Forum Replies Created
Hi Bevan,
Okay, let’s start with the easy tax issue. You are buying an income-producing asset in another country. So you are involved in international tax issues, namely the double tax agreement between Australia and New Zealand.
This means that tax returns shpuld be lodged firstly in the source country, namely New Zealand – where the income-producing property is located.
If there is tax to pay – a net profit has been made – tax is paid firstly in New Zealand and then in Australia. However, you claim the NZ tax paid as a foreign tax credit in Australia. So you might pay a top-up tax if the Australian tax rates are higher than the NZ rates.
If the property is owned in your own name, you will pay CGT in Australia if a capital gain is made on the sale of the property. There is no CGT in New Zealand, so you won’t pay it here.
If the property is owned in your name, and it is negatively geared – a lot of borrowings – you can claim the tax loss against your income in Australia. So that might be attractive.
If the property is breaking even or making a small loss, and you consider that substantial capital gains might be made over a 5-10 year period, you might consider a structure that will allow you to defer or avoid CGT.
The structures are not simple, but they are also not costly. They can also be used for investment in properties in the USA.
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 Alex,
A lawyer that we recommend is Jeffrey Ng in Auckland. His rates are very reasonable and he does a great job on checking mortgage documentation to make sure it has been done correctly. He has corrected some banks and they had to admit that they had got it wrong.
So if you want someone on your side who specializes in property transactions, contact Jeffrey on 09-361 5981 or [email protected]
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 have made several postings to similar forums asking the same questions.
We are a firm of property specialist accountants and tax advisers in New Zealand, and provide low cost setup and low cost administration structures for overseas investors to buy New Zealand and US properties.
If you are interested, send me a private mail so I can email to you our material. We demystify the tax issues involved in investing in New Zealand property.
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 GP,
Thanks for those links. It is nice to have the guides at the ready to quote them.
I have noted that most of the legislative references to definitions etc refer back to the 1936 Act.
It has mystified me as to why this part was not included in the progressive rewrite of the Tax Act since 1997.
But who are we to question the ATO?
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 GP,
The research that you have done is much appreciated.
This is more along the lines that I had found and was able to develop options for clients.
Just reading the guide from the ATO makes one give up hope and think that there are no options. It takes reading in between the lines and the sort of questions and answers that you put to the ATO to uncover options.
By the way, apart from a very short article on transferor trust rules from the ATO website resources, I have only once been able to access the guide from the ATO on the transferor trust rules – maybe I found it in the guide on Trusts. I thought I had downloaded it, but cannot find where I may have done that.
Do you have the link to the ATO guide? or is it included int he ATO guide on Trusts?
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,
You might like to read the legal article in this link for an example of who a transferor is http://www.findlaw.com/12international/countries/nz/articles/2224.html
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 GP,
I am no longer operating in Australia as a tax agent, so I do not have standing with the ATO.
When I have these kinds of questions, I relay them through associated accountants in Australia, and they obtain the information or opinions requested.
That is so in this case. Private rulings have not been applied for. The ATO record on private rulings is not good. Even when they do belatedly provide private rulings, they have seen fit to reneg on them.
My reference to a business activity was to paraphrase the section you had quoted from the transferor trust rules. We are talking about business dealings and doing them at arms length. And it is where the business dealings are done at arms length that the transferor rules are said not to apply.
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 Andrew,
I advise that the NZ Trust also has an independent NZ resident trustee, whether as a company or not. In this way, there are two resident NZ trustee companies.
The Accounts and tax returns are prepared and lodged in New Zealand. The minutes are maintained and recorded in New Zealand. Buying trips are obviously conducted in NZ, and negotiations with lawyers and financiers are conducted in NZ.
We build a case that the NZ Trust is adminsitered and controlled from New Zealand. If the Australian directors of the NZ resident trustee company choose to agree with the ATO that the Trust is controlled or administered from Ausralia, then they shoot themselves in the foot.
If they contend that the Trust is administered or controlled from New Zealand, then the ATO will have a job on their hands to prove otherwise.
Your assessment of the tax implications of an Australian beneficiary receiving an income distribution from the Trust is correct. Firstly, tax is paid in New Zealand, then the income and the foreign tax credit are declared in the Australian tax return.
The CGT on capital gains distributions can be avoided by coming to NZ for 6 months plus at a planned time, to qualify as a NZ tax resident, receive the capital gains distribution and not declare it in Australia as you were not a tax resident at the time.
There are other ways to pay the capital gains without CGT, where this is not a viable option.
Other options involve international tax planning entities. An LLC in the USA is one of those 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 GP,
I know that we have had this debate or discussion going on for awhile.
Can I ask you if you have contacted the ATO about what is a transfer and what is a purchase? Have you put different scenarios to them for clarification?
When a Trust purchases property, it is not a transfer. When an already owned property is sold to a Trust, there is the potential for the transaction to be classified as a transfer, especially where it is sold to the Trust for less than its full market value or for consideration less than an arm’s length amount.
A Trust established to purchase rental properties as investments is unlikely to come under the trust transferor rules, as it is engaged in a business activity, namely investment, and is acting on an arm’s length basis with all parties.
I strongly recommend that you call the ATO yourself or have your Australian tax agent call the ATO Advisings on this issue.
Whenever I am not sure about something that I have read, I seek clarification from IRD. When I was a CPA in Australia, I did the same with the ATO.
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 Shar,
Currently, as you own the rental properties in your own names, you will have to lodge tax returns in New Zealand and in Australia.
It would make more sense to prepare the NZ tax returns, and then use those Financial Accounts for the Australian tax returns – with adjustments just for the different depreciation bases and rates.
When the NZ Trust has been set up with a trustee company, it will only need to lodge a tax return in New Zealand. Where an income distribution is made from the Trust to any Australian beneficiaries, they will have to lodge income tax returns in New Zealand and Australia declaring that income distribution.
In the case of the Australian tax return of the beneficiary, it will show the foreign tax credit for tax paid in New Zealand.
The trustee company will not lodge Accounts or tax returns, as its only function is to act as trustee of the Trust. It has no income or business activity.
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 GP,
The solution is to liquidate the company and pay out the capital gains to the shareholders as the proceeds of liquidation.
It does mean closing down the company, and it does mean that all of the properties should be sold, so all of the capital gains have been crystallized.
In NZ, this would preserve the tax-free status of the capital gains. If the properties are pre-July 1985, then the tax-free status would be preserved also in Australia. If they are subject to CGT, then you still gain the 50% CGT exemption.
The full amount of imputation credit at 30% will not have been paid, owing to the 50% CGT exemption, so if the net profit is paid as a dividend, it will be short of the correct amount.
This is why you would seek to liquidate the company once all the properties have been sold.
As you say, owning capital appreciating properties in a company is not a good idea.
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,
In answer to GP, there are some differences in NZ trust law compared to other jursidictions, the main difference being that the tax residence of NZ Trusts depends on that of the settlor, whereas other trust jurisdictions depend on that of the trustees.
Where the trustee does not distribute all of the net income of the Trust, the trustee pays tax at 33% on the undistributed net income.
My advice to the first forum contributors, who wish to save on compliance costs, is not to act as trustees in their own names but to set up a NZ trustee company with them as directors – let the NZ lawyer be the shareholder to save on auditing the Accounts.
Where the trustees of the NZ Trust are Australian residents, the ATO will deem the Trust to be an Australian Trust – so change it before lodging the tax return of the Trust.
Even though you will be directors of the trustee company, you can still contend that the Trust is being controlled and administered from NZ – the lawyer has power-of-attorney, maintains the minutes, lodges tax returns, etc.
Thr trust transferor rules only apply where property is transferred into the Trust for less than its market value. This happens with transferring the family home into a Trust, but does not happen with rental properties purchased as investments. Deposits paid by the trustees are recorded as loans, so there is no ‘transfer for less than full consideration’.
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 GP,
Yes, I am sure about what I have said about the Trust Transferor Rules.
If you remember, the Rules go as follows –
Under transferor trust measures, tax is imposed on a taxpayer where they have transferred property or services to a non-resident discretionary trust or, after 12 April 1989, to a non-resident non-discretionary trust for inadequate or no consideration. They may have certain income of the non-resident trust included in their assessable income.
New Zealand and Australia have a double tax agreement in place, and regard each other as being on their ‘grey list’. This means that they do not regard the other country as a tax haven, so the Foreign Investment Fund (FIF) rules do not apply.
The only way that the transferor trust rules will apply is where the property is transferred at less than its market value. This usually happens where the trustees transfer the family home into a Trust and gift their net equity to the Trust. In this way, the property has been transferred into the Trust for less than its full value. If the net equity is recorded as a loan, then there is no less than adequate consideration on the transfer of the property to the Trust.
When you have a Trust that is buying rental properties as investments, I see no reason to not record the deposit supplied by the trustees as a loan. They have no reason to disclose less than the full purchase cost of the investment. Gifting should not be an issue, as the property is income producing and will pay itself off. It will pay down its loans.
The middle part of the transferor trust rules extract only acts to qualify a start after which non-resident non-discretionary trusts can fall under the rules. Read this part on its own –
or, after 12 April 1989, to a non-resident non-discretionary trust
The last part of the paragraph applies to both types of trusts –
for inadequate or no consideration
This is the reason for the rules. The common meaning of ‘transfer’ is where something is given with no intention or expectation of return. This is why the rules do not define what is and is not a transfer. It is given its common everyday usage.
To ensure so confusion, the extract ends with the term “for inadequate or no consideration” to indicate what it is meant to capture.
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.nzThanks for that GP,
I know that you have posted that information earlier, and probably more times than you care to remember. As new members join, they may come up with the same questions as others. It is too hard to look back on all the question on the forums.
This still leaves the question unresolved of whether the loan taken out in the taxpayers’ own names can be said to be for an income-producing activity where the taxpayer is living in the house as a principal family residence, in essence if not in form. The answer to this question dictates whether or not the loan interest is or is not an allowable tax deduction.
That is to say, they can say it is a rental property investment. However, if they reside in it, it is deemed their PPOR by the ATO. And it is the ATO that will determine if the tax claim is allowable or not.
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,
We set up NZ Trusts in a way to avoid CGT in Australia. Our cost for the structure is $NZ600.
If you send me a private mail with your email address, I can send the info and attachments.
The structure involves an NZ Trust with 2 NZ resident company trustees. This avoids the ATO deeming the Trust to be an Australian Trust.
As long as any transfers to the Trust, to pay for deposits on properties to be purchased for example, are recorded as loans, then you also avoid the Trust Transferor Rules.
When you buy properties overseas, you unwittingly become involved in international tax issues, so you can avail yourself of international tax planning. There are options to not only defer CGT, but not to pay it at all. It’s up to you. We give the options, you decide.
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 Ralph,
You have not actually said what advice you received from the other accountant or what the conflict is.
In the absence of that, there is nothing preventing you from buying the family home in a Trust and renting it to yourselves.
There just won’t be a tax claim available where the rent received is less than the expenses. In any event, the Trust can only distribute net income to beneficiaries. It cannot distribute losses to the beneficiaries.
If the rental income is higher than the expenses, why would you want the Trust or the beneficiaries to pay tax on the net income? on a family residence?
If I have misundestood your line of argument, please post it to the forum and I will reply.
If you do not wish to post confidential details of your plan to the forum, you may choose to send them to me in a private mail. Your right to privacy will be respected.
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,
Yes, New Zealand does have a more benign tax regime for foreign property investors.
However, the ATO introduced ATO ID 2002/764 with effect from 1st July 2001. This interpretive decision effectively allows for the claiming of foreign rental property losses where the interest deduction gives rise to the bulk of the foreign property loss.
It works this way. The interest deduction is separated from the other rental property expenses and is claimed in your personal tax return. With the interest claim taken out, the foreign rental property income and expenses result in a net profit, and the foreign rental property net income is reported in the appropriate section of your income tax return.
This relatively new decision means that foreign rental property losses, where interest is a large part of the rental property loss, can be claimed by Australian taxpayers. The rental properties should be in the name(s) of the taxpayers to be claimed. If the properties are owned in companies and Trusts, then the old rules of quaranting foreign rental property loseses still apply.
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 way that tax law works, you can effectively claim for the other NZ property expenses.
Tax law says that an expense can only be claimed once against the relevant income. Once you claim the property interest in your personal tax return, the ‘balance’ of the property Accounts will be likely to show a profit – if it is the interest especially that generated a taxable loss – and the ‘profit’ will be recorded in your personal tax returns as overseas rental income.
You claim the interest separately in your tax return from the overseas rental property income & expenses, then show the overseas rental property net income in the appropriate part of your income tax return. You cannot claim the interest again in the rental property section.
ATO ID 2002/764 gives Australian accountants an opportunity to do some fancy tax footwork, and I suspect they may charge extra for the service.
The more complicated the tax system becomes, the more accountants rub their hands. On the other side of the ledger, accountants do have costs in keeping up-to-date with tax legislation changes, so it is reasonable to charge their clients for the costs of keeping up-to-date to provide the best level of services and comply with tax laws.
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 last comment was correct to the extent that there is not a 100% CGT exemption when the family home is owned in a Trust. However, the Trust would still be able to claim the 50% CGT exemption where the beneficiaries of the Trust are the same family members living in the house.
It looks like the ATO doesn’t want families to own the family home in a Trust. Or perhaps they do want you to have asset protection so they can be paid CGT on the sale of the family home – if purchased after July 1985, when CGT came into effect.
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 Anzion,
Any way that you try to cut it, any attempt by whatever structure to purchase a family residence and claim the expenses (or excess of expenses over income), is doomed to failure. The ATO would rightly regard the dominant reason for the arrangement to be tax avoidance, and strike it out.
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
