A question on LAQCs from a new member

[SuperDad]

Hello fellow PT members. I have really enjoyed reading discussions on this forum over the last while, and thought it was time I jumped in.

I'm a new member, and I'm in process of researching prior to purchasing my first IP. Here is a little bit about me:

I'm looking to invest within the next two years (give or take). I'm looking to invest (buy and hold) either in Hamilton (my home town of 31 years, which I know quite well), or else in Rotorua (my playground , which seems to offer slightly better yields with roughly the same prospect for capital growth, or so it seems to me).

I have one question to kick off with, which is: Will I be able to claim the cost of setting up an LAQC for my first IP as an expense for that company for tax purposes at end of year? (Oh, and a corrolary: Are there annnual costs associated with maintaining a LAQC, and are these claimable as expenses for that company?)

Please excuse me if these questions have already been asked and answered - I have searched PT, but have not come accross this info.

I look forward to any help you can give me,

Paul.

[drelly]

Hi Paul and welcome...

From memory, I think that set up costs were claimable when I did it. And there are the usual costs of a set of accounts that are required each year.

cheers,
Dave.

[Dean@Massiveaction]

G'day Paul. I think I agree with Drelly, but some more qualified accountant PTer will reply I'm sure. I was going to say though that the cost of setting up and maintaining an LAQC is so minimal it doesn't matter one way or another. What an LAQC can save you in tax makes set up and maintenance costs a non event

[CJ]

The cost of setting up a company relates to the capital structure of the company and is therefore capital and not deductible for tax. If you do this yourself (it is quite easy on the companies office website), it will cost you about $60. If you get an accountant to do it, it would cost about $250 + exp is my guess.

It is free to claim LAQC status but if you get an accountant to do it, his costs will be dedutible for tax purposes.

Likewise annual costs such as accounts and tax returns are deductible (cost varies depending on complexity).

Have you thought about a trust structure. I am not saying it is better but there should be some good reading on this site aobut LAQC v Trusts, so you should at least consider it before you jump.

Gross yeilds will probably be higher in Rotorua but costs may be higher (as a percentage of purchase cost). Always try to facgtor in all costs when doing your analysis. There are threads around that discuss costs so just do a bit of searching.3

Finally - welcome to the PT.
(note: this should probably be in the Finance/tax forum, but we will let you off just this once since it was your first go

[SuperDad]

Thanks everyone for your replies. I'll have to check whether the set-up costs count as capital costs, as CJ suggests.

CJ - I have thought a bit about the trust vs LAQC question, and a LAQC seems the better way for my situation, but I will do more research before committing one way or the other. In fact, I've got a lot of research to do before I'm in a position to purchase my first IP - thankfully the forum is very helpful in that respect.

[xris]

Hello Superdad,

Have you similarly thought about buying it in your own name?

xris

[Dean@Massiveaction]

Superdad. Just for the record NEVER EVER EVER buy investment property in your own name. Limited tax benefits, zero asset protection. Itis the worst vehicle for IP ownership.

[SuperDad]

Hi Xris and Pooomba,

I have thought about purchasing IP in my own name, but only because I have thought about all the kinds of ownership structure. I would not buy it in my own name for the reason that I don't have any income whatsoever (I'm a stay-at-home dad, and my wife works fulltime). The idea of buying the IP in a LAQC would be to claw back some of the 39% tax my wife is paying. (Maximising this tax benefit would involve my wife being the sole, or at least major, shareholder in the LAQC, but we can live with that.)

The other reason I would not purchase the IP in my own name is that I want to distance myself from assets such as property. I have a six figure student loan, which I currently pay nothing towards due to no income. (I am a very highly qualified house husband!) Were a future government to change certain rules, and come after assets to retire outstanding student loans, then I would be in trouble. Call me paranoid, but it might happen. (In fact, call me anything you want - I know some people will take a dim view of my structuring my affairs so as to avoid repaying the loan, but it makes good financial sense.)

Paul.

[BusyLizzy]

Note: this should probably be in the Finance/tax forum, but we will let you off just this once since it was your first go

I moved it for you SuperDad - no worries. Welcome to the forum!

[SuperDad]

Thanks Lisa. I'll be careful in future to post in the right forum.

[simoncoles]

Superdad, Its great that you have researched before purchasing.

I do have an LAQC now but had purchased an IP under my own name and am now much the wiser thanks to this great site.

The companies office site is incredibly easy to use and setup your own company. I would do this rather than getting an accountant to set one up.

From memory you'll need to apply to IRD as well for the Loss attributing part once the co. is setup.

Simon

[xris]

Hello SuperDad,

Thanks for your further information.

Following is a little bit of devil’s advocate, but not entirely so.

I do believe that sometimes, especially in a forum like this, crowd mentality can take over and an LAQC and/or trust structure is seen as the only possible route to take and that to do otherwise is pure folly. Well, is it? There will be plenty of people reading this who have amassed a healthy property portfolio with everything in personal ownership. They may well say that they have no need for a trust or LAQC. Each to his own. What suits one person won’t suit another: individual circumstances vary enormously. I believe we sometimes need to stand back and say: “Whoaa (I like this latest in-word), let’s just take a deep breath and take a fresh look at our position before we go jumping off the cliff.”

Back to your situation. Regarding the tax benefits, why not simply put the property into your wife’s name? You would probably get more tax back because she, presumably, owns 100% of herself and not 99% of an LAQC. On the other hand, she may receive more tax back because of the additional deductible LAQC running costs. But do you want to spend $3 to get $1 back?

Your other objection is an interesting one. This and that may well happen tomorrow, next year or in 2030, but then again this and that may not happen either. In my opinion double guessing the future is a risky business.

If you set up a structure now before you have even started, there is a good chance that your ideas, aspirations and circumstances will change (probably quite quickly) as soon as you start getting into it. It may be that you will then find that a different structure is better suited to you. It may be easier and cheaper to set up this ‘better’ structure from a position of owning in your own names rather than untangling a more complicated company/trust structure.

Simon, I would caution against telling people to set up and run their own LAQC. Yes, it is easy to set up, and that may be a disadvantage as well as an advantage. Many people will jump in head first and set one up without any real understanding of tax/accounting/legal requirements. Only later, perhaps at audit time, will they realise their error of over-confidence. Of course, many people will know how to run a company, but many more will not. My advice to those people would be to save yourself a lot of money and get an accountant to deal with it right from the start.

xris

[krispedersen]

Or a trust maybe

Hi Superdad,

Depending on your wife's employment position (self employed or PAYE) you may want to look at a trust instead. I went to the North Shore Property Investors monthly meeting on Wednesday where Garth Melville was speaking. He made a pretty compelling arguement about trusts over LAQC's. You may want to give him a bell. His business is Company Solutions.

I'm personally catching up with him next week and will be taking steps to get rid of my LAQC

Cheers

[SuperDad]

Thanks Simon, xris and kris.

Kris - my wife is PAYE - does that tell in favour of or against a LAQC? (I'll contact Garth if it turns out that I can't get a clear answer on this forum.)

Xris (you devil's advocate you ). You wrote:

Regarding the tax benefits, why not simply put the property into your wife’s name? You would probably get more tax back because she, presumably, owns 100% of herself and not 99% of an LAQC. On the other hand, she may receive more tax back because of the additional deductible LAQC running costs. But do you want to spend $3 to get $1 back?

If the property is in my wife's name as opposed to a LAQC, what tax benefits would she enjoy? Your comment suggests that exactly the same losses could be offset against her income as if the property were owned by a LAQC. I thought this wasn't the case.

You also wrote:

In my opinion double guessing the future is a risky business.

Well, sometimes it is and sometimes it isn't. I'm a big fan of insurance, which I don't see as being a risky case of double guessing the future. I pay my monthly premiums on the offchance that, somewhere in the future, an insured event may occur (e.g., fire, death). Of course, I hope that event doesn't occur, but for a small cost now I (or my family) stand to benefit greatly in the future should the worst happen.

Simon - how have you found your LAQC, in light of xris's cautionary comments?

Thanks everyone.

[krispedersen]

Hi Superdad,

In favour of, however at the expense of asset protection. One of the big selling points of LAQC's is that you can access losses which you can't do in trusts unless you have something generating cashflow coming into a trust/s which counteracts this meaning you can reduce your tax bill and achieve the tax efficiency.

I was always under the impression that you have an LAQC, recieve your tax losses and then sell the LAQC shares into your trust once the property/ies are positive cashfllow for asset protection. This is correct however I wan't aware that the properties needed to be formally valued and the equity gifted across meaning that if you had a few houses back in 2002 and sold the shares you would have a large amount of your equity exposed

Everyones views are different, however for me long term asset protection is paramount so i'll be getting rid of the ole LAQC. I've negociated with my director for me to contract meaning that I can achieve both the tax efficiency and protection that i'm after

Cheers