Inland Revenue have released the September 2019 Tax Information Bulletin (TIB), which clarifies this.

For the purposes of this blog post, we are going to assume that the LTC or an individual only holds residential rental property i.e. no commercial, they are not a trader or an associated person or a developer etc, they don't have an Airbnb-style short-stay accommodation house in the picture.

Can losses from an LTC with residential rental property be offset against income from rentals owned by a partnership or in your personal name?
It depends on whether

1. the LTC decides to apply the ring-fencing rules on a portfolio basis or on a property-by-property basis.
2. the shareholders have any other residential rentals with income/loss to offset against this

However, the answer is essentially, "Yes", if:

1. you have decided to use a portfolio basis for the LTC (that is spread the losses and profits out between the various properties owned by the LTC) 
2. you have at least one residential rental property held in your own name or in a standard partnership i.e. we are not commenting on "limited partnerships" here

So the result is, you can have a negatively-geared LTC, and given the above points, the losses can flow through to you as a shareholder. You can then offset this against profits from a personally-owned rental (either solely owned or in a partnership). The situation also works in reverse ie there are profits in the LTC and losses in the personal/partnership rental.

Note that you can't offset any losses against income from other sources e.g. wages, like you used to in the good old days. That is what the concept of "ring-fencing of losses" means. The losses are "ring-fenced" so that they only apply to residential rental property.

Some interesting points

• If an LTC applies the rules on a property-by-property basis, the shareholders have to also take that approach in their returns. If it applies the rules on a portfolio basis, ditto.
• This is not the case for partners in partnerships. If a partnership has filed a partnership return applying the rules on a particular basis, the partners do not necessarily need to apply the rules on that same basis. So a partnership now gives much more flexibility than the LTC in this one respect.

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Do restructure strategies such as selling your old family home to an LTC still work?
We have previously recommended this, in blog posts such as this one.  The answer is that yes, the rules are unchanged, and this still effectively meets IRD requirements for interest deductibility and remains a good strategy. 

However, just be aware that any losses are ring-fenced, as described above. For more info, the IRD Sept 2019 TIB is below

As always, situations vary, so please contact us for advice on your specific situation. Call 099730706 or email us here

No doubt you've heard about the major trust law changes coming soon to NZ. What are they, and how will they affect you and your trust?

The main changes are:

• Trustees will now have some mandatory duties to fulfill
• Trustees must disclose certain information to all the beneficiaries - no more opacity!
• Trustees are being given more flexible powers
• It should become cheaper to setup and run a trust
•  You might be able to remove and appoint a trustee and not have to get the courts involved
• Trust lifespan will be up to 125 years
• Some beneficiaries could become settlors!

Here is the jargon: Section 67 of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 enacts an amendment to section HC 27 of the Income Tax Act 2007.

That amendment provides that when a beneficiary of a trust is owed an amount by the trust, the beneficiary does not become a settlor of the trust if –

• a. the trustee pays to the beneficiary in the income year interest on the amount owing at a rate equal to or greater than the prescribed rate of interest:
• b. the amount owing at the end of the income year is not more than $25,000.

This amendment comes into force on 1 April 2020, and does not have retrospective effect.

How do you know if one of your beneficiaries is owed more than $25,000 by the trust? The trust will need a balance sheet, at the very least, to track this.

What should you do if this is the case?

1. Pay out the beneficiary (check with your lawyer first), or
2. Pay interest to the beneficiary for the use of their money, as described above

* See a link to our blog articles on this subject here
^ The information on this page has been kindly reproduced by permission of Rainey Collins. This does not constitute an endorsement of EpsomTax.com Limited by Rainey Collins. EpsomTax.com Limited cannot provide legal advice. Please contact Rainey Collins for more information on what this means for your trust.