Calling wolf!

[xris]

You must get your structure right before you start!

Buying in your own name is a catastrophic mistake: never do it!

Your family home will be taken from you unless you put it in a trust.

An LAQC is the safe way to buy trades.

Always have at least two lenders at any one time holding different securities.

It is not safe unless you have two trusts between you, your long term rentals and your trades.

The IRD has enormous powers. They will make you pay heavily after they audit you.

All your work will be undone and your money lost without an proper structure.

Garth and Mathew aren't cheap, but they will save you heaps in the long run. Well worth the initial $3,000 and the annual $1,500 fee.



Who has been audited and been badly stung by the IRD?

I don't mean a few hundred dollars on depreciation clawback, but rather losing half their assets to the IRD or some other major catastrophe, and which could have been avoided with a better structure in place?

I am not passing any judgement here. Rather I am just curious to know if this obsession with structures is in any way exaggerated and possibly an unnecessary financial burden? I have tried in the past here to show that in some cases it might be of little use, if any, for your average mum and dad with a home and three rentals to have any ownership structure in place other than their own names.

xris

[ActionMan]

Hi xris

An LAQC is the safe way to buy trades.

Is that correct? I thought Trading Trust was the way to go.

[artemis]

I too would be interested in any answers. I don't have a family trust or LACQ, and own my long term rental properties in my own name. My accountant used to ask me every year to consider going to one or the other, but was unable to tell me of any real benefits (in my circs). There may have been a benefit to the accountant of course. As in extra fees plus a referral fee from the trusts expert whose business card was given to me each year in case I changed my mind.

I can see a benefit from LAQC if owners wish to distributed income unevenly to the owners, presumably based on different tax rates.

I can see a benefit to a trust structure where an owner may lose assets in a (domestic) partnership breakup.

[McDuck]

I keep my nose clean re the tax dept.

But if you did get on their bad side...
they have the power to retrospectively claim back anything you owe them,
and will put on penalties compounding of many hundred percent,
depending on if you were
stupid
careless
misinformed
or deceitful.

They hate the last one.

[SuperDad]

I am passing any judgement here.

Do you rather mean you're not passing judgment? (That's what I take you to mean.)

Rather I am just curious to know if this obsession with structures is in any way exaggerated and possibly an unnecessary financial burden? I have tried in the past here to show that in some cases it might be of little use, if any, for your average mum and dad with a home and three rentals to have any ownership structure in place other than their own names.

You're probably right, xris. For the "Mum and Dad" investors, with 2 or 3 buy-and-holds, and who have not intention of doing anything that would breach the "tainting" rules in the Income Tax Act, holding properties in their own name is not that bad. (There are asset protection issues, which can be addressed by trusts, but that's a different issue.)

I think the "obsession" with structures on this forum reflects two (related) points:
1. The contributors to this forum are not the average "Mum and Dad" investors. Rather, they are people who want to grow their wealth by employing several different strategies in property.
2. The current state of the market, in which it is very difficult to purchase CF+ buy-and-hold properties. This is making (smart) people think of different ways of making money in property, and some of those ways will expose one to the risk of tainting.

As I have said on other threads, I will be setting up a trading trust once I head down the path of doing trades. I'll be happy to pay the moeny to set up and administer this entity, if it affords me protection from tainting. As I see it, this will be a form of insurance. I'd rather set up the entities now and find out 5 years from now that I didn't need to spend the money, rather than buy and trade in my own name and find out five years from now that I should have spent a few thousand at the outset.

Paul.

[xris]

Do you rather mean you're not passing judgment? (That's what I take you to mean.)

Thank you sd, that is exactly what I meant. Amazing how one small word can totally change the meaning of a sentence. In the original post it is now corrected.

xris

[kieran]

You don't need to look much further than my situation to find the irony of getting professional accounting advice...

4 years ago I sought and got advice from a well known chartered accounting firm in Auckland (who I can not name publicly) in respect of improving my GST tax position on a property an entity of mine owns.

The accountants advice and input resulted in my taking steps (also in consultation with IRD I might add!!!) to achieve a better tax position. Little did I know that the advice was BAD and resulted in the IRD declining my GST claim and pursuing me in regards to this single matter over the last 3 years... (Yes 3 years!).

The IRD have been treading extremely carefully as they have learned that playing hard ball DURING THE CLARIFICATION PROCESS does them no favours.

However end result this excercise has cost me huge time and @$10,000...

Accountant waived all their charges for their 'advice' and has offered to pay half of my costs...

Accountant was 'sacked' by me and I must say I have not had great success with accountants (even several high profile ones) over the last decade...

For the record I will state that the CA firm was not Garth or Matthews or Davidsons.

[CJ]

Put but and holds in an LAQC as it is easyier to refinance and get cash out. i had a friend who got stuck in a stupid bad debt sitaution because if he restructured, the depreciation clawback would make it not worthwhile.

While I perfer the PPOR in a trust, how many peope get sued in NZ and have to make a payout and get backrupted - very few. This reason is probably crying wolf as you say. However, the equiticorp guy ('88 share crash) still had his nice home after being backrupted and sent to jail.

I even know of business people who ahve made payments out of their turst to avoid being backrupted. Better to loss money and start again (and not piss off people) than get bankrupted.

[spurner]

I got hit with a $66,000 bill from IRD on a property deal, due to bad accounting advice too. Fortunately all business was conducted in a seperate company, which was deregistered, and the debt written off. Not a pleasant experience I can tell you.

So yes, entities are important.

Like the saying goes "Own nothing, but control everything"

[spaceman]

Taining??

Various structures can be set up for various reasons.

I don't think (according to the letter of the law) protection from tainting is one of them.

This is a quote from the IRD/legislation web-site.

All acquisitions of land by the taxpayer are tainted by the existence of the business, regardless of whether the land is acquired as part of that business.

Now I can hear all the clever-clogs PT'ers out there saying ..."yes but I have different IRD numbers for the different entities/structures ...so it's not the same taxpayer"

Sounds reasonable until you consider the "associated persons" rules ....here is a link to the webpage which states the rules ...OD 7 and OD 8 define associated persons.

http://www.legislation.govt.nz/libra...5&softpage=DOC

Now as I read all of that if you have control over various trusts and companies then you are associated ...therefore you are in effect regarded as one taxpayer and stung by my first quote.

Once again I can hear the clever buggers out there protest about poomba/orion/nzgems etc who are out there doing the deals with their structures in place and saying that they are not tainted.

My answer to this is that they are following the spirit of the law rather then the letter of the law.

I would argue that the IRD are taking the pragmatic approach and allowing a defacto separation of entities as and when it suits them.

If poomba goes out and buys and sells 5 PPOR's over the next 5 years and argues that the profits made on each sale aren't taxable ...i would bet that all his structures and entities wouldn't save him from the wrath of the IRD.

My argument here is that the enmities/structures aren't the magic answer to do what ever you want. A "trading trust" won't protect you if the IRD decide you are tainted then you are tainted until the courts decide in your favour.

Following McDucks line ....stupid/careless/misinformed ...will probably only end up costing you money and time (see Kieran's post)...how much this hurts is relative ... I'd be spewing about Kieran’s $10k if it was me but it wouldn't be the end of the world ....$1,000k and I would be seriously be thinking of running for Prime minister so that I could change the laws in my favour as Berlusconi did in Italy where I live right now.
Deceitful ...can end up costing you money and time as well as a stint in jail ...although jail time would be pretty rare i think.

This is a bit of a pet rant of mine so I'll stop now before it bcomes too long and boring.

Cheers
Spaceman

[Dean@Massiveaction]

Rather I am just curious to know if this obsession with structures is in any way exaggerated and possibly an unnecessary financial burden?

I know you like the devils advocate position Xris but I think it is most unhelpful to suggest this in a public forum frequented by so many new investors. Structuring is critical for asset protection, tax and borrowing ability. Yes you must get things right and if you don't get it right early it costs a lot to sort out later. In a worst case scenario you can lose everything. Most people get into trouble because they A: don't do anything, just own everything in their own name and hope they never get sued in their entire lives or B: get cheap advice instead of paying for good specialists. I deal with this with clients atleast once a fortnight and could tell you many many stories of people who wished they had got their structuring right as it would have saved them a fortune. I also work with several people who have been unable to do any further investing due to bad/absence of good structures.

[drelly]

If nothing else is, I think asset protection should be a focus when creating structures. IMHO, a trust should be the ultimate destination of buy and holds.

[cube]

I guess its a type of insurance.

If you buy B&H and Trades in your own name, then the IRD will look strongly at you when you sell the B&Hs - having some structures in place may help protect you from that.

More importantly, and more established in law, I believe, is the asset protection aspect of the correct structures - look no further than spurner's example to see how effeciv they can be.

Mum and Dad may be quite happy owning their own home and 3 rentals in their own names, until:

1. A deck railing fails, and a tenants 5 year old is seriously hurt and the tenant pursues the landlord for damages.

2. Dad loses his job, and the bank forcloses on the rental mortgages. Because of a depressed market, they can't clear the debts, so the bank goes after the family home as well.

3. The tenant maliciously burns down the property, and insurance doesn't pay out - bank demand repayment as in #2.

4. The estate is left to a child who then goes off the rails, marries badly, divorces and loses half the 'family fortune' in the ensuing legal battle.

Now, Trusts and Companies won't save you in all circumstances, but they can help protect your assets for now and for future generations - just look at all the 'bankrupt' developers out there in the BMWs driving to their boat!.

cube

[CJ]

Note - relevent section of act noted above is sOD8(4). Very complicated (doesn't appear to make sense but i see the need for two trusts).

I see structures like car insurance. My parents have paid for years and never made a claim. I also paid ever year (and a lot more due to higher risk) but I made a claim and didn't lose out. Are my parents foolish for paying car insurance.???

[cantthinkofanickname]

Structures are very worthwile but it is your intention the ird look at did you buy to trade or hold By having the right structures in place and sending a simple letter to your accountant and lawyer stating your intention at the time of purchase you can prove to the ird what you bought the property for