Sole Trader vs Company

[spaceman]

It appears to me that there is a bit of a anomaly in the way the IRD treats the cost of finding an investment property.

Perhaps I'm barking up the wrong tree but I would like to hear peoples thoughts.

1. In theory it shouldn't make a difference tax wise wiether you form a company or operate as a sole trader .....
correct?

2. Costs involved buying a property can't be expensed as a sole trader ..... ie if you do say 10 property reports on diferent properties before purchasing only one. You can't "ëxpense" the cost of the reports, instead you have to capitalise them.

Whereas if you have a company set up you could claim that those kind of costs ( involved in the purchase of property) were an inherent part of the business of the company and thereby be able to "expense" the costs (this means being able to claim the tax write-off in full imeadiately ..... rather than having to capitalise the cost and obtain the tax write-off via depreciation).

Or do you have to capitalise the cost in both cases... company and sole trader???

Cheers
Spaceman

[Dean@Massiveaction]

More important question is why would anyone do property in their own name. Limited tax benefits and no protection. Never ever ever do property in your own name. There is not one single benefit!!

[Rhys]

No Choice

hi,

I dont want to hyjack this thread, but I have propety in my own name because the solicitor said there was absolutly no other option.

I've lived in the UK for last 4 years and am a non tax resident. I came back in december 2004 to put structures in place but was told I could not be a setlor or trustee of any trust as a non tax resident because it would make the trust "Non Qualifying".

Also I was told I could not be a director of a company (laqc or otherwise)

this left the only option as buy in own name.
was he talking bollocks?

rather than divert this thread feel free to PM me.
cheers
R

[CJ]

Whereas if you have a company set up you could claim that those kind of costs ( involved in the purchase of property) were an inherent part of the business of the company and thereby be able to "expense" the costs

Dont thing so. you are purchasing a capital asset so the expense should be capital. If you are a trade (business of buying and selling) then it will be a revenue cost.

This raises potential black hole costs as if you dont purchase the asset, you have nothing to capitalise the asset to.

How are those who buy lots of long term hold coping with this? Can you expense?

[CJ]

was told I could not be a setlor or trustee of any trust as a non tax resident because it would make the trust "Non Qualifying".

Correct. Different rules for non qualifying trusts that can be unfavourable - 45% tax. Can also work out tax free if no settlor, beneficiary, trustee will ever be resident in NZ - NZ was the best tax haven in the work for a while before disclosure rules were bought in.

Also I was told I could not be a director of a company (laqc or otherwise). this left the only option as buy in own name.

Having you as the director would result in it being a company resident in the UK. If you owned 100%, it would also require audited financial stmts adding to the cost.

[Dean@Massiveaction]

There are ways around it Rhys but quite complex structures. Very expensive to maintain so only worth doing if you're talking serious money invested here.

[spaceman]

How dare you hijack my thread!!!!

Hi Rhys

I fled NZ in August 2000 and am also a non-resident for tax purposes.

Consequently I have some fingers in each pie in that I have some properties in my own name, have two companies (one owned buy 3 non-residents equally and the other 50/50 myself and a nz tax resident) as well as a trust.

There are advantages and disadvantages to each (no matter what poomba says :-) )

I have set up both of the companies and the trust while being a non-resident and haven't had any problem in doing so ... although as i said before there are advantages and disadvantages applying to each.

I use GYW as lawyers http://www.gywlaw.co.nz/
and Whithers Tsang http://www.wt.co.nz/ as accountants.

Also ( another stab at poomba here :-) ) I haven't found it complex or very expensive (but remeber we are talking lawyers and accountants here) ... as for serious money .. i think mine is serious but it's probably small change to some.

If you have any specific questions ask away and I'll do my best to help.

CJ

This black hole you are refering is my point exactly. In my specific case, I came back to NZ intended to purchase a property ( arranged cash etc etc) and then ended up not buying. So I'm down a few bucks ... now then I can capitalise this money onto the next purchase (whenever that maybe) as long as there is one.

I would argue in the company situation that prospecting for new purchases would be part of the reasonable day to day expenses of having a company involved in porperty investment .... and thus you "should" be able to expense these costs rather than capitlise them on to future purchases.

I would love to hear from somebody who has an answer for this one from first hand knowledge.

Cheers
Spaceman

[Rhys]

Thx Spaceman,

Does your company have to provide the audited financial statements?. (Which as soon as CJ said it I remembered was the reason for deciding I couldn't be a director rather than any legal reason)

What taxe rate do you wind up paying via the company(s)?

your trust is non qualifying so although you get the asset protection it does come at the daylight robbery tax rate cost of 45%. Can you highlight some of the other advantages/disadvantages. My solicitor didn't seem to have many advantages.

- I considered sending this in a PM but then thought others may now want to follow this thread within a thread! so hopefully we're all clever enough to see spaceman's original expense question and my property in own name discussion as totally non related.

R

[CJ]

I would argue in the company situation that prospecting for new purchases would be part of the reasonable day to day expenses of having a company involved in porperty investment .... and thus you "should" be able to expense these costs rather than capitlise them on to future purchases.

I still think it is a capital cost, not an expense if you are buying for buy and hold. If a company buys a machine (the money making asset just as a house is), you have to capitalise all interest incurred till it is up and running, capitalise the costs of the trial run, capital transport and installation costs. Once you have decide to purchase an asset, it is all capital. Though thinking about it, feasibility studies , before you decide to commit are expendable.

OK - I have confused myself. Anyone got an accoutants opinion on this one.

[spaceman]

Rhys I'll get back to you in a couple of days

I'm leaving NZ and heading back to Italy. I'll post a proper answer once i get over the jet-lag

Cheers
Spaceman

[spaceman]

Not quite over the jet-lag yet ....but here goes

Q.....Does your company have to provide the audited financial statements?. (Which as soon as CJ said it I remembered was the reason for deciding I couldn't be a director rather than any legal reason)

A.....The company that is run by three non-residents is supposed to be audited this each year...the company has been running for a little more than 3 years and the 04/05 tax year is the first time that we have been forced to do the audit .... it remains to be seen what happens in the following years ... ie: will it now be every year or once every three years?
The company that is run by myself and a resident tax payer has been running for about 2 1/2 years and hasn't had to be audited yet and I've been told that it is unlikely to ever need to be audited.

Q ....What taxe rate do you wind up paying via the company(s)?

A....None yet .... through carefull planning both are making a cashflow profit but are posting a tax loss ....it remains to be seen what will happen further down the track.

Q.....your trust is non qualifying so although you get the asset protection it does come at the daylight robbery tax rate cost of 45%. Can you highlight some of the other advantages/disadvantages. My solicitor didn't seem to have many advantages.

Asset protection is a biggy here for me and my wife. We are prepared to except a fair chunk of risk (before Italy I was working in Bosnia, Afghanistan, Iraq and the Ivory Coast) .... but we have decided to separate of a chunk for our kids in case it all goes pear-shaped (1 18 month old daughter so far ...more to follow we hope :-) )
Again at the moment the trust pays no tax .... but it remains to be seen what the future holds.

Another reason for starting the trust was that I read a couple of books by Ross Holmes (NZ trust Lawyer) and a lot of stuff he said made a lot of sense. One real advantage that stood out for us was to be able to have a chance to gift all of our assets in one lump sum tax free without having to go through the normal gifting procedure of $27,000 per year .... this basically involves gifting all our assets to the trust before we become nz residents again ....there are a few other
advantages but those are the two biggies for us ... the rest were just the average run of the mill reasons for having a trust

Hope this helps ....if you have more questions feel free ...... good luck

Cheers
Spaceman.

PS.....Dam you for hijacking my thread as nobody has answered my queries

[CJ]

Spaceman - I still beleive the costs are capital as you are buying a capital asset (unless you are trading).

I think you can change a non qualifying trust to a qualifying trust when you enter NZ for the first time (within a year). Best to get advice when you enter the first time after setting up.

I was sure the audit of a companys accounts was if non resident shareholders owned more than 25%.

Decided to go to the legislation so:

196. Appointment of auditors ...
(3) Nothing in subsection (2) of this section applies to a company—
(a) That is a subsidiary of a company or body corporate incorporated outside New Zealand; or
(b) In which shares that in aggregate carry the right to exercise or control the exercise of 25 percent or more of the voting power at a meeting of the company are held by—
(i) A subsidiary of a company or body corporate incorporated outside New Zealand:
(ii) A company or body corporate incorporated outside New Zealand:
(iii) A person not ordinarily resident in New Zealand; or
(c) That is an issuer within the meaning of section 4 of the Financial Reporting Act 1993.

I now remember looking at this before. The "not ordinarily resident" uses a different test to tax residence and is more akin to domicle. I trust you accounting is aware of these rules more than I am and the advice he provided is correct.

[roseneath_rat]

Spaceman I think most of these queries are best directed to an NZ accountant specialised in both international tax law & property investment. Not easy to find, and if you can get one outside the major corporates please let me know.

[masteraccountants]

Hi,

Interest has always been on revenue account in New Zealand. In Australia it took the Steele's case in the High Court to decide that interest is always on revenue account. In other words, interest is always treated as an expense and does not need to be capitalized.

Of course, mining companies that were setting up a new mine may choose to capitalize their interest during the setup phase - so as not to show a loss.

As long as a Trust or Company is in the business of investing in property, it is accepted that searching for properties is an expense of the business of the Trust or Company. There is a different treatment for sole traders, where the searching for properties is treated as part of the cost of acquiring the property.

On the issue of Trusts for non-residents, there are easy answers. The accountant or lawyer who is a NZ resident can consent to be the Settlor of the Trust. In this way the Trust will always be a qualifying trust. NZ Trust Law is different from other jurisdictions, as the resident of the Trust depends on that of the Settlor rather than the Trustees.

If the country in which you reside determines that personal trustees who are residents in their country makes the Trust also a resident Trust in their country, then setting up a trustee company in NZ can solve that.

Mind you, the NZ resident accountant or lawyer can consent to be the majority shareholder (76%+), thereby avoiding the need for the Accounts to be audited. It may be necessary to add the accountant's or lawyer's trustee company as a co-trustee, to support the contention that the Trust is administered or controlled in New Zealand.

This is not too complex and not too costly. Yet it saves a few problems.

The lawyer that advised Rhys he could not set up a Trust in NZ to be a qualifying trust was not thinking outside the box, as they say. What's new?

I hope this gives you more options than what you were thinking of.

[Rhys]

Hi Masteraccountants,

Thanks for that, I can stop fealling guilty for hijacking spaceman's thread.

It would also appear you've just picked up a new client, i'll be in touch soon

cheers
R