My book - in all leading bookstores this week

My book writing journey

I am delighted that my book Invest and Prosper With Property has been released into bookstores. I started writing the manuscript for this book in January 2010 with the purpose of answering my friends and family members questions on how to invest in property successfully.  I wanted to do a good job, so I decided to give a broad coverage of all property investment topics. After several hundred hours of work had been invested I decided I would like to have it published so I didn’t just sell a few hundred copies or have to give them away. I made the decision to seek out the services of a professional publisher. My friend Amy Hamilton-Chadwick was a professional editor and she edited the manuscript and gave me excellent feedback to make it more readable.  Then it was time to brief out my manuscript to publishers and having been told by so many people about how hard it is to get a big name publisher behind you I was expecting it to go the way of most of my offers on properties – rejected.  This was a most pleasant surprise to me and full credit to Jan Riley of Random House who introduced me to the publishing team.

I was most impressed with the professionalism of Random House from the outset, with their large Auckland presence, an enviable list of best-selling books, and their reputation as one of the very best non-fiction publishers (as well as fiction publishers) in New Zealand, and worldwide.  So I choose them and Random House have been excellent in distributing my work through bookstores nationwide.

Topics covered in my book

There are number of topics covered in my book as it is designed to function as manual for those wanting to invest in property or for those who already invest in property and wish to keep their knowledge up.

Chapter Line-up

1. Why should I invest?
2. Why should I invest in property?
3. What do I need to know to get started?
4. Could I really become seriously rich?
5. Should I buy commercial or residential property?
6. What do I need to know to be a great investor?
7. What kind of goals should I set for my success?
8. What investment strategy is best for me?
9. How to get a great deal
10. How to find great properties
11. How do I check out a property?
12. How do I structure my property ownership?
13. What do I do about paying tax or getting tax rebates?
14. How can I find the money to invest in property?
15. What is a revolving credit or offset account?
16. Fixed vs Floating interest rates
17. How can I save money on my mortgage?
18. What type of loan is right for me?
19. How to structure your loan
20. What do I need to know about accounting and taxation?
21. Depreciation: making it as simple as possible
22. Renovate, redecorate and revalue
23. What do I need to know about valuations?
24. Keeping your investment safe
25. Managing your property
26. How to minimise the risks
27. Don’t derail your own success
28. How to prepare an offer
29. Due diligence
30. Education
31. Useful websites
32. Glossary
33. Index

Sunday Star Times Book Review

Leading financial journalist Greg Ninness of the Sunday Star Times reviewed Invest and Prosper With Property in today’s business section:

OF ALL the useful advice contained in David Whitburn’s book Invest and Prosper With Property, one particular paragraph stands out.  It is a section of the second chapter which asks if property investing will be hard work. ‘The short answer is yes’ the book says…

Whitburn now works as a property mentor and is the president of the Auckland Property Investors Association.  The book draws on his experience, and of others he has seen succeed or fail, to provide a guide that should help investors avoid many common pitfalls and structure their activities in a way that will help them succeed.”

Where do I buy Invest and Prosper With Property?

Now this is available in all good bookstores nationwide with official release date being Friday 7 October 2011, but some bookstores have it already.  This is also sold by a few international online bookstores including a couple of physical bookstores in Australia too. Very shortly the book will be for sale on www.investandprosper.co.nz.

I think it will be an excellent investment for anyone wanting to improve their knowledge on property investment at $37.99, so firmly recommend that you buy it.  I also hope that you enjoy reading it as much as I enjoyed writing Invest and Prosper With Property.

David Whitburn – 2 October 2011

This legislation has not received the Royal Assent yet (perhaps one of the first pieces of legislation for Jerry Mateparae to assent) in light of him being sworn in yesterday, replacing 5 years of magnificent service from Anand Satyanand.

I think that this is great legislation and will save tens of thousands of New Zealanders hundreds of dollars every year from transferring their assets into their trusts.  Well done Peter Dunne who championed this through and the National and ACT parties for their keen support.

Here is an important blog sourced from Inland Revenue in relation to the tax changes for LAQC owners.  The changes take effect from 1 April 2011.  Legislation passed in December 2010 made important changes to the rules for qualifying companies (“QCs”) and loss attributing qualifying companies (“LAQCs”).  These changes mean that LAQCs will no longer be able to attribute losses to shareholders.  The changes will affect all existing QCs and LAQCs, and also closed companies that may have wished to elect to use the qualifying company rules for income years starting on or after 1 April 2011. These changes also include the creation of a new tax entity known as a look-through company (“LTC”) to provide for a transparent form of tax treatment. This is to ensure that income and expenses are shared according to the owner’s effective interest in the LTC.

QCs and LAQCs (or their agents) will receive a letter late February advising them of the changes. Election forms and a factsheet will also be available in late February. A guide about look-through companies will be available in April.

Changes to the QC and LAQC rules

• The introduction of a new look-through company (LTC) tax entity for closely-held companies.
• Existing QCs and LAQCs will be able to transition into a LTC, or change to another business entity (such as a limited partnership or sole tradership) without a tax cost.
• Existing QCs and LAQCs will be able to continue to use the current QC rules without the ability to attribute losses.

The new look-through company rules

• The new rules create a new tax entity, called a look-through company (LTC).
• The new rules mean that the owners of a LTC will pay tax on the company’s profit and use the losses, subject to limitations.
• This is different from the existing LAQC rules because it is the owners of a LTC who will be taxed on the income of the company.
• A LTC’s income, expenses, tax credits, rebates, gains and losses are passed on to its owners, in accordance with their effective interest in the company.
• Shareholders of QCs and LAQCs will be able to elect to become an LTC.

A look-through company is still a company

• A LTC retains its identity as a registered company.
• A LTC will keep its corporate obligations and benefits under general company law, such as limited liability.
• The look-through treatment applies for income tax purposes only; the owners of an LTC are regarded as holding the LTC’s assets directly and carrying on the activities of the LTC personally.

Loss limitation for look-through company owners

• The LTC rules also have a loss-limitation rule, similar to that of limited partnerships.
• This will mean that owners can offset tax losses only to the extent that their losses reflect their economic loss.
• Any losses an owner cannot use are carried forward and may be used by the shareholder in later years.

Here’s what’s happening to current QC and LAQC rules

• The ability for LAQCs to attribute losses has been removed; this effectively means the LAQC rules have been abolished
• Existing LAQCs will default to QCs which may continue using the current QC rules.
• The current QC rules will remain while the Government reviews the tax rules for dividends, with a view to simplifying them for closely held companies.

Your options if you have an existing QC or LAQC

You have several options to choose from 1 April 2011. For instance, you can, without a tax cost:

• do nothing and continue as a qualifying company without the ability to attribute losses (the default option), or
• be taxed as an ordinary company by revoking your LAQC election, or
• elect to become a look-through company, or
• use the new transition rules to become a limited partnership, an ordinary partnership or a sole tradership. You will need to restructure your business and either make the company non-active or wind it up if you choose this option.

The new rules come into effect on 1 April 2011

• The legislation for these new rules was passed in December 2010 and comes into effect from 1 April 2011.
• The LTC regime will come into effect from 1 April 2011.
• LAQCs will no longer be able to attribute losses from the income year starting on or after 1 April 2011.
• The transition to a new entity can take place in either one of the first two income years starting on or after 1 April 2011
• QCs and LAQCs have six months from the start of their transitional year to advise us of their transition. The tax treatment for the entity they transition into (ie, LTC, partnership, or sole tradership) will then apply from the start of the transitional year.
• Provided the election to become a LTC or notification to become another entity is made within the first six months of the income year, the transition will be deemed to take effect from the start of the income year and will incur no tax cost.

Time to make an election

Elections must be received by the Commissioner before the start of the income year they apply to.  However, for the next two income years (starting from 1 April 2011 to 31 March 2013), existing QCs and LAQCs have a six-month extension period to elect to transition into a LTC, eg by 30 September 2011 if you have a standard balance date.  The LTC (look-through treatment) will apply from the start of the transitional year.

With acknowledgements to Inland Revenue

David Leon - Property Masterclass Master of Ceremonies on 27 November 2010

I covered a lot of topics as the keynote presenter, and those attending particularly enjoyed my take on the market, drawing attention to where we are at in this current stage of the property cycle and my predictions for the future in terms of the various Auckland sub-markets.  I gave a thorough analysis of all of the key market drivers, showing and interpreting graphs from the economics and research of the major trading banks, Reserve Bank of New Zealand, Statistics New Zealand, Quotable Value and the Real Estate Institute.

In another segment on stage I talked about how we as investors are running a property business and the fact that we have to wear a number of hats.  One of the leading property educators in the United Kingdom Gill Fielding talked about the importance of being skilled in a number of different disciplines wear you have a number of buckets to control or hats to wear.  I love this analogy so I talked about the various hats we have to wear as property investors in terms of the CEO hat – managing everything in our business; CFO hat checking our bank statements, keeping accounts, monitoring the financial performance of our portfolio, paying taxes, Renovations/Maintenance hat – looking at how we maintain our very valuable assets and renovating to increase our cashflow and equity; Legal hat – when doing due diligence on properties, looking at legislation changes and ownership structures; and Property Management hat on – where you have to manage your tenants or your property manager, to ensure you minimise vacancies, charge market rent and collect your rent and take the appropriate action when tenants are not behaving,  I also covered ownership structures, including the key changes in light of LAQCs losing their potency in that they lose the ability to offset losses against personally earned income.  The new tax structure the Look Through Company (“LTC”) was introduced too, with Chartered Accountant and my colleague from Deloitte Tax many years ago Amanda Macdonald (Tasman Tax and Accounting Services based in Albany) also presented on this topic being the tax and accounting expert she is.

Finally I gave covered my opinions on US tax deeds and liens that have been promoted in New Zealand heavily over the past couple of years, and I covered the good, the bad and the ugly things about lease options, giving an example of the massive win-win situation created in my last lease option deal that resulted in my tenant buyers settling the property and giving me a giant hug as they achieved their dream of being home owners in New Zealand, as well as the sheer joy of meeting their goal.  I also enjoyed presenting on the strategies I am using in today’s market and covered my revamped and intense mentoring programme where I take my mentoring clients out to do deals with me.  I have some new clients from this event and am looking forward to training them shortly.

Other speakers

Senior Resource Management lawyer Andrew Braggins talked about the spatial plan for Auckland the Supercity, which highlit the growth areas in the Auckland region, major infrastructure and planning thoughts from the head planner and CEO at Auckland Council, who are in Andrew’s network.  This presentation was enjoyed by attendees who were impressed with Andrew’s knowledge and communication skills, as he enlightened them about the hot spots in Auckland.

Andrew also briefly covered how to dispute council fees, levies and contributions both under the Building Act (including seeking a determination from the Department of Building & Housing) and also the Resource Management Act (including a judical review application he recently did on a property he rents out).

Jan Galloway then gave a masterclass in property management, including listing out the issues in relation to the Residential Tenancies Amendment Act with the fines for unlawful acts by Landlords and Tenants all covered – luckily these were included in the comprehensive bound manual we gave our event attendees.

Renovations expert Mark Trafford told attendees about a number of ways not to do renovations in a photo driven presentation.

Gary Hey, a director and shareholder of large mortgage broking firm, Mortgage People, then address the property cycle from a finance perspective.  He talked about how lenders’ criteria are changing and it is much easier to get finance for property now (compared to say 6 months, 1 and 2 years ago).

Improve your financial knowledge, get updated on the current market and learn what strategies I am using for wealth creation for the remainder of this year and in 2011.

My topics covered

Come hear me present live at NZ Property Masterclass event, where I will be talking about:

• Loss Attributing Qualifying Companies (“LAQCs”) being abolished and introducing the new tax structure, the Look Through Company (“LTC”)
• a Market Update with my opinions on where the market is heading for 2011 backed up by graphs and facts
• the untold truth about US Tax Deeds and Liens to follow up from my popular blog in March
• the good, the bad and the ugly with Lease Options, and a number of lease option promoters
• how you can create wealth in 2011, using the strategies I am successfully using on NZ properties in the current market.

Also included in the low $29 ticket price is access to 5 other fantastic speakers.

Your other speakers

Speaker #2:  ANDREW BRAGGINS  LL.B, BSc - Buddle Findlay

1. Local government, environment & resource management, litigation and dispute resolution expert
2. Andrew advises a range of clients, including developers, network utility operators, local authorities and financiers
3. Andrew has an in-depth insight into how local authorities work, having spent 3 years as a local government in-house council, and acting for many councils
4. Member of the Resource Management Law Association & Water NZ
5. Barrister & Solicitor of the High Court of New Zealand

Learn all you need to know about how to deal with councils, the structure of the new Supercity and the Supercity’s impact on you as a property investor.

Speaker #3: JAN GALLOWAY  BA Cert. Crim (Criminology) - Corinthian Management

1. Principal Corinthian Property Management
2. Over 25 years as a property manager
3. Multi-millionaire property investor
4. Managed a leading central auckland property management division
5. Auckland Property Investors Association Board Secretary
6. Multiple award winner (property management related)

Jan knows all you ever needed to know about tenancies and the issues that arise from them.

Speaker #4: MARK TRAFFORD - Owner of Renovate to Profit

1. Principal of Renovate to Profit and Maintain to Profit
2. Renovating properties for over 20 years!
3. Accomplished Property Investor
4. Regular Contributor to Property Investor Magazine
5. Sought after speaker

Mark is an excellent property investors knows everything there is to know about renovating properties having done many dozens of properties.  He is an excellent project manager with unparalleled networks of quality tradespeople.  Join us and learn more about creating wealth through smart renovations!

Speaker #5: GARY HEY BCom - Mortgage People

1. Owner and Director of Mortgage People, a leading Auckland based mortgage broking firm
2. Bachelor of Commerce, member of the NZ Mortgage Brokers’ Association
3. Commercial, Industrial and Residential developments advisor as well as residential investment properties financing expert
4. Sought after speaker having a background in education

The banks and other major lenders criteria are changing and it is easier to get finance for property now.  Gary loves finding funding for your deals.  Bring on your best questions forward and he and his team will be there to assist you.

Overview of key topics covered during the day

1. The current market cycle – using current & historic data to identify our current position & determine where, when & how to purchase your next property deal
2. LAQCs & LTCs & what it means to your investment portfolio
3. Practical strategies to increase your rent easily in the current market
4. Hot strategies for 2011 – the strategies NZ Wealth Mentor’s principals and mentoring are using to make money from NZ property today, and how you can meet your financial goals in 2011
5. Understanding the new paradigm for obtaining finance – How to get banks to lend you $$
6. Where are the best strategies to use in 2011?
7. The untold truth about US Tax Liens & Lease Options – what you must know before you ever think of investing on them.

We will discuss all the current hot topics so that you can leave the event well informed and ready to invest successfully.

2 Ticket Options

There are standard tickets priced at just $29 which don’t include lunch or any extra.  The Gold Tickets however are priced at $98 and these include a delicious buffet lunch in a private room with David Whitburn and many of your presenters.  You also get a portfolio review and wealth plan by NZ Wealth Mentor’s head of property mentoring and Auckland Property Investors’ Association President, David Whitburn, to help you set and reach your financial dreams.

So are you going for GOLD???

In NZ Wealth Mentor we want to make sure you get all your financial goals. If you book online before November 20th we will also include our “Financial Mastery Success Plan” in the ticket price. Financial Mastery Success Plan is designed to look at your financial situation today to build a brighter future. It retails at $175 and you will get it for free as a part of this time constrained offer (3 days to go). Make sure you don’t miss out and book your gold seat (select from the menu) for NZ Property Masterclass today.

Soon Gift Duty will be a thing of the past, as it gets abolished in New Zealand on 30 September 2011

Today’s Gift Duty Announcement by the Honourable Peter Dunne

The Minister of Revenue, the Honourable Peter Dunne has just today confirmed the Government’s intention to abolish gift duty, saying the decision would be welcomed by taxpayers generally as the rules were resulting in a high level of compliance costs and were no longer raising any significant revenue.

“Earlier this year I announced the Government’s intention to remove gift duty if concerns regarding creditor protection and social assistance targeting could be addressed.

Since my announcement there has been considerable work done by officials across government to assess the concerns. This work has revealed that the protection that gift duty offers in the areas of income tax, creditors and social assistance has only ever been incidental and very limited.

Furthermore, the limited protection that gift duty offers does not outweigh the significant compliance costs, estimated at approximately $70 million per year that gift duty imposes on the private sector.

There is a broad range of other existing legislation that will provide adequate protection to mitigate the identified risks following the abolition of gift duty. Government agencies will monitor the impact of the changes and a post-implementation review will ensure there are no unintended effects,” said Mr Dunne.

The abolition of gift duty will be included in legislation to be introduced in November 2010 and will be effective from 1 October 2011.

My Interpretation

This is great news as this was a costly and time consuming task for Governments and private citizens with Trusts alike.  Only 0.4% (as per Inland Revenue) of the 430,000 entities (mainly family trusts) for which gift statements were filed from 1 July 2001 and 28 May 2010 actually paid gift duty upon filing their return. This means that 99.6% of entities had strong “gifting programmes” in place and paid no gift duty at all. What a complete and utter waste of time and money.

This was a very expensive revenue stream to administer and the net revenue foregone is projected to be less than $5 million of the next 5 years from abolishing gift duty.  The annual gifting chore of having to pay professionals $180 – $500 to prepare a deed of reduction of debt (ie. gift) and gift statement, will be a thing of the past for many people and as a result some general practice and trust lawyers and accountants will see reduced fees.  Lets face it, this wasn’t a “productive” aspect of work for New Zealand’s economy and despite having done more than my fair share of gifting as a tax and trust lawyer, I am glad it is gone.  It will be of huge administrative convenience to do one deed of reduction of debt for say $270,000, rather than having to do 10 gifts of $27,000.  I act a trustee for more than 3 clients with over $1.5 million still to gift.  I know that they are extremely happy this duty is being abolished.  They think this is long overdue and I couldn’t agree more!

I think that this is fantastic legislation and that the Peter Dunne (United Future party) and the National party should be praised for.  I look forward to reading the Bill when the legislation is tabled for reading in Parliament.

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A New Tax Structure: the LTC

The proposed legislation creates a new tax entity: a Look Through Company (“LTC”).  Here’s an overview of how LTCs work.  An LTC’s income, expenses, tax credits, rebates, gains and losses are passed onto its owners.  These items are allocated in accordance with each owner’s effective interest in the company.  An LTC is taxed as a ‘transparent’ entity – that is you look through the company and income is taxed at the owner’s marginal tax rate, and expenses are deducted at the owner’s marginal tax rate.

The LTC rules differ from LAQC rules in that they include a loss limitation rule.  Owners can offset tax losses only to the extent the losses reflect their economic loss.  This does include loans by the owner to the company.

All owners of a company must elect for that company to become an LTC.  Then the company will remain an LTC until the company breaches the eligibility criteria or an owner chooses to revoke the LTC election.  When a company ceases to be an LTC it will be taxed as an ordinary company.

The rules are being grandfathered in, so there are friendly transitional rules in section CB 32C(2), DV 23, HA 33B, HB 13(3)(c) and HZ 4C of the Income Tax Act 2007, that allow existing LAQCS (and indeed qualifying companies) to leave the QC rules and use the LTC rules, or transition their business structure into a partnership, limited liability partnership or a sole trader with no tax cost.  For LAQCs making losses all of the shareholders must make an LTC election within 6 months of the start of that income year (for the vast majority of LAQCs this due date is 30 September 2010).  If you want to change your shareholding of your LAQC before this structure expires – do so before 31 March 2011 – that is not that far away.

There is a lot of confusion and a lot more detail I can go into with real examples of properties and portfolios for different circumstances.  I am keynote presenter at a seminar on Thursday evening next week at the Employers and Manufacturers Association Building starting at 7:00pm.

NZ Property Mentor Event – Thursday 28 October 2010

Next week on Thursday 28th October 2010 I am going to be presenting for just over 2 hours on a variety of relevant things to New Zealand property investment.  I will be talking about:

1. The Auckland Property Market, focus on House Price Movements by sub-region and where we are at in the Property Cycle
2. Rental Levels to tell you about recent market movements in the Auckland market, why you should be raising your rents and how you can do this to maximise your cashflow from property.
3. Changes to the Residential Tenancies Act – where the largest changes in the past 24 years to the legislation governing Landlord and Tenant obligations
4. Interest Rates – where the various interest rates are likely to be heading, considering global financial issues and New Zealand economic issues
5. Structure Update – Come to hear about more detail on the new tax structure, Look Through Companies (LTCs) and learn about what options you have with your LAQC, since this tax structure will shortly be abolished
6. Launching my revamped Property Mentoring Programme

The writing has been on the wall for a long time for property investors using Loss Attributing Qualifying Companies (“LAQCs”).  We know that the ultimate goal is to ring fence tax losses completely, so we property investors cannot use the LAQC ownership structure (our vehicle of choice) to offset rental property losses against or salary/wages.  Investors should not be surprised about this, although the hopes of many appear to have finally been dashed with the hope that there would still be the ability to deduct tax losses against income from personal exertion to the extent of capital contributed or even more hopefully against the amount of loans personally guaranteed.  Now the missing piece of the puzzle has been found – with the Minister of Revenue, the Honourable Peter Dunne saying this afternoon that “the Government would introduce new rules preventing loss attributing qualifying companies (LAQCs) from passing losses on to their shareholders.”

How did LAQCs become such a problem?

Lets look at this issue.  I don’t use LAQCs myself, instead preferring the asset protection (creditor protection, succession planning) benefits that well managed trusts bring along, with some incidental tax benefits, since I am not ‘normal’ and like to buy properties that make me money.  A lot of investors have bought on the rising market during the boom from 2003 – 2007 and fair few bought in 2008 thinking the market was just taking a short breathe before it would go up in value again.

The credit criteria for getting bank loans were very relaxed from 2004 until the Global Financial Crisis kicked into gear in New Zealand around September 2008.  Investor friends of mine were able to get their effective tax rates down from over 33% to below 15% through rental property losses being attributed via the LAQC against their salaries.  Instead of being net taxpayers, property investors (particularly residential property investors) became net taxrefundees! In 2003 before the last property boom kicked off there were $710 million of losses from LAQCs.  This more than tripled to a significant $2.256 billion by 2008.

The Tax Working Group made a big thing of this in 2009, and the information they had from Inland Revenue and Treasury showed the last two years that property investors were making big losses, despite control what they perceive to be well over $150 billion worth of property.

As a result of the financial crisis affecting companies, reducing consumption spending, rising unemployment and lets not forget the fact that we have many hundreds of thousands of New Zealanders not earning a single cent who have been in increasing numbers totally dependent on Government handouts, our Government has been suffering reduced income, yet facing increased expenditure pressures.  We are losing money to the tune of over $200 million per week.  This has to be borrowed at interest from abroad.  A few things had to give in the May 2010 Government budget.   One was the consumption tax that is Goods and Services Tax (“GST”) being raised to 15% with effect from 1 October 2011, another was building fit-out items being deemed to be fixtures and classified as part of the “building structure” eg. tiles and vinyl flooring is now depreciated at the building structure depreciation rate, and the building structure depreciation rate has been reduced to 0% (from 3% diminishing value, 2% straight line) with effect from 1 April 2011.  At that time the Minister of Revenue the Honourable Peter Dunne and the Honourable Bill English as Minister of Finance suggested that there would be tax changes to LAQCs.  We knew changes were coming – we had thought that LAQCs would be taxed as Limited Liability Partnerships and have to file IR7 returns, with LAQCs would be abolished to just be qualifying companies.  Now far more light has been shed with LAQCs and QCs being able to continue, just without the ability to attribute losses to their shareholders! So from 1 April 2011 LAQCs will lose their major benefit – being able to reduce their taxable income.  They called for submissions on this and wanted to work out the detail.  My previous blog contains the Press Release.

My Interpretation

If you have an LAQC you will need to take an extremely serious look at your structure and indeed portfolio and look for options on what to do with it.  The draft legislation will give full certainty, but one thing is for certain.  If you have an LAQC and make tax losses from which you have been offsetting your personal income – you will not be able to do this post 1 April 2011.  You will need to make changes, and before 31 March next year.

Follow the text of the draft legislation very carefully and look very carefully at your depreciation claims.  As Steve Tucker the owner of NZ’s leading chattels appraisal company Valu-it said in his address to APIA in July 2010, that depreciation claims are likely to be slashed by 60 – 85% depending on the type and nature of the property.  Older buildings with few valuable depreciable fit-out and chattels items would be amongst the hardest hit, as would commercial property as their is very little Landlord fitout or chattels.

Look at your latest set of financial accounts and analyse what is likely to happen to you post 1 April 2011.  If you need to make changes I would strongly suggest that you talk to me and we can look together at all of the fantastic benefits that trusts can provide you with.  Having worked at both leading chartered accountancy firm Deloitte, leading law firm Russell McVeagh, being a successful property investor myself, and having worked with property investors on ownership structures for a number of years, I can work with you to balance tax optimisation and asset protection objectives in this challenging political climate.  Contact me at david@davidwhitburn.com or on direct dial (+64 9) 528 5533.

Minister of Revenue, Peter Dunne said today that:

the Government would introduce new rules preventing loss attributing qualifying companies (LAQCs) from passing losses on to their shareholders.”

The move follows public consultation on proposals for reforms to the tax rules announced in Budget 2010 for qualifying companies and LAQCs.

The new rules will also provide a flow-through income tax treatment for closely held companies who choose to use them. Business income and losses will be able to be passed to shareholders who will pay any tax due, but the rules will allow a business to still have the benefits of a company, such as limited liability.

In response to feedback from small businesses, the Government has also decided to review the tax rules for dividends, with a view to simplifying them for closely held companies” said Mr Dunne.

Until this review is undertaken, existing qualifying companies and LAQCs can continue to use the current qualifying company rules, but without the ability to attribute losses.

Draft legislation for these changes will be available from Inland Revenue later this week, for feedback.

Mr Dunne said that the draft legislation will allow existing qualifying companies and LAQCs to transition into the new flow-through rules, or change to another business vehicle such as a limited partnership, without a tax cost.

The legislation for the new rules is expected to be enacted before the end of this year and will come into effect from 1 April 2011.

This will save the average person a lot of money in accounting and legal fees, as unfortunately most Kiwis don’t get professional structure advice before they purchase their own homes, and then they build up significant equity in them and have a larger amount to gift (as the value of their house goes up over many years) and they can run low in time to gift the money.  I would expect a 5 year stand-down or clawback period or perhaps something slightly shorter to protect creditors, and social welfare needs.

Here are the current gift duty rates in New Zealand:

From this table you can see why everyone targets $27,000 as that is the maximum “gift” allowed before gift duty is payable.

Here’s the statement from the Honorable Peter Dunne’s ministerial website:

Officials have been reviewing the gift duty rules for several months, and a strong case has emerged for repealing the rules altogether.

Gift duty was originally introduced to prevent people from circumventing the estate duty rules.  When estate duty was abolished, with effect from 1992, gift duty was retained to prevent people from gifting away large assets, where doing so may undermine the interests of creditors, minimise income tax liability or enable access to social assistance.

The use of gifting programmes ensures that gift duty is not paid in most situations.

For example, assets are sold at market value, usually to a trust, in exchange for a debt which is progressively forgiven.  This means that the vast majority of gift duty statements that Inland Revenue receives are not liable for duty.

The result is that very little revenue is being collected, but at a significant cost to Inland Revenue and to the private sector in compliance costs.

The alignment of the top personal tax rate with the trustee tax rate announced in Budget 2010 will significantly reduce the motivation to minimise tax obligations through gifting to trusts.

However, there are still some valid concerns around preventing gifting which may undermine the interests of creditors or which enables access to social assistance.

Officials have been talking to relevant government departments about these issues and possible new protection measures.

There will be further consultations over the next few months, and if gift duty is to be repealed, I intend to include it in a tax bill to be introduced in November this year,” Mr Dunne said.

Mr Dunne said that as leader of UnitedFuture he was especially pleased that gift duty looks likely to be abolished, as removing gift duty has long been UnitedFuture policy, he said.

This is a policy of UnitedFuture that I really like.  Subject to a reasonable (say 3 – 5 year) stand-down or clawback period to ensure creditors needs are not able to be compromised and social welfare/aged care benefits aren’t too easy to qualify for, then I am a huge fan of this proposal.  I look forward to updating you when this is put into a tax bill in November.