You and your significant other each own 50% of the shares in an LTC. It owns negatively-geared rental property. At tax time, you get your 50% share of the loss, which generates a nice tax refund.*
Previously you both earned about the same, but now there is a child in the mix, and one of you is working less as a result, and earning less as a result.
Suddenly that 50/50 company shareholding doesn't look so good. Should you change it to 99/1 to get better tax refunds?
The short answer is no. If you do anything with the motive to purely pay less tax, then you leave yourself open to being accused of tax avoidance.
What to do then? Well, there may well be economic reasons for the change, which had not previously been considered. When you take these into account, any so-called tax benefits could well become purely incidental.
As each situation is different, it's not practical to outline these here, so please feel free to contact us to discuss.
You may also wish to read a related article: Changing Shares in LTCs: Considerations
What is the NZCO?
NZCO is short for New Zealand Companies Office.It is part of MBIE (Ministry of Business, Innovation and Employment) and administers a number of registers, including a register of companies, their directors and shareholders, and related documents.
What's a Companies Office Return?
All companies are required by the Companies Act 1993 to file an annual return with the Companies Office regardless of whether or not they are trading.
If an annual return is not filed by the due date, the company risks being removed from the register as the Registrar may be satisfied that the company has ceased to carry on business.
An annual Companies Office return is not a tax return, it's simply an annual requirement for a company to provide certain details to the Companies Office.
For more details, see this page at the Companies Office.
Does EpsomTax.com Handle This For Me?
We certainly do. At this time, we don't charge for filing your annual Companies Office return. Most accountants charge $80-$100 + GST, but we don't. Honestly, it only takes a minute or two so we don't feel we can justify charging for it.
We also offer an optional compliance package, which we'll contact you about at the same time. Questions? Please contact us.
MUST WE Have an Annual Meeting?
Yes, it is a requirement for all NZ companies. But don't despair! It's a great chance to go out for dinner on the company. Keep your receipts for the meal, drinks, taxi, babysitter. While you're out (or shortly thereafter), make sure to complete this annual meeting form, which will be sent to us when you click Submit. You can even attach your receipts to it!
As always, if you are not sure or need more information, please don't hesitate to contact us.
What will you need? Well your lawyer should prepare these three documents for you:
This resolution refers to why you bought the property, assuming it is for rental residential purposes. In addition, all of your written/email correspondence should make your intention clear, i.e., when communicating with your lawyer, bank, financial advisor explain that the purpose of the acquisition is for rental residential investment property.
This last file is a LTC election form. You use it to turn an ordinary company into a Look Through Company
That's a good question, and it depends a lot on what entity incurs the loss. Let's break down the various types and what effect they have.
Look-Through Company (LTC)
If you are a shareholder in a Look-Through Company (LTC) and that company makes a loss, then you get to carry that loss through to your personal tax return (usually an IR3). There are a few rules and limitations* which we won't go into at length here.
Let's assume you're a salaried employee, and so you've had PAYE deducted from your wages. Well, at the end of the financial year a wash-up is done on your personal tax return. The above-mentioned loss is deducted from your gross (pre-tax) wages. It might look something like this:
-$ 5,000 Loss from LTC
- - - - - - -
$80,000 Net taxable income
We then calculate (a) how much tax you have paid, and (b) how much tax you should have paid. If (a) is more than (b) then you get a tax refund. If the other way around, you have tax to pay.
Limited Liability Company (LLC)
Ok this situation is totally different. If the LLC makes a loss, then it can't be passed on to anyone. Not the shareholders, not the directors: no one.
Instead, it carries that loss forward to the following financial year. If there is taxable profit, then the loss can be offset against that profit. It might look something like this:
$85,000 Net taxable profit
-$ 5,000 Losses brought forward from previous years
- - - - - - -
$80,000 Net taxable income
If there is no profit, then you just keep carrying the losses forward, year to year.
If you have a trust it's the same as an LLC with respect to losses. They can't be distributed out to the beneficiaries. Rather, they get carried forward until there is profit to offset them against.
A partnership works in a similar way to a Look-Through Company essentially. Losses are distributed to each partner, according to the rules of the partnership.
Sometimes you might combine some of these structures.
For example, a trust might own all the shares in a Look-Through Company. The LTC makes a loss. What happens then? In this case, the losses flow through to the Trust. They are then dealt with as explained above.
In the meantime, please contact us with any questions, or talk to your tax professional.
* From 1 April 2019, tax losses will no longer flow through from LTCs that are residential land rich. Please see us or call for advice on how to get the best results from your portfolio, build wealth and minimise tax
Also known as: How do you make an LTC election?
It's reasonably straight-forward. Once the company is incorporated (click here if you want us to do this for you), you then complete and send off an IR862:
Section 1 is fairly self-explanatory, although you may come unstuck at the part where it asks you to choose the income year. Accountants always refer to the financial year as the one ending next March. For example, if today is the 31st of March 2015, then we are in the 2015 financial year. However, if today was the 1st of April 2015, then we would be in the 2016 financial year. So make sure you put the right financial year on the form!
In Section 2 you repeat some of the information from Section 1, and then fill in the details of the Owners. The bits you need to fill in are:
then sign and date the form.
Send this to us, or post it directly to:
PO Box 39010
Wellington Mail Centre
Lower Hutt 5045
Make sure you read the instructions on the back, as you can only have a maximum of 5 Owners.
The other thing we'd usually get you to do is complete a resolution, assuming you are purchasing property. Download our sample resolution below for free.
Hmmm, it's a worry! Please read this excellent article from Fortune Manning Lawyers:
All directors need to be aware of the statutory duty they owe to the company not to trade recklessly and of their potential personal liability for the debts of the company if they do so. There are now several recent cases where the Courts have taken a hard line against directors. The Court of Appeal has recently upheld a High Court decision which found a director liable for reckless trading and personally responsible for the debts and liabilities of the company to the tune of $8,400,000 plus interest from the date of liquidation of the company, not including his liability to related party creditors.
The relevant provision is section 135 of the Companies Act 1993:
A director of a company must not -
There are some peripheral points to note:
The best guidelines for determining whether or not the actions taken by the director were legitimate or illegitimate business risks were set down by the High Court (in South Pacific Shipping Limited (in Liquidation), Re; Traveller & Anor v Löwer (2004) 9 NZCLC 263,570).
The Court said the following factors were relevant:
The "legitimacy" test, used to determine director's culpability, was also supported by the High Court in Mountford v Tasman Pacific Airlines of NZ Limited (2005) 9 NZCLC 263,864.
These decisions have no doubt given liquidators and creditors confidence that where directors are reckless the courts will hold them personally liable for the company's debts.
However, directors can take some comfort in the finding that the taking of legitimate business risks is not reckless. Although, it is a fine distinction. In the two cases decided after South Pacific Shipping and Walker v Allen the Courts have found in favour of the director.
In Global Print Strategies (in Liquidation); Re Mason & Anor v Lewis & Anor (High Court Auckland) the Court found that recklessness requires more than mere negligence. The director must make a conscious decision to allow the business to be conducted in such a way as to pose a substantial risk of serious loss to the company's creditors, or must be wilfully or grossly negligent in turning a blind eye. This introduces a degree of subjectivity to the otherwise objective test of whether a director's conduct was reckless.
In Petros Developments Limited (in Liquidation); Re Advanced Plastics Limited v Harnett & Anor (High Court Auckland) the Court found that the director's conduct was not reckless as the director had the full support of the creditors and the creditors were fully aware of the risks which incidentally were substantial. There was a common strategy between the director and the creditors. The Court made the observation that all business is inherently risky.
The question will always be whether the director's conduct can fairly be regarded as reckless but it is important for directors to bear in mind the principles or guidelines in the South Pacific Shipping case. It is still open for directors to authorise their companies to take risks in business (this is often necessary to promote the company's best interests) but all care should be given to those decisions to ensure the risk taking is legitimate.
Read the full article here here. Note that this article is under review due to some recent courtroom developments. We'll update it as more information comes to hand.
That's a good question. Firstly, it depends on whether your company is a Look Through Company (LTC) or not. If it is, then it may be that your company can buy you a car and there will be little or no Fringe Benefit Tax (FBT) to pay. See here for more info.
If not, then FBT needs to be considered. However, before we get into that we'll discuss the two ways to use a vehicle in your business.
1. Business use of a private vehicle
This means that you own the vehicle in your personal name. You can claim business use of the vehicle up to a point: either claim 25% of total usage costs as a business expense, or claim (possibly) a larger proportion if you keep a logbook, or claim using standard mileage rates as provided by IRD or organisations like AA. There are some limits, rules and regulations around these provisions so make sure you get your maths right!
2. Company-owned vehicle
In this scenario you will have to pay FBT for private use. More about that below. In some situations there is no FBT to pay. However, generally speaking if you are a small business owner and you have a company-owned vehicle there will usually be some FBT to pay (or a personal contribution towards the cost of your private use).
This brings us to...
Fringe Benefit Tax (FBT)
What is it?
FBT is a tax you pay on a fringe benefit. That is, you get some sort of benefit from your company, but it is not wages. The Law says you have to pay tax on that.
How is it paid?
You elect to pay FBT by advising IRD; you can pay at different intervals, generally quarterly or annually.
How is it calculated?
Here are the IRD calculators. Enjoy.
Is it compulsory?
Hmm, it depends on the circumstance. Talk to your accountant. There is not a blanket answer that fits every circumstance.
Perhaps an example would help. Let's say you have a Holden Commodore, purchased for $50,000 incl GST within the last 5 years. It is currently worth $20,000 incl GST. It is available on the weekends for private use. No personal contribution is made towards private use. It is not a pooled vehicle.
Method 1: FBT based on original purchase price:
Method 2: FBT based on the depreciated value:
In this example the depreciated value is quite a bit lower, but the % is higher too: 36% instead of 20%. There are a few rules around minimum values and methods which need to be considered too.
See here for the calc. sheets. There are more calculation examples here at the bottom of the page.
What Should I Do?
The best thing is to do the math on each way of accounting for the vehicle, and then work out what will give the best results. And, we suggest you chat to your accountant about it.
The Companies Act 1993 makes the following provisions:
So, in view of these requirements of the Act, your accountant may ask you as a shareholder to sign a resolution stating that you will financially support the company.
Note: If you have a LTC and it has a land-and-build-to-rent project, then it is likely that during the construction phase your LTC will be technically insolvent.
For more information, please call us on 0800 890 132 or contact us here
If you've got 5 minutes, make yourself a hot cuppa and enjoy this video presentation by Garreth Collard, Principal of EpsomTax.com in which he addresses APIA members on the pros and cons of the most common Rental Ownership Structures. Click here for a copy of the handout being used at the presentation.
See this insightful 3-minute video presentation by Garreth Collard, Principal of EpsomTax.com in which he explains the nuts and bolts of the most common rental ownership structures to APIA members. Click here for a copy of the handout being used at the presentation.
Disclosures: EpsomTax.com does not claim endorsement by APIA. Garreth Collard was invited to speak to APIA members by APIA. Garreth was not remunerated for this.
Note: Some partnership agreements do allow annual adjustments to distribution of losses/profits; check the wording of your agreement with your lawyer if you are not sure.
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!