11 April 2013 The Property Hub Amanda Watt – WHK How to Structure the Ownership of Your Rental...

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: amanda.watt@whk.co.nz