Forum Replies Created
Hi Misty,
I think you will find that the subdivision expenses will be classified as capital expenditure, so that the expenditure will not be claimable against revenue – unless the revenue is capital.
What I am saying is that if and when you sell the property, and there is a profit to be taxed – say capital gains for example – the subdivision costs will be deductible from the capital gain before calculating the taxable amount.
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’re right on the first comment. The charity must be registered with the ATO to be claimable as a donation.
The Church of the Latter Day Saints has done very well on this score by tying in its private school funding via the tithing programme to make the tithing deductible…educational purposes.
As regards the second comment, if the trust is a charitable trust, it can donate money wherever it likes in compliance with its deed. But this has nothing to do with the ATO, as the trust would not be carrying on a business to claim the donations.
Businesses and companies are subject to the same rules as everyone else in regard to donations, and the recipient has to be on the charities list for the donation to be claimable.
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,
It does look your accountant is giving you the runaround!
I speak from experience as a property investor in Australia and practising as a CPA in public practice in Australia for six years and, after four years experience as an accountant in New Zealand, specializing in property investment in New Zealand.
Ask your accountant a simple question, “If I own the NZ properties in my own name and I am an Australian tax resident, will I pay CGT on the capital gains on the sale of my NZ properties?”
The answer will be, “Yes.” Then ask him/her, “Then why would I want to own the properties in my own name?”
I have posted other options in this property forum and others in New Zealand, in the interests of affording investors the information to make more informed decisions. And it does not concern me if you do not buy a trust or other structure from me or another accountant or lawyer in New Zealand.
It is enough for me to know that you are now aware of the tax issues should you decide to buy the NZ properties in your own name. You can no longer say that no-one advised you of the options and the consequences.
Using Trusts to own properties in New Zealand means that you can organize your affairs so that you do not have to pay CGT in Australia, and that is a good option if you are seeking to maximize your net wealth.
It is also possible to make capital distributions that are not sourced from capital gains, so you can receive cash from the property without paying tax in Australia. This way, the cashflow is not just one way to New Zealand with no return.
Trust accounting and tax can be done for a reasonable cost – say $300 to $400 pa. A company may cost more than that, as companies with foreign/Australian shareholders must have their Accounts audited, raising the compliance costs.
The costs for doing your rental property accounting and tax if under your own name would be about the same as for the Trust, maybe $100 less.
And maybe I’m scaring you needlessly with the spectre of CGT. As one of the earlier contributors wrote, much depends on your income and whether or not your property investments will be cash-flow positive or negative.
You are probably aware that the ATO will not allow you to claim for your NZ rental property losses – IRD do allow NZ tax residents to claim for tax losses on their Australian rental properties.
So if your NZ properties are running at a loss, you accumulate the losses in Australia and carry them forward to claim against future capital gains and/or rental profits. Let’s say you make a capital gain, you declare 50% of the capital gain (there is an automatic exemption of 50% since September 1999) then take off your carried forward losses on the rental property. So maybe there is no tax to pay anyway.
You need to look at your investment strategies, come up with some likely scenarios and then discuss the way forward with your accountant.
Happy investing!
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 Fluffy,
I like what you are thinking! And the answer is yes.
You do have to be careful though. You can only have one PPOR at a time, and there are tests as to what is your PPOR at any given time.
Some of the tests are as follows –
1. is this your electoral address?
2. is this your address for electricity services?
3. is this your address for postal mail?
4. is this where you actually reside?In your relations with the ATO, I would strongly suggest that you do not try to hoodwink them and that you are truthful. If you claim that an IP is your PPOR for one year or more, then you had better have been actually residing in it for that time.
This should be something that can be evidenced by the testimony of your neighbours, your mail at the post office, the electricity account, your electoral address and the like.
The ATO accept a lap over period so that, where you are selling your PPOR and you move into an IP that becomes your PPOR for a time, the ATO accept that you do not pay CGT on your previous PPOR and that the IP has become your new PPOR.
Just ensure that what you are claiming is factual, that is that it actually happened. What you are proposing is completely legal and good tax planning.
If the reason for the absence is that you went to work overseas, so you always intended to come back to that house, that supports your case.
If the reason for the absence is that you moved to another State to work for a few years, and had the intention to return to that house as your PPOR, that supports your case.
Having said that, the ATO accepts that a person’s situation can change, so what was the PPOR no longer suits, eg additions to the family and the house is now too small, the relocation has become permanent, and the like.
So it can be a grey area, and you should be prepared to argue your case. And that does not mean that you have slim chances. You just have to have reasons and be prepared to argue them.
As a final warning, I would be careful about contrived situations. If it looks as though you only lived in the IP for one year with no intention to really establish it as your PPOR, in the absence of any strong reasons to the contrary, the ATO could deny your claim and charge you CGT.
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 correction! And it’s better to be referred to as the seventh state rather than the wannabe state!
The Australian Constitution is supposed to have allowed for the inclusion of New Zealand as another State. There is CER and some recent talk of becoming one currency and one economy. I suppose we will have to watch and see nature take its course.
Chris
http://www.masteraccountants.co.nzChristopher 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,
A lawyer does more than just write up contracts to put through a property deal. They check on the property title to see if there are any mortgages that weren’t disclosed. They check for caveats and emcumbrances registered against the property. And they check for compliance with building codes and pest control. They check that the rates and taxes and water rates are paid up.
I don’t know if I would want to buy a property without all the checks and balances being carried out by a lawyer or conveyancing company. Look at the value that they add, that you are buying a property worth tens of thousands or hundreds of thousands of dollars and imagine the costs if things went wrong.
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 Misty,
Okay, you’ve done the easier one about the company search, and the information is not current.
I have an old copy of a CD from the National Phone Directory. You may like to check if you can obtain an up-to-date version, then do a search on the phone numbers that you have to see if you can locate current name and address details.
Then, if this person has defaulted on other bills, they may have a record of Court Summons and Judgement actions against the company. From those records, you will find their name and address details. I don’t know if this information is online on the Internet. You used to have to leg it to the Courthouse and enquire at the counter.
Heaven forbid that they might already be bankrupt! Check with ITSA (Insolvency and Trustee Service) in your State.
The last option costs more money. Contact Dun & Bradstreet or other collection agencies, such as George Laurens, and tell them you want a credit check on this company. They will tell you if you have to subscribe for a full year or can pay for just one credit check.
If they are passing around bad cheques, the CIB might know about them for fraudulent conversion, so contact your local Police Station.
There’s a few options to get you started!
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 Misty,
I hope that you will be pleasantly surprised to receive the answer YES.
A lot of part-time students do not realize that, as long as their courses relate to their day-time jobs, they can claim the cost of travel from work to tafe/uni. Even a one-way trip from home to the tafe/uni library is claimable. If they travel work-uni-work, then the return trip is claimable.
So, the way that you have worded your question makes the expenses claimable – including travelling costs, but usually just one way. If your home is a place of business, then travel from home to tafe to home will be claimable.
The ATO quite correctly does not view the owning of rental properties as a business, so justifying a home office is rather problematical. If you own many rental properties or a block of units that requires regular management and collection of rents, for example, then ATO are more likely to accept that you need a home office to maintain records and as a base to manage the properties.
If you were to travel from the rental properties to tafe, then the travel claim would be clear. You may need to ask your Australian tax agent about the travel claim to ensure it is documented correctly.
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,
Your questions were as follows –
1. What type of trust should I set up (its just me buying positively geared property)
A. You would set up a discretionary trust.
2. Why even set up a trust?
A. Asset protection. If you own the properties in your own name or in a company, creditors (apart from the bank from whom you borrowed money) could sue you and attack the equity in the properties.
3. Should all future properties be in a trust?
A. Do you want to protect your assets or not?
4. Who will the trustees be (if its only me involved)?
A. In Australia, as in most trust law jurisdictions, you cannot be the trustee of your own trust. You can be the guardian, and the trustee is supposed to respect your wishes. In New Zealand, you can be the trustee of your own trust – a most desirable situation for peace of mind.
5. What are the tax and cost implications?
A. If the trust makes a loss, the loss stays in the trust to be offset against future net income. A trust can be set up from $250 in Australia through ‘shelf trust’ organizations, and can go up to $4 000. Annual accounting is approx $400.
If the trust makes a profit, the net income is supposed to be distributed to the beneficiaries – you – otherwise the trustee pays tax on your behalf at the top marginal rate. You receive a tax credit when the a distribution is made to you. So probably best to distribute the net income each year, unless you’re at the top marginal tax rate.
6. What are the advantages of a trust?
A. Mainly asset protection plus tax optimization where family members are also beneficiaries – not under-age children unless in a testamentary trust, but that would mean that you were no longer on the planet.
Domo has a different problem. The purchase of properties has been done the wrong way around. The loan should have been used to buy an IP and have the PPOR mortgage-free. It’s a bit late now. New Zealand has an answer in an LAQC company, but Australia has no equivalent where the company losses are attributed to the shareholders.
My advice to Domo would be to sell the IP, use the funds received to pay out all or most of the PPOR mortgage – if the value is higher than the IP – then buy another IP with borrowed funds. Sorry, you can’t keep the IP that you have now. Are you sentimental about it? Rental property investment is a rational exercise, not a sentimental one.
And, if that was the best advice that your accountant could come up with, ask the other forum contributors for a rental property savvy accountant. If you take their advice, you will have a trust with a loss that you cannot use until it starts to make a profit at some time in the future. My suggestion will give you tax benefits from the time you put it into place. Don’t buy the new IP in the name of a trust. Buy it in your own name.
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,
There are differences between NZ Trust Law and just about every other jurisdiction, so why not set up an NZ Trust to handle proposed property investments in NZ? It quarantines the properties on both sides of the Tasman, and you won’t pay CGT on your NZ properties.
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,
It’s wise to ask before doing something.
The property has not been settled yet, so it has not been rented out, I hazard a guess. The income-producing activity has not commenced, so the travel and accommodation are capital expenses. They are added to the purchase cost and can be depreciated over time.
If you visit the property after it is rented, then the travel and accommodation will be deductible to the extent that they relate to inspecting the property, dealing with rental agents, effecting repairs and the like.
You might be able to get away with the travel and accommodation becoming deductible if you pre-arrange with a rental manager to have the property listed as available for rent. Then your trip is to make final arrangements for renting, such as effecting any changes requested by the rental agent following a joint inspection.
Visiting the property when it is available for rent is similar to visiting it when it is rented. This may be a later time to the actual settlement, so may not suit you if you really wanted to see it prior to settlement. But if your aim is to make the trip deductible…
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,
It is difficult to provide a comprehensive answer to an open-ended question such as yours and with very little in the way of a scenario.
I can tell you one issue is the tax issue. Once the trust changes from a NZ tax prespective from a foreign trust to a qualifying trust, IRD will want to charge the trust tax at 45% on the accumulated funds after 1/4/88.
So you would not want to do this lightly or on a whim.
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 use of the word replacement indicates repairing something by replacing like with like, so you could claim the expenses 100% in the year of expenditure. This is in revenue account.
By like with like, waht I am saying is that where you replace a wooden door with a wooden door and where you replace a metal gate with a metal gate, so that there cannot be said to be any “improvement”.
The first contributor was correct if the replacement qualifies as an improvement, something different from what was there.
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 Fluffy,
All the available distributions do not have to be made in the year. However, the trustee will have to pay tax at 33% on the net income. When it is distributed at some time in the future, the beneficiary receives the tax credit.
No need to have a lawyer close to the area where you are buying a property. We use faxes and emails for speedy communication, so proximity is no longer a problem.
Obtain quotes on companies and trusts before you act. Accountants and lawyers commonly offer company and trust setup in 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 Jason,
I agree with the comments of the earlier contributors. What you have done is money shuffling. The decision to sell has nothing to do with any loan attaching to a property. If you reduce a loan and sell a property, you receive back the money that you repaid. No advantage. The advantage is in the increase in value of the property.
You mention investing in mutual funds. If you want to invest in mutual funds or anything else, it would be better if you went to see a financial planner. They would take you through a process of establishing what are your financial goals five years and twenty years out. They would see how averse you are to risk, and check out your current resources to see if your financial goals can be reasonably achieved.
Ask any financial planner about mutual funds, and you will see that they underperform the share market on average. You would be better served investing in an investment product that mirrors the market, such as the Standard & Poor’s Index or similar products available from insurance companies. Mutual funds do the same but you pay hefty management fees for the privilege – that is why they underperform on average, due to the higher management costs and often poor investment decisions.
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 Fluffy,
Companies and Trusts are cheaper to set up in NZ than in Australia. Companies in NZ cost $250 and Trusts cost $350. Companies in Australia cost $1000 and Trusts can range from $250 to $3000.
You are right about asset protection lacking in companies, as you hold the shares and they are an asset and the company can be attacked though you.
If you own property in a Discretionary Trust, then you have absolute asset protection. Even the offical assignee in bankruptcy (the equivalent of your offical trustee in bankruptcy) cannot tell the Trustee how to exercise their discretion. NZ Trust Law differs from other jurisdictions in ways that will no doubt suit you.
1. You can be the trustee of your own Trust -this is not allowed in Australia.
2. The tax residency of the Trust depends on that of the Settlor not the Trustee – it is the opposite in most other jurisdictions. So if you have a local Settlor in NZ – a once off role with no ongoing control or responsibilities for the Trust – then the Trust qualifies as a Qualifying Trust for NZ Tax Law.
If you use a company in Australia to purchase property in NZ, you will be subject to capital gains tax (CGT) in Australia on the sale of any properties. The same applies for a Trust set up in Australia to purchase property in NZ.
If you set up a Trust in NZ to buy property in NZ, you can avoid CGT in Australia and receive capital distributions that are not taxed in Australia. New Zealand does not have a CGT.
So do you need any more convincing of which is better? companies or trusts? and whether in Australia or NZ?
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.nzI can confirm Terry’s advice to you. You can claim the interest incurred to buy the capital asset, and likewise you can the interest to fund necessary expenses incurred in earning the income from the asset, whether they are repairs to maintain the asset or ongoing expenses such as rates. Even funding renovations would make the interest claimable.
It took a while – like years, 15 if I remember correctly – but the Steele’s case in Australia finally settled the argument that interest expense is always on revenue account. There was never this question in New Zealand, but Australia seemed to want to decide it in the High Court.
I was a CPA accountant in Australia for six years, so I should know.
I hope that puts your mind at rest!
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
