MBA Partner

Recent changes made by the Finance and Expenditure Select Committee affect many property investors in regards to trusts set up for the placement of assets. The definition of associated persons was just one new area that complicated things for the investor; the Trust to Appointor test cited in section YB 11 is another area that perhaps needs further explanation.

Associated Persons Rules

The association rules apply to the relationship between land dealers, real estate developers or builders, and other business entities involved in buying and holding property. The rules were put in place because of a concern that associated businesses would work together to buy a property for the express purpose of holding it and avoid the capital gains tax.

An unexpected by-product of these rules is that professional advisors who are designated as appointors to an otherwise unrelated trust are considered an associated party. The appointors’ assets, as well as those of his or her other clients, are also considered tainted under these rules.

Taxation Remedial Bill: Section YB 11

What YB 11 states is that a trust is associated with its appointors. The association exists because of the tripartite test whereby an association exists between two parties where both share a common associate, such as a professional appointor.

However, upon examining this test more closely, the common entity is not subject to the test twice. For instance, if a professional appointor for Trust A also holds the Power of Appointor ship for Trust B, there is not an association between these trusts. This tripartite provision states that the common associate (the professional appointor) is associated to both trusts by means of the same test – and applying the same rule twice is not allowed by YB 14.

The associated persons rule does not necessarily work as it should, however. It is possible under the current test for an appointor of a trust used for property investment to also be a shareholder in a development company or a settlor of another trust involved in property development. With the rules as they stand, this would allow the association.

Of course, most appointors would be negligent if they accepted an appointor ship to two such trusts or held stock in a related company. Should this situation come to light, the client’s assets could be subject to a 30% capital gains tax when sold within a decade, as well as any assets acquired over the period of association.

Even if there is not outright negligence proven, other situations, such as when a client begins the business of real estate development at some time during an association with the appointor without telling him or her, could also result in the same consequences.

Until the new rules are further sorted out, it is advisable to be very careful when appointing a professional to manage a property investment trust.

Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com

When financial woes hit a married couple the unfortunate outcome is often a divorce. Of course, this means the division of assets, along with the usual amount of bickering over that division. But if those assets are in a trust, what happens?

The Creation of the Trust

For the property investor or any other type of investor, a trust is always recommended for placing assets. Do take some care, however, before creating the trust. An individual’s rights to the assets are affected by this legal structure, so it is a good idea to consult a lawyer.

Property Relationship Agreement

In the case of a married couple, the two parties should also enter into a Property Relationship Agreement (PRA). This component is essential for laying out exactly what happens to the property in the future, particularly in the case of separation. The PRA prevents the parties from having to go to court and argue the disposition of assets.

The PRA covers such matters as who owns what assets before they are placed in the trust. Additionally, the disposition of those assets upon separation is laid out in exact terms, such as provisions for sale of property and using the assets to repay outstanding loans.

The agreement is implemented by lawyers if the necessity arises. Any amounts outstanding after payment of liabilities and proceeds from sale are divided between the parties, who each now have their own private trusts.

Two Trusts Are Better Than One

Another option for the married couple is to create two individual trusts right away, one for each spouse. This allows each spouse to transfer property that was owned before the marriage into a private trust, such as family heirlooms or inherited property.

Often, the couple will each get half the value of the family home added to their private assets. The trust should also include a PRA that specifies disposition of the home upon separation.

Any additions to the trust do not have to have the spouse’s approval, provided that they are not named co-trustee. Property that is inherited during the marriage can be added to the recipient’s private trust. As well, each spouse can designate the assets they bequeath to beneficiaries – a great option for couples who have children outside of the current relationship.

Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com

For the married couple, it is truly essential that an estate is properly structured, legally protected, and the disposition of assets in the case of separation clearly defined. If you have not yet started a trust for your assets as a property investor, perhaps this scenario will convince you of the need to do so.

The Case of the Trust-Less Divorce

In most cases, divorce is a messy matter. It is highly unlikely that the two parties will be able to reach an amicable agreement as to the disposition of assets. Even with a trust, in the absence of a Property Relationship Agreement a legal battle may ensue because there is still the issue of what to do with the assets in the trust.

Of course, the first step will be hiring a lawyer for each side. As we all know, legal fees can quickly add up to thousands of dollars. Consider the property investors who have a $500,000 house listed as an asset. Is a combined $100,000 in legal fees worth the argument? It may not make much sense, but this is what many couples end up doing – paying money to fight over a property that is still mortgaged.

Then again, during a divorce few people are going to act rationally. More often than not they are hurt, and those hurt feelings cause them to fight. Because legal issues can take months or even years to resolve, this must makes the pain last longer. The lucky couple engages a trustee who can help calm them both down and move them toward some agreement. The unlucky couple has no one to advise them thusly, or chooses to ignore attempts at resolution.

If an agreement cannot be reached, the next step is to go to court. It will be up to the court to decide the disposition of assets.

The Importance of a Property Relationship Agreement

If there is a trust in place without a Property Relationship Agreement, then the court must also review the terms of the trust, including how it was set up, how it has been run since its inception, who is in control of it, what assets have been transferred to it, and the amount of outstanding financing that is secured by the trust’s assets. Obviously, this could take some time.

Following the review, the court will set out its orders. Another individual could be put in charge of the trust, as trustee. The court will have to decide how much money is awarded to each ex-spouse. No matter what happens, someone is likely to be unhappy about the outcome.

The best way to avoid this scenario is for the property investor to create a trust where the assets are placed immediately. Following that, the creation of a Property Relationship Agreement which designates disposition of the assets is essential. A married couple may even want to consider creating two trusts, one for each spouse.

The time to protect your property is now.

Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com

As one year ends and the next begins, interest regarding the future of the tax system is natural. In regards to property laws, many of the changes being considered by the Tax Working Group could prove detrimental to those who invest in real estate.

For some time the government has been proposing various modifications that will result in higher taxes being paid by property investors. It is unlikely that any of the proposals will result in immediate change but it is a good idea to become aware of what’s on the table.

As it gets closer to the time when a definite determination will be made – most likely soon after the beginning of the year – it is appropriate to consider how these changes may affect investors.

It is expected that the following revisions will be considered for inclusion in the new tax system:

* While individual tax rates will decrease, the rate of GST will increase in order to make up for the deficit. Corporate and trustee rates will become more closely aligned.

* The tax rates are expected to change drastically but tax laws will most likely remain unchanged in regards to assessments of capital gains and equity. The government’s stance is that it is disinterested in instituting sweeping changes at this time that could negatively impact a strengthening economy.

* There should be no surprises in the federal budget, either. Should any new tax rules be implemented, such as a risk-free rate of return investment property tax which has been bandied about, the legislative process is such that it will take some time before they are enacted.

* Throughout the year of 2010, additional options in the tax rules are likely to be debated and subject to public review. The Tax Working Group will probably propose several options rather than strongly back only one. This will allow the government to select the most favourable to stand behind and bring to public review.

* Tax changes regarding property investments will most likely be considered at some time in the upcoming year during the budgeting process. It would not come as a surprise if the deduction for building appreciation is denied. Whether or not it would apply retroactively is in question.

The tax program currently under review in Australia will probably influence the decisions for future tax structures in New Zealand. Depending on the results of the Henry review, our tax laws may or may not change as expected.

Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com