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11 April 2013
The Property Hub
Amanda Watt – WHK
How to Structure the Ownership of Your Rental Property
Brief Recap of Last Time
• The Basics – Why Rental Property?
• Main Reasons People Invest
– Additional income
– Capital growth
• Why Invest in Property?
• Example of Building Your Wealth
On our Blog: www.aucklandpropertyhub.com
Foundation
A good foundation is needed for structuring your affairs. You need to focus on:
• Creating a strong foundation
• Getting good asset protection
• And if you do it right, potentially minimise
your tax
Put every $ to good use and protect it
What is Asset Protection?
It is protecting what you own from others – or liabilities arising elsewhere.
What to protect from:
• Matrimonial / de facto relationships
• Creditors
• Certain family members
It gives you choices
Asset Protection
• No form of asset ownership is perfect
• The most appropriate form of ownership will depend amongst other things on:
Individual circumstances, and
Whether the structure adopted can be administered correctly
• Structuring is less risky & less costly than
restructuring
Different Types of Structures
• Sole Traders
• Partnerships
• Company
– Ordinary
– LTC’s
• Trusts
• Limited Partnerships
Sole Trader
• Simplest Form• Legal entity is individual
• Personally liable
• Unlimited liability
• Limited tax planning ability
• Taxed at individual rates
– $0 to $14,000 at 10.5%
– From $14,001 to $48,000 at 17.5%
– From $48,001 to $70,000 at 30%
– Over $70,000 at 33%
• Commercial reason for change – Asset Protection
Partnerships
• Legal entity is individuals
• Unlimited liability personally
• Joint and several liability
• Taxed at individual rates
• Limited tax planning ability
• Partner leaves – new partnership
• Commercial reason for change – Asset
Protection
Companies
• Legal entity - Company• Limited liability• Two parties
– Directors – manages company but have obligations – Shareholders – owners
• Easier to introduce new shareholders• Tax planning ability – single tax rate of 28%
but can take advantage of lower rates for
individuals
LTC’s
• Look through company
• Legally treated as a company
• Taxed as a partnership so profits and losses must be passed out to shareholders to include with total income in proportion to shareholding
• Shareholders can be individuals, another LTC or a trust
• Close shareholder test – a maximum of five groups
• Owner’s basis calculations may limit flow through of losses
• Selling shares in LTC for 50k more than book value is taxable
• Depreciation recovered triggered for any sale of shares
• Few fish hooks with LTC’s
Trusts
• Three parties– Settlor – the person who sets up the trust
– Trustees – the people who manage the trust’s assets
– Beneficiaries – the ultimate receivers of the trust’s wealth
• Most trusts are discretionary trusts
• A trust is a relationship – it is not a legal entity
• The trustees are the legal representatives of
the trust and therefore the legal entity
Trusts continued
• People trustees versus a company as trustee
• Independent trustees
• Trust tax rate is 33%
• Very effective tax planning tool
• Allows intergenerational transfer of wealth
• Good asset protection
• Careful to operate the trust as separate from you and not just an extension of yourself
Limited Partnerships
• A form of partnerships with two parties:
– General Partner – operates and manages the partnership and carries all of the risk, public party
– Limited Partner – silent owner with limited ability to manage, private party, no limit on the number of limited partners
• Separate legal entity – general partner carries all of the risk and liability
• Flow through treatment for profits and losses
Structuring – Final Points
• Is the Rental Property going to make a Profit or Loss?• What are your long term plans?• How important is Asset Protection?
Other considerations can include:• Plan• Risk profile• Personal situation• Types of income earned• Cost / risk management• Lifestyle support• Tax benefits versus asset protection
Next time!
Come next time and we will go over Tax Implications for Property Investors!
Accounting
IRD Audits
Tax
Penalties
RISKS – WHAT CAN GO WRONG!
Benefits of a Good Property Accountant
• Use an Accountant who is a property investor and knows about property investment – they have an invested interest!!
Personal Profile - Amanda Watt
• Chartered Accountant in public practice (WHK)
• Specialist “generalist”, with a strong focus on property investment
• Property investor (seriously since 2000)
• Board member of Auckland Property Investors Association (APIA)
• Treasurer of New Zealand Property Investors Federation (NZPIF)
• Head of Property Group at WHK Auckland
Questions
?
www.whk.co.nz
WHK AucklandLevel 6, WHK Tower
51-53 Shortland Street, Auckland 114009 300 5784
Email: [email protected]