Trust owning loss-making LAQC shares

[brendan]

The value of the properties in an LAQC I partly own has gone up quite a bit, and so now i'm thinking it might be a good idea to transfer the shares of the LAQC to a trust before they go up in value to much and it takes too long to gift them. As it is, it'll take about 6 years to gift the current value of the shares to a trust.

However, the LAQC is still making a loss. I spoke to my accountant, and they advised me that any loss that the LAQC makes will be passed up to the trust and then trapped there. Unless the trust has other income to offset, the trust will keep accumulating the loss.

When the LAQC company makes a profit, it will distribute a dividend with imputation credits attached, and so the trust wont be able to use it's loss to reduce the amount of tax that it pays.

Does this sound correct? Does this mean that unless the trust owns another income producing asset (eg, after-tax cashflow positive property), the losses are trapped/lost forever?

[xris]

Hello Brendan,

I will leave your main question to one side, allowing the accountants to answer.

However, why do you feel it is such a big loss having the losses trapped in a trust? Admiyyedly you will not be able to take immediate advantage of those losses to offset any personal tax you might be paying but, as has not infrequently been discussed here before, many of those losses and tax rebates will come in useful in the future. This is particularly true of depreciation in the form of necessay maintenance and possibly too in depreciation claw back. I believe that all the tax credits we get from running a rental property are there for a reason and to treat them as a free annual handout to be spent on oneself is understandable but potentially risky - ten years down the track you might need those tax rebates, so what does it matter if they have been locked into the trust? It may in fact have been an advantage, renoving the temptation to flitter it away.

xris

[CJ]

Xris - a tax credit in the hand is worth 2 trapped in the trust.

The accountant is pretty much right. You will need to find a source of income to use them against. NZ Share investments are not normally good since dividends normall come with imputation credits.

There are ways to move around where profits ar made if you have a few entities (by using loans - creates deductible expense in one entity and income in the other).

If your company starts paying tax, do a captial distribution to the trust and then loan funds back up (need to do it in a way that the new loan is deductible and the scheme isn't tax avoidance).

[brendan]

Admiyyedly you will not be able to take immediate advantage of those losses to offset any personal tax you might be paying but, as has not infrequently been discussed here before, many of those losses and tax rebates will come in useful in the future. This is particularly true of depreciation in the form of necessay maintenance and possibly too in depreciation claw back.

Can you explain how those losses and tax rebates will come in useful in the future?

Lets say that we sell a property and it's deemed that we need to pay depreciation claw back. If the trust is carrying forward a loss, I don't understand how this helps? Can I get access to the loss in the form of cash?

I also don't understand what you mean about necessay maintenance. The tax refund's I have recieved in the past have been reinvested in either maintenance on existing properties or put towards savings to purchase additional properties. If the trust is carrying forward a loss, how does this help?

I believe that all the tax credits we get from running a rental property are there for a reason and to treat them as a free annual handout to be spent on oneself is understandable but potentially risky

Agree with you there. It's a nice tax free loan to be used for the business.

ten years down the track you might need those tax rebates, so what does it matter if they have been locked into the trust?

I'm interested what are the ways can I use them in 10 years. Dividends from shares of companies will have imputation credits attached, interest from cash is not a way to make money, so I guess if the trust directly purchases after-tax cash flow positive properties, I can use them there. Can you suggest other ideas?

[xris]

Can you explain how those losses and tax rebates will come in useful in the future?

Lets say that we sell a property and it's deemed that we need to pay depreciation claw back. If the trust is carrying forward a loss, I don't understand how this helps? Can I get access to the loss in the form of cash?

You sell and the IRD claws back $20,000 depreciation. If that depreciation had been locked into the trust over time it is simply used up and no money goes to the IRD. If the depreciation had gone to you in the form of a tax rebate and you had spent it then that $20,000 claw back would be used to amend your latest tax return and lead you (approximately) to pay back $5,000 cash to the IRD.

I also don't understand what you mean about necessay maintenance.

You buy a new oven for $1,000. Over time it depreciates and you claim back annually, say, $100 depreciation, or $30 tax back, and spend it. After 12 years you need a new oven. You either pay $1,000 for it or you pay $1,000 minus $700 (annual tax refund for the oven with interest added to the tax refunds you have so carefully put to one side).

The tax refund's I have recieved in the past have been reinvested in either maintenance on existing properties or put towards savings to purchase additional properties.

First reason good;second reason less good. If the trust is carrying forward a loss, how does this help?

Agree with you there. It's a nice tax free loan to be used for the business.

The main problem in all of this as I see it is that people are a lot less disciplined to save their tax rebates for what they are meant for and then are in trouble when they are suddenly faced with a $10,000 maintenance bill after seven years, or they sell and the ird wants $10,000 back as depreciation clawed back.

I agree with cj that it is better to have the money in your hand, but I believe many people are not discipled or intelligent enough to use that tax rebate wisely and sensibly.

xris

PS/ Forgive the sloppy quoting please. It is for two reasons:

1/ I find the whole thing too darned confusing to operate properly.

2/ It provides ivi with some mild amusement.

3/ It keeps the moderators busy fixing them! (Added by BusyLizzy )

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[SuperDad]

xris,

I hope your painting is better than your posting.

Or is your post just an undercoat?

PAul.

Postscript: xris' orignal post contained a strange quoting method, and so looked "funny". He (she?) has now fixed it, and so my comment here now looks like a criticism of the content of xris' posting. I just want to make it clear that it is not. (xris' posting looks a lot better now the topcoat is on.)

[brendan]

You sell and the IRD claws back $20,000 depreciation. If that depreciation had been locked into the trust over time it is simply used up and no money goes to the IRD. If the depreciation had gone to you in the form of a tax rebate and you had spent it then that $20,000 claw back would be used to amend your latest tax return and lead you (approximately) to pay back $5,000 cash to the IRD.

Ok, this is one of the things i'm trying to understand.
Lets say the trust is a sharehold in the LAQC company and is getting a $10,000 loss passed to it from the LAQC company every year, and in 5 years LAQC company sells a property and the IRD sends a tax bill for $50,000.

Can this bill be passed from the LAQC company to the shareholder of the LAQC company (the trust) and then 5 years x 10,000 would cancel out 50,000 and no tax to pay? Or is it the companies responsibility to pay the bill, and it has to pay the $50,000 to the ird (probably out of capital gain from selling the property) and the trust still has a $50,000 loss on the books?

[CJ]

Can this bill be passed from the LAQC company to the shareholder of the LAQC company (the trust) and then 5 years x 10,000 would cancel out 50,000 and no tax to pay? Or is it the companies responsibility to pay the bill, and it has to pay the $50,000 to the ird (probably out of capital gain from selling the property) and the trust still has a $50,000 loss on the books?

NO. I dont beleive the tax bill can be transfered to the trust (which has losses) nor can the losses be passed to the LAQC (which has taxable income). They will be traped. You will need to earn other income or structure your entities to use the losses (one example is to use loans as I mention above).

[brendan]

NO. I dont beleive the tax bill can be transfered to the trust (which has losses) nor can the losses be passed to the LAQC (which has taxable income). They will be traped. You will need to earn other income or structure your entities to use the losses (one example is to use loans as I mention above).

That's what I thought, which is why xris's post was confusing. So going back to my original question "Does this mean that unless the trust owns another income producing asset (eg, after-tax cashflow positive property), the losses are trapped/lost forever?"

MUST an LAQC distribute the losses? It sounds like it would be better after transfering it to a trust not to distribute them.

[Josko]

[quote=SuperDad;52425]
Postscript: xris' orignal post contained a strange quoting method, and so looked "funny". He (she?) has now fixed it, and so my comment here now looks like a criticism of the content of xris' posting. I just want to make it clear that it is not. (xris' posting looks a lot better now the topcoat is on.)[/quote] 

Did it look like this?

Is xris still painting?

What are you painting xris? A castle, a muti-unit dwelling I really am curious why it is taking you, (well at least four weeks from memory) to paint a place...

[xris]

PAul.

Postscript: xris' orignal post contained a strange quoting method, and so looked "funny". He (she?) has now fixed it, and so my comment here now looks like a criticism of the content of xris' posting. I just want to make it clear that it is not. (xris' posting looks a lot better now the topcoat is on.)

I didn't fix it. Don't know who did though.

xris

[CJ]

MUST an LAQC distribute the losses? It sounds like it would be better after transfering it to a trust not to distribute them.

An LAQC must attribute losses to the Shareholder (ie the trust in this case). You can revoke the LAQC status, either to just a QC (qualifying company) or altogether.

If you revoke the LAQC, I am not sure how hard it is to get back in if need be later on.