NZ Gift Duty - Estate Planning

[Super_BQ]

Greetings to All,

Though this may not apply to many others, especially of younger age, I can not stress how much the following implications will have on people wanting to retire. A simple example is given:

You're living in NZ and somehow, you win $5 Million from the lottery. Although there are no taxes on lottery winnings in NZ, there is a problem when you want to share some it.

According to the gift duty, for a given calendar year, the maximum tax free amount that one person (or entity/trust/corporation) can give to a person (or to another trust/company) is $27,000. If you give more than that amount, then expect to pay taxes. From the horse's mouth

http://www.ird.govt.nz/resources/fil...20ac/ir194.pdf

Though this may not be alarming at the start, it can create a difficult situation when the person has health difficulties AND is forced into elderly group home care. Some light can be read here:

http://www.ageconcern.org.nz/?/article&id=0000000092

and here from another horse's mouth

http://www.moh.govt.nz/moh.nsf/238fd...257000000d202d

Quite interestingly, gifts to charitable non-profit organisations are exempt (non-arms length transaction I say?)

A common case is the person may own serveral land and housing properties for retirement but at the same time, does not generate enough passive income (income less property maintenances, etc...) to cover their illed accident or elderly group home care costs. The result is the person is forced to liquidate the assets into cash so they can pay for their elderly care.

The smart figure that they try to move ALL the land/house properties into a trust. However if you own 2 or 3 houses by the time you reach retirement, it would take a LONG time to move say $1 million in assets into a trust because you're still bound by the $27,000 gifting limit per year.

The hidden message is that there's a tendancy for kiwis to try and get the gov't to pay for their elderly care despite if they're wealthy or not. Similar to the "student allowance" scheme whether the student really needs it or not - it's still a gov't hand out.

But, even if a person manages to get enough assets into a trust so that they are below the $160,000 asset test threshold. The trust still has the problem of disbursing it to the beneficiaries as the trust alone is bound by it's $27,000 a year gifting limit to the beneficiaries. Not to mention the lawyers and accountants win on annual fees.

Since I moved to NZ (from Canada) some 8 years ago, I thought I had a major tax advantage by residing in NZ. However over the years the NZ gov't has gone in a direction that Canada was nortorious for having (high taxes) to where Canada has gone the opposite.

Don't bet that I will be planning to retire in NZ. I know at least in Canada, there is no gift duty. If I put the wealth in a trust in Canada, at least I know I have the freedom of taking the cash out in case of say I need an emergency medical treatement that is not covered by the gov't - spend so freely with no tax consequences. "You've earned it? So it you're right that you do what you want with it..."

BQ

[sarahw]

UK has gift duty & inheritance tax so nothing different (just the amounts) from where we're coming from.

[sarahw]

By the way - NZ doesn't have capital gains tax so you can buy & sell as many properties as you like without paying a cent to the government... that might be beneficial if you do decide to retire elsewhere... or if you just decide to buy a rental house or 2 as a pension to be sold off as and when it suits...

[Super_BQ]

hi sarah,

Please forgive any misunderstanding I may have caused. However, I do believe the issue of taxable capital gains needs clarifying. The key would be the time frame for when the properties were bought and sold and the frequency of these transactions.

A recent article by the NZ Herald clearly states that capital gains in NZ can be taxable. Quoted:

"Regardless of whether or not a rental property is run at a loss, it is the taxpayer's purpose or intention at the time of purchase of the property which is material for determining whether a gain on the sale or disposal of the property is assessable income.

"Where it is established a person regularly buys and sells properties, even when also residential landlords, Inland Revenue will look at the purpose behind the activity.

The full write up of the article which has comments from IRD is here:

http://www.nzherald.co.nz/section/12...ectid=10409057

IMO, it would be very hard to convince IRD tax auditors that the regular buying and selling of property should be tax free when in a sense, a company or business that engages similar activities also buys and sells for the sole intention of making a profit.

Nevertheless, I do believe it's completely safe to acquire several properties over the period of 20 or 30 years and liquidate all of them at the time of retirement - without having to pay any capital gains tax. Though holding any asset this long would be quite obvious that speculation isn't the reason.

If the properties were all bought in a company's name or trust, well unfortunately capital gains tax would apply. The very nature of running a business is to make a profit?

Like Canada, NZ has no inheritance tax.

BQ

[Avalon]

If you are buying houses to "do up and sell" - its best from the outset to do so in a separate company than anything you want to buy as a rental "buy and hold" property.

If you were to buy a rental (usually through a company called an LAQC) - and then needed to sell it for whatever reason - the IRD will not look to closely as long as a/ your stated intention at time of buying is to HOLD the property (it pays to documant this with your solicitor), and b/ you can show a good reason for having to sell.

You dont need to keep hold of "buy and hold" properties for decades to avoid Capital Gains tax - but you DO need to be very careful, and make sure you get good advise before buying property as investments.

Some advise I was given just recently - if in doubt - NEVER tell anyone you may do up and sell the house you are buying - UNLESS you are doing it from day 1 as a "trader" and you have the correct business set up to do it in. You will get charged Capital Gains tax - but they will leave any "buy and hold" properties alone.

The very nature of running a business is to make a profit?

Not necessarily in New Zealand Many people do it to make a "Paper loss" and then get some income tax back.

Say you buy a rental - and you get enough rent in to cover your costs (exceedingly difficult right now). Or enough to JUST go into profit. You can use "Depreciation" to turn that into a loss on paper. And teh government then gives you some of that back (equivalent to your tax rate - so if you make a £1000 loss and pay tax at 39% - they give you $390 back. So in effect you increase your profit, or pay less tax.)

Of course some people just make a loss and get some if it back from the taxma, so in efect just make less of a loss.

Does that help?

[Super_BQ]

Thanks for the input Avalon.

I've heard of lots of people in NZ doing "negative gearing". My uncle in Australia did that for decades however recent tax laws have made this practice less attractive.

When I 1st arrived in NZ I had no clue about this idea (buy property and deduct the loss of it from your tax return). That's because in Canada (where I grew up), you can only deduct losses from 1 venture with gains from the same similar venture. ie. A night club owner can't offset his profits from the losses of say his rental income or capital gains sale of houses.

Depreciating large assets like houses and land sounds dangerous. Please bear that i'm speaking from an overseas tax view. Any attempt to depreciate land would only reduce the adjusted cost base of the property, thus causing an even greater capital gain once the property is sold. That is, although on books the property is being depreciated, the fair market value of the property never really goes to zero over several years (ie. unlike the case where you would depreciate a car or plant equipment). I'll say i'm not familiar with this practice done in NZ and the negative gearing aspect.

BQ

[sarahw]

Cheers for clarifying BQ and Avalon - interesting. We'd planned to do the old buying rental property/ies over a long period to liquidate as a pension later but I'm sure there are people out there who have thought about property development (but as you say that, of course, would be a business).

[Avalon]

Thanks for the input Avalon.

I've heard of lots of people in NZ doing "negative gearing". My uncle in Australia did that for decades however recent tax laws have made this practice less attractive.

snip

Depreciating large assets like houses and land sounds dangerous. Please bear that i'm speaking from an overseas tax view. Any attempt to depreciate land would only reduce the adjusted cost base of the property, thus causing an even greater capital gain once the property is sold. That is, although on books the property is being depreciated, the fair market value of the property never really goes to zero over several years (ie. unlike the case where you would depreciate a car or plant equipment). I'll say i'm not familiar with this practice done in NZ and the negative gearing aspect.

BQ

Just a few things more (if its not getting dull yet )

The tax laws here on negative gearing may change. The thought is that a change will come in meaning that you can only claim "losses" upto the original amount of money you actually put into the investment. So say for example you put in a $20k deposit on a rental - your refund from the government over the life of the investment cannot come to more than 20k. And if you buy with "no money down" ie. a 100% mortgage - you wouldnt be able to claim anything.

BUT - it may not happen - and I really dont think its worth NOT doing something on the basis that the rules MIGHT change. If you have decent lawyers & solicitors - they will adjust how you have things set up to find a better way. Bear in mind that most MP's here are probably also investing in property - they aint gonna rock thier own financial boat!

Also - depreciation. Here in NZ - you CANNOT depreciate land. You can only depreciate the building and chattels. And the rules on that have recently changed as well (but Im not sure how). The theory is that land never actually goes down in value - whereas buildings and so on wear out.

You use deprecaition to increase your cashflow at the start - but at a certain point your ability to do that "runs out" (as yousay - when you have depreciated to zero effectively). Any money you get from this is "Clawed back" by the government when you sell - BUT if you make $10k in the next 5 years by doing this - and then had to pay it back in 20 years - when your house is now worth 3 times what you paid for it - does it really matter????

Bear in mind - you are only going to use depreciation on houses that you hold onto - where Capital Gains tax isnt paid. Any hoses you buy to "flip" (do up and sell) - you wont be depreciating anyway - so any effect it has on the end capital gain doesnt matter.

I know this doesnt make sense when coming from coutries where tax laws are not waorking entirely in your favour - but - as odd as it seems - the tax laws here are REALLY quite cool (as long as you are not just paying straight income tax). There are lots of ways to make the system work in your favour.

(Bear in mind - Capital gains tax DOES apply to selling shares - no matter how long you hold them for!)

[Avalon]

Cheers for clarifying BQ and Avalon - interesting. We'd planned to do the old buying rental property/ies over a long period to liquidate as a pension later but I'm sure there are people out there who have thought about property development (but as you say that, of course, would be a business).

Sarah,

If you need a good accountant and /lawyer - give me a bell and ill pass on the ones Ive found. They will really help you make sure you do it right - and get the best results