If you own rental property, one of the things your accountant will look at is depreciation. If you've got 6 minutes and 5 seconds, then watch this animated video from Inland Revenue.
What is depreciation? Why do you have to depreciate? Here's a 30-second overview
How and why should you account for your family trust? The first thing to consider is that there are whole teams - firms - of lawyers dedicated to unraveling and breaking apart trusts.
"What?! Who would do such a thing?" you might ask. Lots of people: MSD, IRD, WINZ, creditors etc. They may try to prove that your trust is simply a false front to make you "poor on paper." (a)
How do you prevent this? Simply put, you need to manage it well. (b) How?
Other sources of info
So, what are the news media saying about all of this? See this article at the NZ Herald website. See also this article:
Excerpt: "A key recommendation in the review was that courts would be able to find that a trust had not been established and had no legal standing if the person who established it continued to manage the assets it held "as if they are their own personal property."
and this article:
Excerpt: "The proposed new law would clearly set out the core characteristics of trusts and duties of their trustees. It would also firmly underline that a trust could be found invalid if the trustees were not steering it towards its ultimate purpose, the benefit of its beneficiaries."
I want a second opinion!
Certainly. See The Trouble With Trusts at www.grownups.co.nz.
OK. Now I know. I haven't done any financial statements in the past. Can I just ignore the past and carry on from here?
Honestly, that's risky. Scores of court decisions have shown that the threshold for trustees not breaching their duty is quite high. In our opinion, the best thing is just to bite the bullet and get them done. You'll be grateful later in life that you had the foresight to spend a small amount now to preserve the enormous assets that your Trust owns.
Oh but our Trust only owns the family home so we don't need all that.
With respect to financial statements for the Trust, Janet Xuccoa of the well-known property accountant firm GRA writes on page 117 of her book Family Trusts 101: “It never fails to amaze me the number of Trustees that don’t have annual financial statements prepared for the Trust they are administering. How can a Trustee meet one of their fundamental duties of accounting to a Beneficiary if they do not possess up to date financial knowledge of the Trust’s affairs? Furthermore, a Trustee has a duty to meet the tax obligations of the Trust, and these obligations can’t possibly be identified and satisfied if a Trustee doesn’t know the financial position of the Trust. So in my view, the rule is financial statements should be prepared for Trusts.” She then goes on to list three reasons why your Trust needs annual financial statements even if it doesn’t receive an income.
Hmm, so where to from here?
What should you do now? We recommend that you read Martin Hawes' book. Or if you don't have time for that, at least look at this blog article from LegalBeagle. Get a good accountant who has expertise in trust accounting and can do your annual accounts at reasonable prices (us!). Speak to your lawyer.
When should I start?
I'm overwhelmed by all this. Is there anyone out there who can help me?!
Yes. Us! Contact us today on 099730706!
References: Family Trusts by Martin Hawes. (a) Page 164 (b) Chapter 7 (c) Chapter 9. This blog does not claim any specific endorsement by Martin Hawes, Janet Xuccoa or GRA.
Should you operate your new business as a sole trader, partnership, or company? In this animated video, Inland Revenue explains the ins and outs in plain language.
Accounting for your rental residential investment property; general taxation advice.