The Two Main Types of Trust
There are generally two types of trusts that we do the accounting for:
A trust is an arrangement between three groups of people: the Settlor, the Trustees and the Beneficiaries. The Settlor of the trust sells his property to the Trust. To acknowledge this, a Deed of Acknowledgement of Debt is usually drawn up. The Trustees must then manage the property on behalf of the Beneficiaries of the Trust. (Any legal documents including bank statements should actually be issued to the Trustees, but sometimes you will see bank statements and invoices issued to the Trust). A person may be the Settlor, a Trustee and one of the Beneficiaries.
Now, usually the Trust has no income, so the Settlor pays the mortgage to the bank on behalf of the Trust. This creates more advances (loans) from the Settlor to the Trust. Usually an Agreement to Occupy is drawn up, and this basically says that the Trustees can live in the house rent free, so long as they pay for the upkeep of the property.
Note that if the Settlor (assuming he is living in the house and is also a Trustee) does improvements on the house, then this is also considered an advance to the Trust (this is because it is not the sort of an expense that a “tenant” would pay for; rather, an improvement is a landlord’s expense and in this case the Trust is the “landlord”, even though no rent is charged to the “tenant”).
This is where gifting comes in: the Settlor is owed money by the Trust (he sold the property to the Trust) but he decides to progressively forgive this debt, usually no more than $27,000 per year (here’s why people usually don’t gift more than that amount). This gifting is recognised by Deeds of Forgiveness of Debt, which are typically drawn up annually. In the past these had to be registered with IRD but not anymore. Sometimes the Settlor will forgive all of the debt at once. The decision on whether to do this or not is best taken under legal advice.
Why do people set up trusts?
The benefit of a trust is that a person gets to use its assets, thus controlling them, without having legal ownership of them. People do this to protect themselves from being sued by creditors and losing everything. Most commonly people put the house they live in into a Trust.
Here is everything we’ve written on trusts: http://www.epsomtax.com/blog/category/trusts Please feel free to browse; there are a couple of videos and articles which you’ll find helpful.
Where to from here?
We hope that this gives you an overview. For more information please contact your lawyer.
What Is It?
Audit Shield covers the professional fees that you may have to pay to your accountant to respond to an official audit, enquiry, investigation or review of returns lodged with Inland Revenue (IRD) or other government authorities.
It is a 100% tax-deductible annual fee, paid to your accountant. This product is a bit like travel insurance. It's there to cover you if and when an audit problem arises
Yeah But Mate, That'll Never Happen!
Don't be so sure. Here's a general idea of how it works:
So, What Does this Thingy Insurance Do Again?
Surely My Accountant is Organised & Anyway, If They're Half-Decent, why Would I Be Audited?
Do I Really need It?
Well, do you have negatively-geared rental property (translation: you have to top up the mortgage)? Are you making tax losses every year from your rental? In that case, don't you think that IRD might like to look more closely at whom it is that is always claiming losses and that they are always refunding money to?
If you're a "she'll be right mate", fly by the seat of your pants, throw caution to the wind sort of investor, then maybe this ain't for you. On the other hand, if you take a more cautious measured approach to your investments, and would like some peace of mind, then this product is a good choice for you.
But, don't just take our word for it. MYOB think audit insurance is wise. Here's a comment from their website:
It’s getting to the point that unless you spent all day on your work book, payroll and IRD returns, you might still get it wrong occasionally. So accept this and take out some tax audit insurance, which will pay the fees of your accountant to give you the best possible protection from the IRD.
Once the IRD starts an audit, they need to justify their decision to pick on you, so they don’t give in easily. Tax audit insurance is affordable and available through a good accountant, so if your accountant doesn’t offer this, change to one who does.
Bold print ours. See here for the full article.*
What Does It Cost & How Do I Get It?
Contact us or your current accountant for a quote.
How much would it normally cost for EpsomTax.com Limited to compile reports for IRD if an audit was to take place?
This question is similar to how long is a piece of string. Your costs - including the costs of any professionals you hire to respond to the enquiry - would vary on the situation and complexity of the audit, review or investigation. The good part is that there is no excess and no minimum amount that you could claim and this insurance covers any audits re any previously lodged returns irrespective of whoever may have lodged that return. If a professional such as a tax lawyer gets involved, could you imagine their fees?
Does the cover amount of 10k only cover EpsomTax.com Limited's fees?
The cover is for all professional fees that would have normally been incurred by you for us to respond to the audit, up to this amount.
Could part of this cover pay the IRD for if money is owed after the audit process?
This insurance only covers for professional fees. No fees or penalties are covered.
When does the IRD audit? Any particular time of year? Who would they normally target to audit?
The IRD specialise in random audits, although from time to time they put stuff in the media about some industry they may be focusing upon. Hence such events could happen at any time.
Case Study 1
A company based in Tauranga was investigated by Inland Revenue and asked for copies of their Financial Statement, Tax Returns and Tax Reconciliation.
End result: All of the $11,282.42 of costs were covered by Audit Shield.
Case Study 2
A business in Auckland was selected for a review of compliance risks which were identified within their industry and expenses claimed.
End result: The total of $7,962.60 was covered by Audit Shield.
Case Study 3
An investor was selected for a review of their lodged Income Tax in Auckland.
End result: The complete amount of $2,511.60 was covered by Audit Shield.
Case Study 4
A GST return review for a business in Wellington equated to $11,500.
End result: Every cent of the $11,500 was covered by Audit Shield.
* Referring to this article does not constitute an endorsement of EpsomTax.com or this website by MYOB.
We here present some common FAQs on the subject of Depreciation, provided by Valuit.
Q. We are going to get a chattels apportionment completed but do we need to have it done by a certain date?
A. The simple answer is no. Depreciation reports are always best completed as close to the time you take possession but not critical. Depreciation is based on the property when you purchased it so our report and the figures within it are calculated based on that date. If any major changes have occurred then it is great if you have photo or video evidence.
Q: If I replace the carpet, blinds, light fittings, heat pump, dishwasher in a house, would I be better off with the chattel depreciation or claiming it as repairs and maintenance?
A: The question of Repairs and Maintenance versus Depreciation is not really about what is best. Rather it is a question of what is correct: is it repairs or an improvement? This will generally come down to if you are improving the property beyond what it was when you purchased it. If so, then generally it is a capital cost and you may be able to claim depreciation on some or all of the replacements. The key with any property that you look to improve is to make sure you have a chattels breakdown completed before you do any work. For example:
When you buy a property you are paying for everything, even an old dishwasher that might be ready for replacement. With a depreciation report a value will be placed on the old dishwasher. When you decide to replace the dishwasher you will not only get to claim on the new dishwasher but you will also be able to claim the value of the dishwasher that is currently in the property as a loss when you dispose of it.
[EpsomTax.com's comment: However, note that the question of whether something is a deductible repair cost, a depreciable chattel or a non-depreciable improvement to the property is not clear cut as there are numerous factors to consider. We recommend talking to us about this]
Q: Will I still have to pay depreciation recovery on buildings if I sell my property after 1 April 2011?
A: Probably yes. In most circumstances where you have been claiming depreciation on the buildings you will have to pay some level of depreciation recovery. This is why the removal of building depreciation for people buying property after 1 April 2011 is not so bad. Yes you lose the use of the depreciation during ownership but you will not have to pay deprecation recovery when you sell. For investors that own property during the change date of 1 April 2011, your depreciation claim for buildings after this date will be zero, but when you sell the property in the future you may need to pay depreciation recovery on the buildings for the depreciation you claimed prior to the change.
Q: Last year I did my own tax return as the income did not justify the accounting fees. I did not bother claiming any depreciation as I only owned the property for part of the year. This year there will be a whole year of rental income so it may be worth claiming depreciation. What is the best option?
A: Once you take a position not to claim depreciation in your first tax return you cannot change this and claim in future years. This is why it is important to use an accountant and get correct advice. The most important point here is that you need to ensure if you do not claim depreciation that you have made a written statement declaring the property as a non depreciating asset. If you fail to do this then when you sell the property IRD can deem that the depreciation you were entitled to claim has in fact been claimed and you can be hit with depreciation recovery, despite the fact that you never claimed it. So make sure if you are not claiming that you have declared this.
Q: With the changes around ownership structures, if I transfer the ownership with this be deemed a sale and therefore incur depreciation recovery?
A: In 99% of cases no. The transfer between associated companies will simply see the existing depreciation schedules transfer from the old entity to the new entity.
Accounting for your rental residential investment property; general taxation advice.