Forum Replies Created
Hi,
The other contributor has suggsted correctly that you seek the advise of a property accountant. If you want some advice without the benefit of consulting an accountant, then I offer the following.
The title would be 99/1. The way to achieve it is buying the property as tenants in common. Ensure that your lawyer understands this, as they usually put it as joint tenants when it is married couples buying a property – this is 50/50 ownership while both parties are alive but invokes survivorship rules on the death of one of the parties; the surviving partner owns the property, it does not form part of the deceased’s estate, so cannot be included in their will.
Your wife could go as guarantor of the loan. This is preferable to having her name on the loan. The ATO are inclined to say if the loan is in joint names, then the loan expenses must be claimed 50/50. If the property is owned 99/1, this may convince them that this is the appropriate proportion to use. I have not tested that with the ATO. However, the first case is a real danger.
To protect your wife’s property rights, you could do the tenants in common 99/1 ownership, so that you could not sell the property without her knowledge. Otherwise, you could own the property 100% and your wife have a caveat on the property to advise her on any action to deal with the property – either sell it or put a mortgage on it.
I hope this assists you. However, you should seek advice to ensure that your best interests are served in the way you structure the ownership of the 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 Nick,
A nice thought, but it doesn’t happen in my experience.
You have paid for the LMI upfront and there is no refund – even where you sell the property.
I would be interested to hear of anyone receiving a refund where either the property increases in value or is sold early.
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 Nick,
Rental property inspections can be claimed for as many trips are necessary or appropriate in a given year.
If repairs are being carried out, or there are changes in tenants or property managers, more inspections than normal may be required. So more claims can be made.
It would be wise to document the trips. This would involve arranging the inspection trip to be accompanied by the property manager, and following up the trip with a letter to the property manager, thanking them for their assistance. They will have their record of the trip, however the more documentation that there is of the trip the better.
If the property is co-owned with your wife or another person, then the travel expenses of that person can be taken into account and claimed. Travel expenses would include –
* airfares
* train fares
* taxi fares
* car hire
* fuel, repairs and insurance
* telephone calls
* meals & accommodationWhere air travel is required, it would be wise to maintain a travel diary to document the trips and who was met, what business was conducted and the like.
If two people own the property through a company or Trust, then the same rules as above apply. However, it would be difficult to see how children accompanying the owners on the trip could be seen as tax deductible. Section 26-30 disallows travel expenditure of relatives not involved in the income-producing activity.
The amount of the expenditure is only limited by the amount that cannot be attributed to the income producing activity. This refers to what would be categorized as private or capital in nature. So where private business is conducted during the trip, an apportionment is appropriate.
If the property is still under construction, and it is a rental property investment, the income producing activity has not commenced, so the expenditure is capital in nature – the only exemption is interest that is on revenue account.
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 Nick,
Loan Mortgage Insurance in excess of $100 is claimable over the term of the loan or 5 years, whichever is shorter. This is pursuant to ATO ID 2002/1116.
This means that the $7 800 is claimed over five years. Where the property is sold before 5 years has expired, the balance of the unclaimed insurance is claimed at that time.
LMI is considered as a borrowing cost. It is regarded as on capital account. As it is related to the loan, it is written off over the time of the loan. There is an ATO interpretive determination (ATO ID 2002/1116) that governs the claiming of the expenditure, and allows the expenditure to be claimed over the term of the loan or five years, whichever is less.
Therefore, it is in a class of expenditure governed by special rules – ATO ID 2002/1116 in this case.
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 Nick,
In your example, the $1 500 loss would be claimed as Loss on Disposal of Assets. It would be claimed in the Statement of Financial Performance (formerly known as the Profit and Loss Statement). This shows that it is a deduction on revenue account.
In general, any loss on disposal of fixed assets is recorded as a Loss on Disposal of Assets. The loss has to be crystallized by the asset being either sold or scrapped (gotten rid of). The asset cannot be still in use and have a claim made for the diminution of value through damage.
Where an insurance claim is made, the insurance recovery is shown as income. The replacement of the asset is claimed as depreciation, in the same way as the original asset – which is written off, giving rise to the loss on disposal of assets.
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 Nick,
In this case, there is no capital loss. The negatively geared property gives rise to a loss on revenue account not on capital account.
What you ask happens in effect, but not the way that you envisage. A current year deduction cannot be claimed in a future year. It has to be claimed in the relevant year to which it applies.
So that, where in a given year the rental property expenses outweigh the rental property income and your own income, the result is a tax loss that is carried forward to future years to be claimed against future income.
Tax losses can be carried forward indefinitely to be claimed against future income.
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 each of the three scenarios listed – the number of years before sale – the legal costs are claimed at the time of sale. They reduce the capital gain on which taxed is paid. They are capital costs and are taken into account to reduce the capital gain made on sale.
If by LMI you refer to loan mortgage interest, that is claimable each year. Interest deductions are on revenue account, so are claimed each year against the rental or other income from the 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,
Maybe you should consider another tax issue – CGT. You won’t receive the 50% exemption where the property is held in a company.
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,
For a NZ bird dogger you can try CastleDreamer. She is a member of PropertyInvesting.com. Check out her profile.
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, that is an interesting Income Determination from the ATO.
The use of the word “taxpayer” means that the ID can apply to any taxpayer, as companies and trusts are also referred to as taxpayers.
The ID goes on to say –
“For income years commencing on or after 1 July 2001, debt deductions are no longer subject to foreign loss quarantining. The definition of ‘foreign income deduction’, to which the foreign loss quarantining provisions apply, now excludes debt deductions to the extent they are not attributable to any overseas permanent establishment of the taxpayer (subsection 160AFD(9) of the ITAA 1936).”
The last sentence seems to not exclude from the quarantining provisions (that is include in the quarantining provisions) debt deductions that relate to foreign entities of the taxpayer.
So your understanding that it only relates to individual taxpayers is correct.
The ID has not been withdrawn at the time of posting this reply, so it is still current.
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,
On a closer reading of the provisions quoted, you are correct. The version I had downloaded from the internet did not clarify as well as yours the first and second limbs.
The for less than adequate consideration rule applies only to the non-discretionary foreign trusts.
The Foreign Investment Fund (FIF) rules won’t apply to trusts that you beneficially own and control. Those rules are only for foreign trusts where you have a small percentage ownership.
There is de minimus rule in the transferor trust provisions that is interesting. I am pasting it below –
“De minimis exemption
The de minimis exemption ensures that the transferor trust measures do not apply to small amounts derived by a trust estate in a broad-exemption listed country.
The de minimis exemption is worked out having regard to the total of the attributable incomes of all trust estates for which a taxpayer is an attributable taxpayer. The de minimis exemption will be satisfied if the total of the attributable incomes of all the trust estates is equal to or less than the lesser of:
$20 000 or
10 per cent of the total of the net incomes of those trust estates.
If these tests are satisfied, the attributable income of broad-exemption listed country trust estates will not be included in the assessable income of the attributable taxpayer. The attributable income from the non-broad-exemption listed country trust estates would still be included. “
New Zealand is a broad-exemption listed country, so the de minimus rule applies to income of the trust. There will be no need to report income in an Australian resident’s tax return where the above criteria apply.
There is another legal article that I have found that offers different options and interpretations, so I may be able to post some better news shortly.
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,
You have still not picked up on the operative words of “for inadequate consideration”. What this means is where property, including money, is transferred to the Trust for less than its market value.
In the case of real estate property, it would be where property worth $500 000 is transferred for $400 000. Can you see what the ATO is trying to stop or capture if it does happen?
In the case of money, the loan is recorded as full value (naturally), then it is written off or gifted away. This is how money would be transferred at less than its market value.
My earlier comment that money could not be transferred at less than market value is correct, as it can be done no other way. However, the loan can be written off or gifted, and ATO have other rules to cover that situation as well as these rules – the transferor trust rules.
The question about an Australian Trust being able to distribute foreign sourced capital gains tax-free to a non-resident beneficiary would have to be addressed to an Australian tax accountant.
I suspect that the Australian Trust has earned the income and will be assessed on it by the ATO. Where the distribution is made to a non-resident, higher non-resident income tax rates would apply.
A non-resident receiving a distribution from the Australian Trust would still have to lodge an Australian income tax return. I had situations in Australia where I did 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.nzHi GP,
It looks like we have some budding legal eagles out there! It’s great that you are doing research to be better informed.
Okay, let’s have a look at the ATO transferor trust provisions. What you are referring to is –
“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.”
The operative words are “property” being transferred for “inadequate or no consideration”. So we are talking about assets being transferred for less than their market value.
We are not talking about “funds” or “money” being transferred for less than it’s market value. It is not possible to transfer money for less than its value.
I hope that this helps.
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 Wayne,
You can set up companies online in New Zealand. I have not heard of doing it online with trusts. Trust are important legal documents, and getting it right is important for the best legal and tax outcomes.
Either you or your Australian trustee company can be the trustee of a New Zealand Trust. As long as your settlor is a New Zealand resident (can be me), the Trust will be a Qualifying Trust. This means that the capital gains will not be taxed in New Zealand.
The NZ Trust structure also allows you to not pay CGT in Australia – as long as no capital gains sourced distributions are made. Capital distributions can be made with no tax consequences.
Contact castledreamer. She has been in contact with my firm and has made enquiries about a Trust structure. Otherwise, you can email me for more information, free Rental Property booklet, fact sheets, etc.
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,
Okay, it’s a big step for anyone first time out. The properties should be positively geared, as the yields are in the region of 11-14%, so you should not have to send money across to New Zealand to top up loan repayments.
The properties are likely too old to make it worth getting a quantity surveyor to do a chattels valuation for a depreciation schedule. You can check at no cost by contacting the Valu-It website and requesting an appraisal. They will look at the addresses of the properties, check the building construction and determine whether it is worth doing – given the cost. They will advise you accordingly and quote you for the work – around $480 each The website link for appraisals is http://www.valuit.co.nz/book_appraisals.asp.
The money that you are planning to spend on settlement will be classed as preparing the properties for rental, so will be capital in nature. You will not receive a 100% deduction in the first year. You will have to capitalize it and depreciate it over a number of years. Depending on the repairs carried out, the depreciation rate will likely be from 4% to 25%.
After the properties have been rented out, you will be able to claim for repairs as a 100% deduction. If you can delay the repairs until the properties are rented, your tax claim will be better.
You may benefit from a free copy of our 31 page Rental Booklet. You can request this on-line through our website link http://www.masteraccountants.co.nz/index_files/enquiries.htm. It has been written mainly for New Zealand resident investors, but the information has application for anyone investing in NZ rental properties.
For more specific advice for overseas investors in New Zealand, we would need to correspond with your email address that allows articles as attachments.
However, I can advise you quickly that a New Zealand Trust would be the most suitable structure for owning your NZ properties. You would be able to avoid paying CGT in Australia, and there is no CGT in New Zealand. If the properties have been purchased in your name, then you will be liable for CGT in Australia when you sell them.
When you signed the sale & purchase agreement, did you have the name as yourself “and/or nominee”? This would allow the Trust name to be inserted before settlement takes place. Even if you did not do this, you may have time prior to settlement to ask your lawyer to ask the vendor to approve a name change to the Trust. This change is normally accepted.
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,
If you are renting out the apartment – it is an IP in other words – you can claim the levies against your tax. They are current expenditure not capital expenditure, so are claimable against the rental income each year.
If you live in the apartment, you won’t pay CGT as it is your principal place of residence.
So why wait for CGT time to claim the levies? You can claim a tax refund if the expenses are more than the income. So grab the tax benefit now rather than waiting.
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,
According to your stated intention of buying a property for the purpose of resale – instead of as an investment as a rental property – you wouldn’t have to pay CGT.
You would pay tax on the whole of the profit made. At least with CGT you obtain a 50% exemption – you don’t pay tax on half of the net profit.
I don’t know if that is a cause for celebration in your camp, but it wouldn’t be in mine.
I happen to live in a country that doesn’t have CGT. Now that is cause for celebration! We have to be careful about saying that we are buying properties with the intention of resale at a profit – then we get taxed on the whole profit.
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 Jamie,
If you are talking about the fees for internet payment of an investment property, yes. If you are talking about your isp fees to access the internet, the best you could do would be to apportion them between business and private.
And if you are talking about paying off your own home and not an investment property, then none of the fees are claimable. Unless of course you are in the USA and come under the IRS – very different tax rules to Australia and New Zealand.
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 can’t help you with finding an Australian accountant to assist you, but I can help you with a New Zealand accountant – used to be CPA in public practice in Australia – who knows both sides of the Tasman.
Wait to see if anyone can recommend an Australian accountant, if you prefer to talk to someone over there.
By the way, if you’re investing in New Zealand, shouldn’t you be asking for a New Zealand accountant to set up NZ structures and do tax returns? Even if you have an Australian structure to purchase properties in NZ, you will still need to lodge tax returns in New Zealand.
Check my postings in this forum to see if I have the answers to your questions.
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 Yuyu,
I see that you have joined in this forum and posted another topic.
Your income alone isn’t going to give an adviser all the information to give you a comprehensive answer, but let’s have a go.
Let’s make an assumption that you have a deposit or equity to make the NZ property purchase, and that there will be 80% borrowing, and that you are looking at properties with high rental yields but low capital gain, then it is likely that the property breaks even or shows a small loss or profit.
Many NZ advisers will say buy in your own name or through an LAQC company. These options are not for non-residents as they will pay CGT if in their own name or the LAQC company is of no benefit to them as they don’t have NZ income to use the losses attributed from the company – hence the acronym LAQC for loss attributing qualifying company. And eventually they will say to transfer the property into a Trust for asset protection.
For the overseas investor in New Zealand there is no point in waiting. Buy the property in a Trust, so the asset protection is there immediately. The property will either show a small loss or profit from the start, and will continue to generate net profits into the future. Depreciation will lessen the tax liability and allow for capital distributions to the Australian beneficiaries without tax consequences.
When the Trust sells the property and makes a capital gain, the capital gain replenishes the capital depleted by distributions from the non-cash depreciation charge. As long as the capital distributions are not funded from the capital gains, there is no tax to pay in Australia. The Trust has made the capital gain, not the beneficiaries in Australia, so no tax is payable.
And no CGT is payable in New Zealand. So all of the tax laws are adhered to and no more tax is paid than what has to be paid. The retention of the capital gain in the Trust helps to fund future property purchases by the Trust, so that the Trust will not have to call on the beneficiaries to fund deposits for the second and subsequent property purchases.
Now you see why I like Trusts for overseas investors. Also, if a dividend is paid by a company to an overseas investor, they do not receive the benefit of the tax paid on the company’s profits – the imputation credit. New Zealand and Australia have signed an agreement to allow half of the imputation credit. If a Trust distributes tax paid income to an overseas investor, they receive the full benefit as a foreign tax credit.
If in the example given above, the property has a lower rental yield and high capital gains potential, the overseas investor will have to top up the excess over expenses over income each year, and receive all of that back after say five years when the property is sold, with a healthy capital gain. The net capital gain (after deducting carried forward rental property losses) will have to be left in the Trust and can be used to fund future property purchases.
I have investment analyses that show how this works with real investment scenarios available in Auckland. It would not be hard to input other figures into the model to see how a proposed investment elsewhere will fare. This allows the investor to know what they are facing bfore making the investment – always a good idea.
I have posted this to your private mail also.
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
