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!

AccountingIRD Audits

TaxPenalties

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: amanda.watt@whk.co.nz