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.
Which structure is best? Although not exhaustive, we hope that this chart will give you an overview of the four most commonly-used structures and their pros and cons.
Note that some partnership agreements do allow annual changes in distribution of income or losses; check the wording of your agreement if you're not sure.
Check out our other articles which discuss these in more depth, such as
Feel free to contact our experienced team on 0800 890 132. Please see the desktop version of this website if the chart does not display on your mobile device. This page uses a script from SCRIBD to display the PDF.
You might have heard of the Financial Reporting Act 2013 and the Financial Reporting (Amendments to Other Enactments) Act 2013. Maybe not. Anyway, changes which took effect on 1 April 2014 mean that entities that do not meet the large entity* definition will no longer be required to prepare financial statements in accordance with NZ GAAP.#
What does that mean for your LTC? Does it mean that you no longer need to pay an accountant to make up financial statements?
Unfortunately not. Even though SMEs^ will no longer be required to prepare GAAP financial statements, the information requirements of stakeholders, e.g. owners, lenders and IRD, have not changed. In addition, there is no change to directors’ responsibilities under the Companies Act 1993; including maintaining proper accounting records and issuing solvency certificates when there are planned distributions.
So, what does the IRD expect?
The IRD has proposed historical cost, double-entry, accrual-based special purpose financial statements that allow the preparation of a Financial Statements Summary (IR10). Such special purpose financial statements would include:
Hence, even though we only file the relevant tax return and an IR10 with IRD, the full financial statements are still required in case IRD ever want to have a look.
What is required by the Companies Act 1993?
See this blog article for more info.
You might find this article useful, as it explains how to read financial statements.
* Section 19A(1)(b) of the Financial Reporting Act 1993 defines 'large' company as one that crosses two of the following thresholds:
# NZ GAAP: New Zealand Generally Accepted Accounting Practice
^ SME: Small to Medium Enterprise
Image courtesy of Gualberto107 / FreeDigitalPhotos.net
It's a fact: Almost 80% of New Zealand business owners don't understand their financial statements. So, we've written this short guide to help you. Financial Statements are not necessarily laid out in this order (the order isn't that important), but here are the essential bits and pieces.
The first part is the:
This is also known as the Statement of Financial Positon. It is a statement of what your business/company owns (assets) and owes (liabilities). Assets include things like bank accounts, inventory (stock) property, cars, computers, money owed to you (debtors) etc. Liabilities include GST or tax you have to pay, holiday pay due to staff, company credit cards, loans to the bank or others, money you owe to others (creditors) and so on.
Further, it includes the amount of money that the shareholders have put into the business. Sometimes this bit is on a separate page.
Both Assets and Liabilities are often divided up into Current and Non-Current. Current Assets are those which are expected to be realised in cash, sold, or consumed within one year of balance date (generally 31 March). Obviously, Non-Current Assets are everything else. The same applies with Liabilities. If you will have to settle (pay off) the liability within one year of balance date (balance date is usually 31 March), then it is Current. If not, it is Non-Current.
Here's a sample one:
The next part is the:
PROFIT & LOSS/STATEMENT OF FINANCIAL PERFORMANCE
This is also known by a couple of names. You might have heard of it as the P & L. Same thing. You'll see funds coming in (revenue) from sales, rents, interest etc. If you buy and sell products you will see entries to do with the cost of sales. This page also shows your expenses. Here's what one looks like:
Another key part is the:
STATEMENT OF MOVEMENTS IN EQUITY
Equity is basically how much money there is in the company. If the company owns a house, for example equity is the difference between what the house is worth and how much the company owes on it. Let's say the house is worth $300,000 and the company owes $100,000. Well, the difference ($200,000) is how much equity the company has. Over time, as you reduce the amount owed on the house or the value of the house grows, the equity increases. It's that simple.
Here are some other common components of Financial Statements:
SCHEDULE OF DEPRECIATION
As you may be aware, when you purchase something over $1,000 (excluding GST), you can't claim it all at once.* Instead, you claim it over the usable life of the product. This varies greatly, from 80% for a TV down to 13% for other things. The Schedule of Depreciation puts all this info in a nice neat chart.
SCHEDULE OF LOANS
This shows information about what's owed, to whom, interest paid and so on.
SHAREHOLDERS' CURRENT ACCOUNT
Ah, the Shareholders' Current Account. Well, when you put money into the company out of your own pocket, that credits this account. When you take money out, it debits this account. (Don't confuse this with reimbursing yourself for something you bought for the Company with your own money. That's different and doesn't enter into this account). At the end of the year we total up the ins and outs. If you took out more than you put in, then it has to be repaid to the company, or taxed in some way. (Note that if your company is a LTC then it's a bit different, as overdrawn Shareholders' Current Accounts are not subject to FBT; although interest must be charged to the shareholders).
This is usually a page where the scope of the Financial Statements is disclosed, your responsibilities as Directors are outlined, any relationship with the Accountant is disclosed and often includes the Accountant's Disclaimer of Liability.
This is the page where the Accountant reminds you that the buck stops with you as director(s) of the company. The Accountant has done their best to present an accurate picture of the financial state of the company, based on the information provided and their understanding and application of Tax Law. But, it's up to you to check and make sure you're happy with the financial statements (and that you understand them!) as it is YOU who is signing them off and YOU who are responsible in a legal sense. (For more info on your obligations as a Company Director, see this article).
These pages contain statements of Accounting Policies, and extra detail which is not included in the main body of the Financial Statements. It pays to read these, as they have useful extra bits of information that you should be aware of.
These are to do with your annual meeting of the Company, as required by the Companies Act 1993.
Phew! That's about it. If you are having trouble understanding your Financial Statements, please feel free to contact us. You might also be interested in this article, which discusses the 2014 changes to reporting requirements for SMEs
* see this article for temporary changes to asset depreciation thresholds, as a result of COVID-19
Other FAQs you might have:
WHAT IS XERO.COM?
WHAT'S THE PROCESS FOR MY TAX RETURNS?
COMMON QUESTIONS ABOUT YOUR TAX RETURNS
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NB: Information provided on this website is not intended to provide an exhaustive or comprehensive statement of tax law and should not be used as a substitute for considered written advice. All information published is subject to our standard terms and conditions and disclaimer
Watch this interview with Garreth Collard, Principal of EpsomTax.com Limited, Property Accountants, Auckland, and learn more about:
Note that this was recorded before certain tax losses were ring-fenced, so not all of this applies now. However, there are still many situations where an LTC may be a good solution. Contact us to discuss on 099730706
Yes. However, note that Fringe Benefit Tax (FBT) may apply, depending on the situation.
Is the car being supplied to an employee?
FBT applies to an LTC if the car is being supplied to an employee.
What is an employee then?
An employee is someone employed by the company, with an employment contract - just like any other employee. However, a "working owner" is not viewed as an employee for FBT purposes (as per the Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill 2011.
So, if I'm a working owner, the LTC can buy me a car and I don't pay FBT? Woohoo!
Yes, if a look-through owner is not an "employee" there will be no FBT liability. But! Note that the cost of providing the fringe benefit is viewed as a distribution of profit to that owner, to the extent of the private use element. The "private" costs will be non-deductible to the other owners.
Um, I'm not getting this. Can you give me an example?
Sure. John and Mary each have a 50% shareholding in an LTC, which owns a rental investment property. The LTC buys John a car for $10,000. John is not an "employee" of the LTC. The car is available to John 90% of the time for private use. The LTC then depreciates this capital asset, but makes an adjustment for the 90% private use. This drastically reduces the amount of depreciation it can claim.
John's car costs $4,000 a year to run. As 90% of these costs are private, the company can only claim $400 as tax-deductible expenses (10%). The other $3,600 is non-deductible.
So, let's say the LTC had taxable income of $40,000 and total expenses of $24,000, including the car costs. However, you now minus the $3,600 non-deductible costs of the car from the total expenses, leaving claimable expenses of $20,400. Thus, John's share of the net profits will be $19,600 divided by two ($9,800) plus his private use of the vehicle ($3,600), equaling $13,400 taxable income from the LTC for him, and $9,800 taxable income for Mary.
I'm still not sure I understand!
Don't panic. Feel free to drop us a line or give us a call on 0800 890 132.
For definitions, see ss HB 1, DC 3B, YA 1 paragraph (db) of the definition of “employee”, paragraph (b)(iib) of the definition of “employer”, definition of “working owner” and definition of “contract of employment”. NZICA Commentary to the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill 2011, p 100
What If My Company Is Not An LTC?
See this article: SHOULD I GET THE COMPANY TO BUY ME A CAR?
As a company director, you might receive a letter from the New Zealand Fire Service asking you to make a Statutory Declaration. What does it mean for you and your Look Through Company (LTC)?
The NZ Fire Service website states: "All property owners who insure property in New Zealand against the risk of fire pay a levy." Did you know that? I sure didn't.
So, what is it for? The purpose of the declaration is to provide to NZ Fire Service the following information:
Why do they want this info? The NZ Fire Service seeks to establish that all parties who are liable to pay levy do so. Where your insurance is through a NZ-based insurer or broker, then this levy will likely be included already in your premiums, and the NZ Fire Service is looking to confirm with you that this is the case. However, where you insure offshore, the liability to pay levy falls directly to you.
What do I do with the form? You have to take it to a Justice of the Peace, Solicitor of the High Court of NZ or another person authorized to take a statutory declaration, and sign it in front of them. They then sign it to. This form is then sent to the NZ Fire Service.
Want to read more? Go to this page at the NZ Fire Service website, or contact us for assistance with completing this form.
All trademark and copy rights belong to their respective owners. EpsomTax.com is not endorsed by the NZ Fire Service. Thanks to Darren Stafford for assistance with this post.
What is an LTC?
Unlike the LAQC rules, shareholders of an LTC are liable for tax upon the company's profit, as well as being able to offset the company's losses against their other income. The key features of an LTC are:
The LTC retains its identity as an incorporated company, and will keep its corporate obligations and benefits under general company law, such as limited liability.
For income tax purposes, the LTC is "looked-through" and the owners of an LTC are regarded as holding the LTC's assets directly and carrying on the activities of the LTC personally.
An LTC's income, expenses, tax credits, gains and losses are passed onto its owners, in accordance to their effective interest in the company.
Each owner of the LTC will then record any income or losses, as appropriate, in their own income tax return.
For other tax purposes (such as GST, PAYE or FBT) the LTC retains its tax obligations.*
What about QCs?
· There are no new QC or LAQC elections.
· Existing LAQCs cannot attribute losses or income years starting on or after 1 April 2011 - only LTCs can.
· Existing LAQCs automatically became QCs (without the ability to attribute losses) at the start of the income year that begins on or after 1 April 2011.
Read more from IRD here. Find out more about the QC and LAQC rule changes here
Tax Information Bulletin Vol 23, No 1 (February 2011)explains the LTC rules and the other changes to the QC and LAQC rules in further detail
“Are the losses from my rental in NZ tax deductible in Australia if I’m working there?” That’s what we were recently asked by a client. It appears that if your NZ rental property is owned in your personal name, the answer is yes. But if it is owned by a Look Through Company (LTC), what then? We didn’t know the answer, so we rang the Australian Taxation Office (ATO). After speaking to three different people, no one there knew either, so we have written to them. Here’s our letter below… we’ll let you know when we get a response:
GPO Box 9990
Dear Sir or Madam
Re: Personal attribution of losses from a Look Through Company (LTC)
We have some clients that are moving to Australia, where they will receive a regular wage from which tax is deducted by their employer and forwarded to the ATO. My questions are:
Click here to see the ATO's reply.
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!