Articles by Matthew Gilligan

The Tax Working Group report was publicly released at a press conference yesterday, 20 January 2010.  Please read our summary including our response of interest to property investors. 

The full report can be read in full HERE.

The highlights of the report seem to be:

Ring Fencing of Losses

Targeting of Existing Property Investors

Targeting existing property investors in this way (taking their wealth) is not fair, neither is it in the public interest in the writer’s view. I hope the government works this out and decides not to change the depreciation regime. Trailing it and hurting average mum and dad investors that make up the bulk of the investment base in residential property. These are ordinary (voting) public trying to get ahead.

Perhaps the government should consider the political popularity as it will certainly impact voting. This will not be an election winner for them; hundreds of thousands of investors will be affected.

Also consider the banks position. Many investors are geared (borrow) 80% of the property value. If property prices drop 10-20%, banks will be in breach of their banking covenants and be obliged to call up loans and mortgagee sell investors. This will destabilise the banking industry, - totally unacceptable one would think.

Consumer Spending

Reduced house prices and reduced disposable income from investors will also dampen consumption. Not good at time when the government is trying to re-activate consumption.

However, if the depreciation regime is grand-fathered (affecting new investors, leaving existing investors as they are with current rates until they sell existing property), the impact would be less of an issue.

This addresses the 'level the playing field' argument between property and shares (an argument I don’t agree with, that is driven by people with vested interests in shares like Brash (a shareholder in Huljich Wealth Management) and Weldon ( NZSE CEO).

These people have huge upside in attacking property, and personally I do not believe this issue has been addressed by the media.

Summary

In summary my primary concern surrounds the depreciation rate changes: if the rates are to be changed, or to be set to zero, grand-fathering the old rates would be the middle ground and more sensible in my view, to protect existing investors, the banks and the economy in general.

Would you like assistance with a review or understanding how your affairs may be impacted by any possible changes in legislation? If so, please contact us for an interview. We can work NZ-wide and globally by phone, email or Skype.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

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Bernard commented on 30-Apr-2010 06:29 AM

Are you saying that real-estate may be a good buy if they do in fact "grandfather" previous depreciation rates? What are some other good areas based on your estimated depreciation laws. Disposable income is the name of the game and the reason why we still have several years before we are out of the woods. I've been playing a lot of lagging small caps during this run using http://www.microcapreports.com/

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Warning To Solicitors, Accountants and Trustees/Trust Advisors...

BEWARE THE APPOINTOR IN NEW ASSOCIATED PERSONS RULES

(11 August 2009)

While the Finance and Expenditure Select Committee managed to weed out much of the over-reach of the new associated persons definition there still appears to be a glaring problem in relation to the Trust to Appointor test in section YB 11.

In the Official’s Report to the Finance and Expenditure Committee on submissions on the bill, the Committee was made aware of the potential for s YB 11, when coupled with the tripartite test, to lead to otherwise unrelated Trusts being associated when professional advisors are nominated as Appointors. This valid concern was raised by Tomlinson Paull and whilst accepted by the Committee, not enough has been done to prevent the undesirable outcome of otherwise unrelated entities from being associated to each other.

As background, this is about association rules between dealers in land, developers or builders and other entities in the business of buying and holding property that are ‘related’ by the associated persons rules. The concern is that if associated, an entity buying property to hold will be taxable on capital gains on properties sold within ten years of acquisition, if at time of acquisition the buy to hold entity was associated to a dealer, developer or builder.

The rules are changing and are much wider than they were, introducing the prospect of:-

Section YB 11 in the new Taxation Remedial bill associates Trustees of a Trust with the person or people who hold the power to appoint and remove Trustees. In short, a Trust is associated with its Appointors. The tripartite test at s YB 14 associates two parties where there is a common associate of both provided that the common associate is not associated to the two parties under the same rule.

For this reason, if a professional holds the Power of Appointorship in respect of a Trust (being Trust “A”) and then holds the Power of Appointorship in a second Trust (Trust “B”), there will not be association between the two Trusts under the tripartite provision as the common associate (being the advisor) is associated to both Trust A and B under the same test.

The Select Committee held this limitation out as being the reason why there would not be unintended Trust to Trust association. Whilst it is true this will prevent an advisor who holds this power in respect of multiple Trusts from creating inadvertent association between the Trusts, the door is still left wide open for there to be association on a far wider scale than surely could have been intended.

To explain further, consider the situation where an advisor accepts a role as Appointor in relation to a Trust that is going to buy an investment property. The Appointor is related to the Trust under s YB 11. The same Appointor might also own shares in a development company, perhaps be Settlor of a second Trust (otherwise unrelated to the first) that is involved in property development or might even be deemed to hold shares in a company involved in development under s YB 3.

What this demonstrates is that there is a raft of other provisions that might associate otherwise unrelated Trusts or companies to the Appointor then leading to association between these other entities and the first Trust under s YB 14. This is obviously not a problem that is fixed by the exclusion of not being able to apply the same rule twice in s YB 14.

Negligence Prospect

Of course reading this you might say that the advisor in that instance would be negligent in accepting the role of Appointor given that they should be aware that they are associated to a development company, and you may be right. What taxes could arise from this on other client’s assets as a result of this oversight?

Thirty percent of capital gains in the next ten years, on assets acquired during the period of association would be an approximation of the answer. However, there might be situations that arise where the advisor has less control over the matter.

Whilst uncommon it is not completely unheard of for an advisor to be a “back up” Appointor in respect of a Trust when the original Appointors die. Or what if a client decides to start trading / developing / building property in their Trust that you are appointor in and does not tell you ? Or what if IRD deem such activity to have existed ?

Summary

It seems clear to us that this is a flaw in the associated persons provisions that was quite rightly raised before the Select Committee but their proposed solution does not work.

The moral of the story clearly is to be careful whom you nominate as an Appointor in respect of your Trusts both now and in the future. It can lead to unwanted consequences. 

A brief background on the new associated persons rule changes (if you are interested) is here.

Remember these blog articles address the general public and are therefore simplified in the blog for the intended reader.

If you would like help with understanding how this affects you, or have a question, we are here to help.  You can Request a Free Interview or use our Ask the Experts service.

Until next time,

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

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The much talked about new Association Rules are back before Parliament and unfortunately for those in the business of dealing in or developing property or erecting buildings, the Bill has not been substantially changed.

The new expanded definition of association has largely survived the Select Committee process and the new rules are likely to come into force in August, potentially from early August.

We are currently working through the rules so if you are looking to buy a rental property in August please contact us for advice if you are concerned about potential tainting.

Important Note for Builders

If you are in the business of erecting buildings this is the one activity that could lead to tainting of existing properties. To explain, if you are a dealer or developer only (ie. not involved in the business of erecting buildings) any rental property that you own now and that was not tainted under the existing rules will not be affected by the new rules. Further purchases could be, but your existing rentals will not be.

On the other hand, if you are in the business of erecting buildings, existing rental properties that you have could be tainted if you carry out improvements on those properties. If you are in the business of erecting buildings and are looking at making improvements to a rental property then contact us immediately as you need to know the implications of this.

Changing Use on Existing Stock

The other major impact that the change in Association Rules has is for those of you who have property bought for dealing and development purposes where you are considering a change of use. If you have a property bought for dealing and development purposes and you are considering holding it (ie. making a complete change of use in respect of that property) you need to contact us urgently.  You should consider restructuring the ownership of that property in the next two weeks before the new rules come into play.

Summary

In summary, the new Association Rules are coming in and as feared they are wide reaching and going to make it very difficult for those engaged in a business of dealing in or developing property or erecting buildings to prevent future rentals from being tainted.

More immediately than that though, if you have property owned by your dealing and development entity that you now wish to hold long term you may need to take action within the next two weeks to restructure the ownership of that property before the rules change. If you are in the business of erecting buildings you also have to be extra careful if making improvements to existing rental properties.

If you want tax advice in relation to these issues please contact Anthony at GRA on 09 522 7955 or at anthonyl@gra.co.nz.

Thank you.

Matthew Gilligan

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In a welcome development for taxpayers, the Minister of Revenue, Peter Dunne, has recommended to the Finance and Expenditure Select Committee considering the new associated persons rules ( for dealers in land, developers, and builders) that the implementation date of these rules be delayed.

To recap, legislation has been drafted which is proposed to apply to land acquired on or after 1 April 2009. The proposed legislation includes new associated persons rules which drastically widen the existing definition of an associated person, - causing developers/traders / builders other entities (and potentially their relatives) to have their capital gains taxable, no matter what structure they adopt.

Executive Summary

The legislation is currently before Select Committee but has been significantly delayed due to the intervention of the election. The Select Committee is only due to report back to Parliament on 30 June of this year. This has raised the issue of the legislation having retrospective effect which would mean that taxpayers would not know when they acquire property after 1 April but before the enactment of the legislations whether property that they have is tainted under new associated rules or not. For example despite the legislation not being passed, if a builder, or dealer in land or developer acquired a property in an LAQC not associated to their Trading Trust on the 1 of April, - they may or may not have been tainted under previous indications from IRD. It was unclear as to the position taxpayers were in Now it is clear – the old rules still apply until at least July, but possibly later ( perhaps even next year).

Background

Fortunately it seems that common sense is going to prevail and that the implementation of these rules is going to be delayed. In his recommendation, Peter Dunne has suggested that the new rules apply to land acquired on or after the date of the Bill’s enactment or, where there is association to a builder, applying to improvements on or after the date of enactment.

This is a potentially significant development for taxpayers and one which GRA welcomes. What this means is that taxpayers will have certainty on transactions that occur post 1 April but prior to the enactment of the new rules as to how they are going to be treated.

As the original application date of 1 April 2009 has loomed we have been dealing with a number of clients in relation to moving property between entities prior to that date to make sure there is no tainting. We now note that there is further opportunity for that to be done and we encourage you to contact us if you have any queries in this regard.

In terms of the implementation of the rules, at GRA we still see it as almost inevitable that there will be amendment to the associated persons provisions. Our pick is that the breadth of the rules as proposed will be narrowed, but we certainly expect them to be wider than the current form in relation to land tax provisions.

As to a potential application date it seems that it will be no earlier than the enactment date which is likely to be mid to late this year and we also note the prospect of it being delayed further and we are aware of submissions to the Select Committee that strongly suggest that it be delayed until at least 1 April 2010. Naturally we will keep abreast of these developments and let you know any progress.

There are pre-rule change planning opportunities for those in the business of dealing, developing and trading. Feel free to call us if you have queries in this regard, contact Matthew Gilligan mg@gra.co.nz

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