, but its not a question of getting around the system, because that is what you achieve apparently by setting up a trust.

I'm more interested in whether this is "really" the case, before wasting money on a structure that when the corporate veil is lifted by the courts/ird turns to custard.

If a trading trust does provide adequate protection i am more than happy to pay, but i do no belieave in wastage.

I have contacted a professional advisor, for some expert advice.

[NZGEMS]

Hi James,

I feel if you are waiting to see if the courts/ird are going to change the rules you could use some very valuable investing time up and be worse off, personally I am a fan of trusts. And I also dont over analyze what could happen I just make a decision on what is happening on the day or what is passed into law, I dont worry about what might or might not happen as it might not happen.

I guess it depends on how quickly you want to excelerate your investing, i feel time is going so fast anyway we dont want to waste any more time than we possibly can.

If the rules get changed it will affect lots of people but it is just a fact of life, when we get to where we think we are going someone moves the goal posts so we just have to make the most of what we are doing and find a way around what ever you come against. (happens all the time)

If you beleive there is always a way you will find it.

good luck with your structures