Forum Replies Created
Hi Vivy,
Technically, if you become a shareholder in the LAQC, you would be subject to the CFC (controlled foreign companies) Regime. This would normally mean that you would return (declare) in Australia your income interest in the company.
As there is a double tax agreement between Australia and New Zealand, I believe that the arrangements would be similar to that in NZ. That is to say, you would not have to declare your income interest in your Australian tax returns. You could check this with an Australian tax accountant. But that is the situation if a New Zealander owns part of a company in Australia. The reverse should apply.
The LAQC is presumably making a loss. LAQCs are not recognized in Australia as being anything different from a normal company, so they would regard the losses as belonging to the company – to be offset against future profits. So there would be no tax claim in Australia for your share of the losses in the LAQC.
Eventually, if the property were to be sold, and a capital gain were made, then you would have to pay CGT on your share of the capital gain. As the property was owned by a company, you would not receive the 50% CGT exemption. Your other shareholders would have no CGT to pay in Australia.
That begs the question, why would you want to do it?
If you want to jointly own some other property with your relatives, preferably a cash-flow positive rental property, other structures would be more tax effective.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi HB,
No, there have not been any tax-related issues or queries from the ATO in regards to any of the Trusts that we have set up. We have been setting them up over the last two years, so there has been opportunity for the ATO to query them with the Australian resident taxpayers who are using them.
That does not mean that they could not be questioned in the future. An auditor can always request details to review the tax affairs of an Australian resident taxpayer.
We have done our research into all of the issues, such as the transferor trust rules and control/administration by Australian tax residents, and have developed a structure and administration process that we believe will pass an audit test with the ATO to ensure it is not also deemed to be an Australian resident trust.
There is CER (closer economic relations) between Australia and New Zealand since the 1980s (at least). This means that there is information sharing between the ATO and IRD. So we believe that the ATO is aware of what arrangements their tax residents are entering into.
They certainly know when an Australian tax resident purchases a NZ property in their own name. They don’t have to wait until you inform them!
So it is highly likely that they know their tax residents are being named in NZ Trusts when we apply for IRD Numbers for them and their Trusts. And IRD are sent copies of our Trust Deeds. They could share this information with the ATO should the ATO request it.
There is no attempt to hide information from either IRD or the ATO.
It is interesting that Australian tax residents have to answer a question in their income tax returns about any interests in foreign companies and foreign unit trusts. They do not have to disclose any ‘interest’ in a discretionary trust.
This is probably so as in discretionary trusts no-one has a ‘present or legal entitlement’ to the assets or income of the Trust. So there is no ‘interest’ as defined. It does provide a nice arrangement for overseas investors, nevertheless, while still being honest with the tax authorities.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi,
The Trusts that we set up are NZ qualifying trusts, not NZ Foreign Trusts.
NZ Foreign Trusts are not illegal. There are situations where NZ Foreign Trusts are suitable for certain overseas (to NZ) investors and their foreign-sourced income.
The ATO is not concerned with NZ Foreign Trusts that are used legitimately. They were correctly concerned with promoters using NZ Foreign Trusts illegally to evade tax. They were used by these promoters to evade tax. It was a scheme, so would be determined be a conspiracy to defraud the Australian Government.
The claims by the promoters were false and would not stand up to an audit inspection.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Forklift,
In New Zealand, everyone has been speculating about when the market is going to top out. Most of us thought that after two years, the market would slow down. Well, we’ve seen four years of growth and the market still is growing. So, none of us are predicting its early slowdown.
To be true, many of the yields are falling as the prices rise – and the rents are not rising as fastly as the house prices.
There are opportunities in different towns, so doing research is important.
NZ Bird Dogs are property finders in New Zealand. They find properties, negotiate a price below valuation and then offer the properties to their members for a fee. The fees are the lowest I have seen for comparable property finders.
If you cannot find NZ Bird Dogs contact details, just drop me an email and I will send you their promo material.
Yep. Still looking for clients. I’ve put on more graduate accountants so I can handle the work. We are all providing opportunities for each other.[biggrin]
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi,
Well, there are a number of advantagesm compared to Australia –
* no stamp duty
* no capital gains tax
* higher rental yields (rent/investment)
* can structure for cash-flow positive investment – self-funding
* good capital growthDo you need any more reasons?
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi MaiA,
In case it was not clear, not CGT would be paid in either country on these deals. Income tax would be payable. To qualify for the 50% CGT exemption in Oz, you would have to own the property for twelve months and one day – from the date of purchase as per the Sale & Purchase Agreemens to the the date of sale.
Your money partners would be paid a percentage of the profits or the gross amount of the sale, whatever you have agreed upon. The sum paid is a claimable expense for you and it is income for your money partners.
If the deal is structured as a joint venture with them, then no GST would be payable in NZ on their share of the proceeds. It is possible in other scenarios that you would have to add on GST to their share of the profits or gross proceeds, especially if your money partners are GST registered.
This is not really a problem, as you can claim back the GST in NZ on your expenses – and on the purchase price of the section of land. You would register for GST as your property trading is a business – rather than an investment like rental property investment – and the gross income (sale value of the development in one year) is likely to exceed to $40 000.
Does that make it more complicated than what you may have thought? Mind you, if you were doing the same thing in Australia, you would have had to register for GST. So it is not that different.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi MaiA,
Even though both Australia and NZ tax property trading or development income in a similar way, there is still the opportunity to reduce your overall tax bill if the marginal rates that you pay in Australia are above 33% – quite likely as the top rate is 49.5%.
With the extra information that you have supplied, it does look like a NZ Trust could assist you, especially if this is more than a one-off deal. If it is a one-off deal, then just paying the NZ tax and top-up tax in Australia would be the simplest way to go.
If you plan to carry out several developments over time, then the NZ Trust would allow you to cap your tax at 33%, and this may make it easier for you to fund further developments.
The profits would be quarantined as tax-paid profits in the NZ Trust, as that is the Trustee’s tax rate in NZ on undistributed net income. As the income would not be distributed to you in Australia, you would not have to include it in your Australian income tax returns.
At a time of your choosing, you could have the income distributed to you. If you became NZ tax residents, after 6 months of living in NZ, you could pay the tax-paid profits to yourselves and receive a tax refund – as your average tax rates in NZ would be likely to be less than 33% within a range up to $100 000 in any one year.
If that is not a viable option, there is another option through the use of LLCs (limited liability corporations) in the USA.
And, of course, if one of you has a low income in any particular year in Australia, a distribution could be made to that beneficiary – the foreign tax credit would be taken into account, and you might receive a refund of your Australian paid tax on other income.
There are some tax planning options as you can see. They are all legal, but may require liaison between your Australian and NZ tax agents to make sure that you benefit in the best way.
If you wish to take this any further, my contact details are noted below and you can always send a Private Mail through this forum.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Redwing,
GVs are Government Valuations (used for council ratings purposes and apportionment of purchase costs by accountants) and RVs are Registered Valuations (used by banks for lending purposes).
PS. Funny that about my name coming up. Must be Karma!
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi MaiA,
It may already be too late to set up a structure for the project.
You have bought a section of land and are building on it. When you purchased the section of land, it would have been in your own names (presumably), and you have expended money on building the development.
Are you going to sell to a new structure to carry out the marketing of the development? There is nothing preventing you from selling at cost to an associated entity, and then making the profit in the new entity. Tax will still have to be paid.
However, there would be unlikely to be any gain from doing this, as you would be earning income and have to pay tax in NZ, and then report the income in Australia (whether as a trust distribution or income in your own names) – you would claim as a foreign tax credit the tax paid in NZ, so you would only end up paying a top-up tax in Australia.
These transactions are subject to double tax agreements between our two countries – meant to prevent double taxation. You are now involved in international tax issues, whether you realized it or not.
There is an opportunity to save on CGT, as NZ does not have CGT. However, both countries tax property trading income in a similar way as gross income, so there is no opportunity for deferring or avoiding this form of income tax by using different structures.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Dr X,
In our trustee companies, the investors are also the directors – the only directors. And the Trust Deed ensures that only they are the persons authorized to appoint and remove trustees. There are many protections included in the Trust Deed.
Our trustee company acts as a co-trustee to ensure that the Trust is regarded as being controlled/administered from NZ, that the ATO does not regard it as an Australian resident Trust.
Whatever you are comfortable with is the way to go.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Redwing,
An LAQC is a Loss Attributing Qualifying Company. It is a NZ invention, and only assists NZ tax residents. The normal situation is that the losses of a company have to stay in the company to be offset against future (hopefully) profits.
In an LAQC, the losses are attributed to the shareholders in proportion to their shareholdings in the company, so that they can use the company’s losses to reduce the taxable income (and tax liability) on their other income.
The ASB is a well known bank in New Zealand – the full name is Auckland Savings Bank.
Your other questions relate more to lending criteria.
If you buy properties below value, you can have them revalued at market value and then refinance to purchase other properties. There is nothing magic in that. It is wthin the law (regarding borrowing) and is a common property investment practice.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi MaiA,
Yes, the proposed structure quarantines the capital gain in NZ, where there is no CGT.
The style of the corporate trustees and Trust ensures that the Trust is only a resident NZ Trust and is not considered an Australian resident Trust.
As it is not an Australian resident Trust, it does not need to lodge a tax return in Australia.
However, if a distribution from the Trust to an Australian resident beneficiary is sourced from the capital gain, then the Australian resident will have to pay CGT on that distribution.
There are ways around that. However, most investors want to grow their property portfolio, so leave the capital gain in the Trust to help fund future property purchases – reducing the need to fund from Australia the deposits for future property purchases.
When it is desired to repatriate those capital gains to Australia, we present our clients with two options.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Carlyle,
The ATO Ruling is IT 2360. If you have problems accessing it from the ATO website http://www.ato.gov.au I can send you a pdf version, if you send me a private mail.
The rules in the double tax agreement are that between the two contracting states, the country that has the income-producing asset is the ‘source’ country. And the tax return should firstly be lodged in the ‘source’ country.
In the example given, where the property is making a loss, it may be academic as to in which country the tax return is lodged firstly.
However, where tax is payable, it is not academic.
Article 6 covers real property issues. Article 23 covers the source of income issues and Article 24 (2) explains how the NZ tax paid can be claimed as a credit in the Australian tax return.
It should be self-evident that you cannot claim the tax paid until it has been paid. So, where tax is payable in NZ, the NZ tax return should be lodged firstly. Then the Australian tax return can be lodged claiming the NZ tax paid.
If the Australian tax return is lodged firstly, there will be no NZ tax paid to claim as a foreign tax credit.
If you have a problem accessing the DTA, send me a private mail and I can email it to you.
Kind regards
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Dom,
I was wondering if it was you. The username made me guess.
Yes, the NZ qualifying trust that I set up for you will suit the purpose of either share trading or share investment.
Kind regards
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Dom,
That is correct. There is no capital gains tax in New Zealand. So, where you make capital gains in New Zealand, you will not have to pay CGT to IRD.
However, if you own the shares in your own name, you will have to pay CGT to the ATO.
The solution would be to own the shares in a suitably structured New Zealand Trust.
You can do on-line share investing through most NZ Banks. I am adding below a number of links for you to check on –
http://www.bankdirect.co.nz/section59.asp
http://www.nationalbank.co.nz/online/onlinesharetrading/
http://www.directbroking.co.nz/
http://www.crestsystems.co.nz/crest_shareprice.html
http://www.asbsecurities.co.nz/section691.asp
http://www.canopus.co.nz/
http://www.broking.hsbc.com.au/public/asx_share_trading.htmlKind regards
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Scally,
That is a very good question. I am asked the same question by NZ taxpayers that own rental properties, and my answer is always the same.
Let’s say that you have a chattels valuation (statement of estimated building construction costs as per TR 97/25 for our Australian taxpayers) prepared when you purchase the property, and you claim $100 000 depreciation over five years. The tax benefit on that claim has been $33 000 at 33%.
Let’s say you have another chattels valuation prepared when you sell the property. What will it show? It will show what all property investors know, that the increase in value of the property has come mainly from the land value increasing, not from the building increasing in value – although it may have from inflation in building costs.
In practical terms, what does this mean?
It usually means that half of the depreciation is paid back as depreciation recovered. The Australian term is ‘balancing charge’. There was no balancing charge in the pre 1997 Tax Act rewrite – nice little loophole, since closed.
So, in our example, $33 000 has been received as a tax benefit and $16 000 is paid back. Do you need to be a Rhodes Scholar to work out whether or not to claim depreciation?
You would certainly claim it in your NZ tax returns. And if the rules apply in Australia, that you can claim depreciation even at the lower rate, then you claim it and you repay half of it (based on my clients’ experience) when you sell the property.
Regards
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Scally,
Australia had the special building write-off, now called a capital allowance, that allows writing off the building cost at 2.5% straightline per annum.
The only problem is that the allowance only started from 19th July 1987, so any construction before that date cannot be claimed for depreciation.
That is why your Australian tax accountant will have to adjust for the NZ depreciation. Where it is allowed, it is at lower rates than in New Zealand, so an adjustment is required.
If the building costs were before 1987, then no capital allowance is allowed for residential property.
There was a capital allowance for hotels and commercials buildings from 1985. Residential properties were added later in 1987.
Regards
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi,
The issue with ‘tainting’ is that the tax-free status of capital gains is compromised. They are taxable, in other words.
Where there is an association between the persons owning each of your Trusts, any rental properties purchased after the property trading commenced will have the capital gains tainted for up to ten years.
If the properties are sold within ten years, then the capital gains are taxed. Any capital gains on properties owned prior to the property trading activity will remain untaxed.
The way to avoid the associated persons test is to have some difference between the owners of each Trust, so that when considered as a group, the group of trustees in one Trust cannot be considered to be related to the group of trustees in the second Trust.
In practical terms, this means having an independent trustee join in with the trustees of one of the Trusts.
If you can find one, good luck to you. Most independent trustees will not jump at the opportunity to make themselves personally liable in a trading Trust.
You are more likely to find someone willing to be the independent trustee in a property owning Trust, and you can conduct any property trading in a company, where you are the directors.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi,
I would have thought that all tax agents would know about double tax agreements, but I have come up against one Australian tax accountant that showed complete ignorance of DTAs.
I qualified and practised in Australia, so I think that he must be the exception to the rule.
You might have to do an internet search of Yellowpages in South Australia and put in the keywords NZ property investment, and see what comes up.
I know accountants in Melbourne that are up to speed on NZ property investment.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi landlordtobe,
You might be worrying needlessly.
Your investment in New Zealand comes under the double tax agreement between the two countries.
The country where the income-producing asset is located is the source country so is entitled to tax in the first instance.
Even if the property is making a loss, the tax return should firstly be lodged in New Zealand. If tax is paid, it is firstly paid in NZ, then you claim the tax paid as a foreign tax credit when you lodge your tax return in Australia.
Do it the wrong way around, and you pay the tax in Australia, then pay it in New Zealand, and only get to claim the tax credit in Australia in the second year.
Next point, the tax year in New Zealand is 1st April to 31st March. There is a protocol between the two countries where tax returns lodged in NZ up to 31st March can be accepted in Australia as being to 30th June.
This means your Australian accountant can use the information in the NZ tax returns as if it is to 30th June, just convert to $AUD and adjust the depreciation to comply with the Australian tax rules on capital allowances. So you do not pay for two lots of accounting fees.
By now, you should be seeing that you do not need to lodge an Australian tax return for 30th June 2005 showing the NZ income until next year – then show the income to 31st March 2006 as if it is to 30th June 2006.
Don’t you just love double tax agreements – meant to avoid just that!
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz
