McLEAN AND CO. Chartered Accountants

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 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email murray@mcleanandco.co.nz                                  Website www.mcleanandco.co.nz

 
 
EMAIL NEWSLETTER  JANUARY 2011
 
 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

 

NEW CLIENTS

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

 

INDEX

  1. Paid Parental Leave

  2. Living in a Property Owned by an LAQC, Company, Partnership or Trust

  3. Gift Duty to be abolished

  4. Reasons to keep a Family Trust

 


PAID PARENTAL LEAVE

Paid parental leave is a government-funded entitlement paid to eligible working mothers and adoptive parents when they take parental leave from their job(s) to care for their newborn or adopted child (under the age of six).  These payments go towards the loss of income that working mothers and adoptive parents experience when they take parental leave from work to care for a new baby or adopted child. 

Paid parental leave payments equal your normal pay (before tax) if you're an employee, or your average weekly earnings if you're self-employed, up to a current maximum of $441.62 a week before tax.  If you're self-employed and make a loss or earn less than the minimum wage, for at least 10 hours work a week, the payment is $127.50 each week before tax (this is equivalent to 10 hours each week at the current minimum wage rate).

You can receive paid parental leave for a maximum of 14 weeks. You can transfer your paid parental leave to your spouse or partner, as long as they also qualify for paid parental leave from their employer or self-employment.

IRD will pay parental leave payments directly into your bank account each fortnight. The payments will be treated as income, just like your normal salary and wages or self-employed income. Paid parental leave payments have tax and student loan deductions taken out (at whatever rate applies to you). It will not have earners' levy deducted from it. 

 

 

LIVING IN A PROPERTY OWNED BY AN LAQC, COMPANY , PARTNERSHIP OR TRUST

If you're living in a property owned by your LAQC and are claiming what would otherwise be private expenses, this may be regarded as tax avoidance.

If you Rent your Family Home to Yourself

Problems arise when an LAQC buys an LAQC shareholder’s family home, and shareholders continue to live in the home and claim deductions (such as interest, insurance, rates and maintenance) for the property. In most instances this is considered tax avoidance.  

You may believe that if you continue to pay market rent to the company you can continue to claim these LAQC losses against your income.  However, IRD are likely to consider the arrangement to be tax avoidance.

The same principle applies if a similar structure is used such as a company, partnership or trust.

The problem arises when a structure (eg company, partnership or trust) is set up which enables an individual to rent their family home effectively to themselves. The individual or their family then continue to live in the home and claim deductions (such as interest, insurance, rates and maintenance) for the property which would otherwise be private expenditure.

Living temporarily in a Property owned by your LAQC, Company, Partnership or Trust

From time to time a shareholder will move into a home owned by their LAQC which they had previously rented to tenants. There may be good reasons why they do this. For example:

  • inability to find tenants
  • relationship breakdown
  • relationships formed with tenants
  • renovating or building your own home.

But, if you live in the property and you’re a shareholder, you generally cannot continue to claim what would otherwise be private expenses, as outlined above.

Whether or not this structuring and claiming of resulting losses is considered tax avoidance depends on a number of factors. For example, whether the arrangement is permanent or temporary, and whether there are commercial factors driving the decision to live in the property.

IRD  look at these arrangements on a case-by-case basis, but in many situations they may be regarded as tax avoidance.

Living with your Tenants in a Property Owned by your LAQC, Company, Partnertship or Trust

The situation about tax avoidance is less clear when both a shareholder/owner and other tenants live in an LAQC-owned home. IRD consider the proportion of expenses attributable to the shareholder/owner is not deductible. 

Setting up a Family Trust has a number of advantages if operated in a proper manner.   The abolishing of Gift Duties reduces the cost of setting them up, as there will be no more need to arrange a yearly gifting from 1 October 2011.

1. SECRECY: Private trusts do not have to be registered and do not have to provide financial statements in any form available to the public. 

2. DEFYING CREDITORS: Gifting assets into a trust is a means of impoverishing yourself, while not losing control and use of the assets. Abolishing gifting duty will only make it easier to put assets beyond the reach of future creditors. Trusts may be assailable under certain circumstances, but their very existence still protects assets.

3. CUTTING OUT A WAYWARD CHILD: Wills are easier to challenge than trusts. Anyone trying to cut one of their children out of a will has a greater risk of that being contested than if they put assets in a trust and simply exclude one adult child as a beneficiary. Similarly, adult offspring could challenge your will if you leave money to a charity. Settle it in a trust and they'd have a much harder job.

4. SECURITY DURING BREAKUPS: Those planning on marriage tend to feel a lot more secure when all their assets are in a trust, because it is easier to exclude them from any divorce or separation proceedings. 

5. REST HOME SUBSIDIES AND DODGING ASSET-TESTING REGIMES: Placing assets in a Trust reduces your personal asset wealth, which assists in you obtaining rest home subsidies rather than paying for rest home service out of your personal wealth. There is currently  spotlight on Working for Families because of the ease with which relatively wealthy individuals can use trusts to reduce their income to qualify, if only they are willing to defer taking some income from a trust for a year. IRD are currently looking on including trust assets in Working for Families assessments.

6. WISE OLD EYES: Setting up a trust with trustees can be a means of providing a loved one you are leaving behind with one or more advisers who have a fiduciary duty to manage their money for them. An independent trustee can also be helpful, some say, in convincing the authorities your trust is not a sham.

7. TAX: This is a much-reduced reason to set up a trust. From October 1 last year year the top personal tax rate and the trust tax rate were equalised at 33%. There are still benefits here for the rich, though, as trusts can be used to stream income to family members on lower tax rates.

8. PROTECTING ASSETS FROM BEYOND THE GRAVE: You might not trust your daughter's – or son's – other half. One solution is to leave your offspring nothing but a beneficiary interest in a trust set up to ensure your son-in-law or daughter-in-law can't split with half of your hard-earned wealth. It can also allow you to ensure the family bach, for instance, is not sold and your grandkids get to enjoy it.

9. INTRODUCING COMPLEXITY: The rich love complexity in structuring their affairs. It makes auditing them harder, befuddles those seeking money from them, and allows for more related party transfers of assets and tax reduction methods. The IRD has made inroads in auditing the wealthy, but trusts remain valuable to them.

10. FUTURE-PROOFING: The argument is that the government can, and does, introduce new taxes and levies from time to time, and that a trust can help people avoid some of them. There has been some truth to this, but  government and its departments are getting better at catching trust assets in their planning.

 

McLEAN AND CO KNOWLEDGE CENTRE AND ARTICLES ABOUT TAXATION AND BUSINESS IN GENERAL PRESS HERE FOR BUSINESS STARTUP KNOWLEDGE CENTRE PRESS HERE
FOR INFORMATION ABOUT COMPANY INCORPORATION PRESS HERE FOR PREVIOUS MONTH EMAIL NEWSLETTERS PRESS HERE

FOR PROPERTY INVESTMENT AND TAX INFORMATION PRESS HERE

FOR FRANCHISE INVESTMENT AND TAX INFORMATION PRESS HERE


The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
  • All text must be copied without modification and all pages must be included.
  • This document must not be distributed for profit.    

 

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