LAQC's

[Poi]

Hello everyone

My wife attended an assett planning seminar last night and we have a few topic starters that we would like to share some opinions on.

1. Has anybody noticed how all the books and seminars promote the use of LAQC for holding your IP's?? We were fortunate to be informed by our lawyer of the potential risk you expose yourself to before we ever formed our Company but it appears a few investors were "rattled" by the wide expanse of risk they were unknowingly open to.

2. This one is more for the seasoned investors out there. Do you believe in the idea of holding your properties in an LAQC until you have used up most of the loss potential and then either gifting them to a trust or selling the shares to a trust. It's an idea we are keen to employ but thought we would get some further input.

3. Is it a straight forward process to transfer shares within a company. For instance, I am the director with a 99% share holding and my wife a 1% share holding. That was done because she was at Polytech 12 months ago but the roles are now reversed and my income is a third of what it was. We have been advised to transfer the shares for tax refund purposes as obviously, you need to pay enough tax in the first place to receive any end of year benefits.

4. Do we paint the roof of our latest IP black or grey ???

Have a wicked weekend people

[Gerrard]

1) Tell us more about those risks! It's not something I've heard before.

2) I haven't got to the point of this yeat. Although I did read an article in the NZ Property Mag suggesting it's not such a good idea. Although it may be within the letter of the law, I think IRD frowns up the practice. You might be opening yourself up to a higher chance of being audited, or the practice may be disallowed in the future.

Every man and his dog is establishing trusts at the moment and I wonder if they are being used for something other then the intended purpose? IRD may change the rules ni the future

3) Pass

4) Grey. Definitely grey. Grey is the new black.

Gerrard

[drelly]

Regarding LAQC's... I have exactly the structure you suggest in #2. It was put recommended by my accountant. The idea is to eventually transfer the entire company to my trust once my other assets have been gifted across.

As for the IRD frowning upon it... well, they frown upon anything that means the investor/businessman is able to avoid paying more tax. I will also be depreciating chattels this year as well... more frowning no doubt!

Understand that the IRD are a rule unto themselves... If they're not happy themselves, they'll make up a new rule about it. Until that point, enjoy the benefits of an LAQC.

[Poi]

Cheers for that Drelly

We have spent a small fortune on accountants and structure specialist trying to gain an insight into the mind of the great IRD and then a few weekends ago we met a guy through a mutual friend who just happened to be one of the top dogs at the Wellington IRD office!!!!! He explained a few stories about chasing sham trusts and gave us a brief view of the story from an IRD point of view......priceless.

Gerard, when you become a director of an LAQC you become open to unlimited liability, just like when you hear about "the board of directors" of any company, school etc, these are the people who have power but also carry the risk of unlimited liability. Say you were responsible for some kind of traffic accident. Once the insurance company has paid out thousands to all parties concerned they will then come after you and can by law, force you to liquidate your assets to settle your debts!! That is why we aim to drop our properties into the safety of our trust a few years down the line. Hope that helps

[drelly]

Hi Poi,

Yeah, I think that the word "intention" has a great deal of meaning with the IRD when it comes to trusts. In other words, if your intention was to set up the trust specifically to avoid tax, then it's a sham. However, if you can clearly show that the intention was to protect assets in the event of marital dispute or some other good reason, then it's seen in a better light.

By the way, I don't think that a limited liability company offers that much protection for a director any more anyway. However, a trust does... so far.

[CJ]

Although I did read an article in the NZ Property Mag suggesting it's not such a good idea. Although it may be within the letter of the law, I think IRD frowns up the practice.

I will have to go re-read the article but I think the point is that if you do what is suggested, due to capital growth of the assets, you have to transfer something worth quite a bit (20% deposit + principle repayments + capital growth), as opposed to if you did it at the start, it would only be the 20% deposit.

Anything done with the purpose of avoiding tax can be treated as tax avoidance. Always have a wealth creation, wealth protection purpose. Never do anything just because of tax. If you flip it into the trust as soon as it is profitable, it looks like avoidance as if you were doing it for wealth protection, you would ahve done it before it increased in value.

3. easy. in theory just pay money for the shares. A bit of paper work doesn't go astray to comply with companies act regulations and trustees duties.

[drelly]

Just a clarification in case anyone gets worried...

Tax Avoidance is legal.
Tax Evasion isn't.

In other words, if you work within the law, it's avoidance. If you don't, it's evasion.

[CJ]

Just a clarification in case anyone gets worried...

Tax Avoidance is legal.
Tax Evasion isn't.

In other words, if you work within the law, it's avoidance. If you don't, it's evasion.

SECT BG 1. AVOIDANCE

Arrangement void
(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes.

Tax minimisation is legal
tax avoidance has penalties of 100%
tax evasion has penalties of 150%

[Poi]

Hi CJ

We are not planning to put our properties into our Trust for Tax reasons but for asset protection. We want our Trust to eventually hold all our investments and for us personally to own very little.

With our LAQC we can legally access our tax losses but when those losses are heavily reduced, mainly due to depreciation, we have no reason to hold them in an LAQC any more. If we held them in a trust from day one, we would not be able to access those losses.

All our properties are pre tax positive so the end of year rebate is always an added bonus.

:P

[drelly]

CJ - haven't seen that before! Is it new?

[cube]

Hi CJ
If we held them in a trust from day one, we would not be able to access those losses.

You will be able to access the losses when the investments become profit making - it becomes a question of cashflow (getting the tax benefit now) versus ease of implementation (less changes later = easier in the long run.

cube

[CJ]

We are not planning to put our properties into our Trust for Tax reasons but for asset protection. We want our Trust to eventually hold all our investments and for us personally to own very little.

While the reason is asset protection, the timing suggests tax avoidance. Just dont do it blatantly and transfer it with other stuff.

haven't seen that before! Is it new?

No - it has been around for ages. The wording is extremly wide so the courts have narrowed it down. Just ensure you have a true commercial purpose and it is not an issue.

Sorry to scare anyone but there seems to be a bit of a misconception and if you get an eagar IRD auditor who tries to apply it, it will cost you more to defend it. Just ensure you have a commercial purpose.

[drelly]

It's all pretty nit-picky isn't it? Obviously, any business person is going to do everything they can to legally maximise their tax breaks And it's hard to think of something that you can do to reduce tax that doesn't also have some other benefits!

I know a couple of ex-IRD auditors and you'd be amazed at how little real business knowledge they have. They are pure bean counters. Although they would be fair, beware the auditor with an attitude!