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There will be further consultations over the next few months, and if gift duty is to be repealed, I intend to include it in a tax bill to be introduced in November this year,” Mr Dunne said.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

Saturday 29 May 2010

8:30am start to 6pm finish (registrations from 8am)

Parnell Jubilee Hall, 545 Parnell Road, Parnell, Auckland

The 2010 Annual Budget has just been presented and it implements the largest tax reforms New Zealand has seen in 25 years.  To arm you with the knowledge and tools to succeed in light of the Budget and in today’s market, the not-for-profit Auckland Property Investors’ Association (APIA) have a 1 day seminar BUDGET BUSTER 2010 – Strategies for Today’s Market with tickets at just $49.

The speakers include multiple best-selling Author and NZ Property Investors’ Federation Vice President Andrew King, who provides a State of the Property Investment Nation address, then sets the theme for both newer investors and more experienced investors with substantial portfolios.  APIA’s Treasurer & Chartered Accountant Ann Loudon has the all important topic of tax changes to go through, particularly in light of the depreciation changes and the taxation treatment of LAQCs to have to become aligned to Limited Liability Partnerships.  APIA’s Honorary Solicitor & Property Lawyer Tony Steindle then talks about structures, including the legal aspects of the Limited Liability Partnership, and APIA Vice President, Property Mentor & Trust Lawyer David Whitburn talks about what to buy in today’s market, how to buy it and how to analyse just what is a good deal or not.  APIA President & former NZ Mortgage Broker of the Year Sue Tierney then talks about finance in light of the turbulent global financial crisis we are in, particularly with the highly indebted European Union countries and the relevance of this to New Zealand.  ANZ Mobile Mortgage Manager Vanessa Murch then covers off financing in New Zealand, including why fixed interest rates are so high in comparison to floating loan rates and just how we get our loans approved.  In case this wasn’t enough content, we provide further value to you in relation to tenancy management with APIA Board Manager and Principal of leading boutique Property Management Firm Corinthian Limited Jan Galloway, presenting on how you should manage your property to get the best tenants and lowest vacancy rates.  This is combined with a presentation by Tenancy Practice Lawyer Scotney Williams, giving his expert advice on the Residential Tenancies Act including recent times and also proposals to reform parts of it.

So don’t delay, BOOK YOUR TICKET for Saturday 29th May at the Parnell Jubilee Hall by emailing admin@apia.org.nz now.

Steve’s been busy buying property – making himself a few more hundred dollars a week positive cashflow from Lease Options, doing some super do ups and quick flicks, and basically anything he can to maximise his lifestyle and quality time with his lovely life wife Kelly and their two kids. Steve’s an inspiration to me as well as a long time friend of mine. It is just so fantastic to see his and Kelly’s continued personal and portfolio growth. Keep it up mate.

He is a fine example to many younger New Zealanders that you don’t have to join what seems like the majority and do an OE. When we live in the most beautiful country in the world, have plenty of financial opportunties to make for ourselves, own Businesses to grow – there is not such a need.

The burning house of Kemp Road & insurance protection

In the same street as our Fuzo showoffice today I saw and smelt a house burning down. Not very pleasant at all. The firefighters were super and got there very quickly – sadly the house inside was gutted. The second house within the past 9 days on the street to be gutted by fire. Suspected electrical fault again at this early stage – guys old wiring is dodgy. No one was injured or hurt fortunately. However this got me thinking. For properties you are keeping you can lose a substantial asset if a current insurance policy is not in place and income from not having a rental house in place. My suggestion is to get insurance policy extensions to cover loss of rental income from fires too. It happens far too often.

A Fuzo client has even had their house burn down (the older one not the new house we built for them). Fortunately they had insurance to cover the rental income whilst the assessors did their work, demolished the old home, got building consent to erect a new building, insurance company approval to built it and then getting it built. This takes many months, possibly a year – can you survive without that cashflow? If not get insurance to cover it. I know some successful investors don’t insure all their properties, but until you achieve massive success and have 40 plus properties in your conservatively geared portfolio – you are not ready to do the same.

Asset protection

I often get asked about what structures I use. Today I helped guide a couple of trading and development clients re just what is the best structure for their property investment activities today. So for those that I have promised this information to and to be useful to others here’s what I do and recommend.

Because I am a Business owner, property developer, trader, investor and own home owner trusts are the best structure to have. I value asset protection extremely highly, more highly than total tax optimisation so I have 3 core trusts:

1) A trading trust – for all properties I buy with an intention for resale
2) A buy/hold trust – for all properties I hold and buy for the long term (with no plans to resell at the time I buy it)
3) A family trust – for my own home in central Auckland, my wife and my life insurance policies, some ungeared passive investment (shares, managed funds, bonds, mutual funds and term deposits).

I have 3 other trusts, but these are for my business interests, joint venture entities, and I am a trustee of some of my family members and a couple of close friends trusts too.

I highly recommend the use of professional trustees in your trusts (not so for trading trusts). So I am not a trustee of my buy/hold trust, nor my family trust. Rather leave my lawyers to run it and let me focus on my core activities.

A structure like this gives me true asset protection in the sense that I get creditor protection, a clear and simple ownership structure, smart savings structure, in built succession plan, flexible structure, tax effective for me, no need to enter into gifting programmes, option to get around means testing (eg for medical, pharmaceutical and nursing costs).

In my opinion everyone should own their own home in a family trust. And also every property trader (that I define similarly to the Income Tax Act 2004 – as a person that purchases a property with a purpose of resale at the time of acquisition) should buy that property in a trading trust. However for some salaried people it may be better to purchase long term buy/holds in a Loss Attributing Qualifying Company where they get massive tax advantages for doing so. In my opinion business owners should be using the tri-trust structure I have recommended.