Asset Planning and Tax Structures
DESIGNING TAX AND LEGAL STRUCTURES TO PROTECT AND GROW YOUR ASSETS
Your business and property planning affairs will often overlap with your personal and estate affairs. You have worked very hard to build your business and personal assets. Our role is to help you maintain, protect, and grow your assets by advising, designing and optimising the right tax and legal structures for your unique needs.
Simple explained asset planning ensures taxation, asset protection and estate planning are all dealt with at the same time.
Experience and expertise are vital in asset planning. The longevity and loyalty of our client base is a testament to the peace of mind our clients enjoy knowing their asset planning affairs are being looked after.
There are a number of considerations and complexities that can only be best planned for by looking at the total picture of your affairs to optimise structures. Consideration needs to be given to;
Plan A - what does success look like when things go as expected?
Plan B - what are the downsides and risks to your net worth if things don't go to plan? How well are your assets protected in this scenario, and can you mitigate risks further with insurance?
We know one size does not fit all and take the time to get to know each of our clients; so that, we understand our client's current situation, aspirations and dreams. We believe in keeping things as simple as possible and so, will not oversell you complex structures (unlike some other lawyers/accountants), that doesn't make sense and can require significant compliance cost overheads.
Your needs come first and foremost. We will work happily alongside your existing advisors i.e. lawyers and financial advisors or introduce you to our own trusted professional team of advisors. We will ensure you get the best advice and right fit tax and legal structure for your circumstances.
Additionally, you will gain confidence and peace of mind knowing you can rely on us where the relevant laws are constantly changing. We know it’s critical for us to make sure we keep up with changes, not only in the law but also in our client’s lives. This means we are constantly searching for how to be proactive in suggesting structuring improvements for better business and net worth outcomes.
One of the most common areas of advice given by accountants, solicitors and numerous self-acclaimed property gurus is advice over-structuring and management of investment property
Property can be less volatile than shares and other investment types. It’s also a concept most New Zealanders are familiar with, which is what makes it so popular. However, it’s not easy to sell property in a hurry when you need the cash.
Property values are tied to interest rates, how many buyers there are for your property and how many others are also selling their properties at the same time.
IS a residential property investment easy?
The short answer is no. Residential property investment is not a passive way to make money when compared to less intangible investments such as bank term deposits, unit trusts and shares.
With all investments, the right advice and guidance are critical to helping you balance the rewards and risks. Having a clear property investment strategy as part of a diversified portfolio of investments is the best way to manage overall risk to net worth.
We have over 28 years of practical hands-on property investment experience at Martin Davidson and Associates. Our clients invest over $500million in property. Clearly, we know and understand property.
WHICH STRUCTURE IS BEST?
That will depend on your circumstances. Let us explain tax and legal structures more fully by using a commonly used tax and legal structure for a husband and wife wage/salary earner as shown in the accompanying diagram.
Explaining the diagram the legal structure used is a Discretionary Family Trust . The trust utilises the services of an independent Professional Trustee to best protect key assets e.g. family home. Estate planning can be triggered via the Trust deeds in the event of the death of the husband and wife.
The second legal structure used is a Look Through Company (LTC). 9 out of 10 times LTCs are the best structure for owning rental properties in NZ . The key benefit of using a LTC in this example is both profits or losses can flow to the husband and wife shareholders. Very advantageous if the rentals are in a loss situation which can be then be cleverly offset according to respective husband and wife tax brackets. The % of shareholding reflects the higher earner having the highest shareholding. In this example, the loss offset could go against either wage and salary income, reducing the overall tax bill or even produce a tax refund.
HOW CAN WE HELP?
Firstly, by clearly defining with you what your Property Investment Strategy is and the resources, you have available to execute your strategy e.g. money and time.
Secondly, we will make sure you understand the pros and cons of the tax and property structures and how options fit with your life circumstances and your risk appetite. Getting your properties into the correct property structures will save you money by minimising tax.
Thirdly, we will ensure you are claiming the maximum deductions that can be legally claimed. Again minimising tax and maximising net worth.
Whether you are planning on using the above strategy or seeking more information about how they could work for your particular circumstance, we welcome the opportunity to talk. Contact us for an obligation free tax planning meeting.
DEPRECIATION IS STILL CLAIMABLE
CHattels and building fitout are DEPRECIABLE at 8.5% - 67% for all RESIDENTIAL PROPERTY INVESTMENTS.
Whilst land and building are not depreciable chattels are. By splitting the purchase price of your investment property into the various depreciation categories set by the IRD, you can increase your depreciation claim and improve your cashflow.
Your current accountant may only be claiming nominal depreciation based on the value of chattels assessed by a Registered Land & Buildings Valuer. It is worth noting the value is assessed for finance purposes e.g. to obtain a mortgage and is unlikely to maximise the depreciation claimable a smart Property Investors seeks.
WHAT IS OUR APPROACH?
We recommend at a date close to settlement engage an expert valuer familiar with chattels valuation for tax purposes. By separating chattels into IRD categories from the building structure the depreciation claim is maximised and also Property Investor cashflow.
These assets are a small sample of the various assets that can be separated from the building structure for tax depreciation purposes.
Driveways & Paths
Curtains and Blinds
Hot Water Cylinder
If you have bought an investment property and have not completed your first tax return then you can still take advantage of a specialised apportionment.
To complete a valuation for depreciation purposes we recommend using the market leader in chattel valuations valuit. Martin Davidson & Associates and Valuit offer client services as part of our Together Better Trusted Partnership™ strategy.
The benefit of the valuation will depend on the age of your property investment and whether older properties have been updated/refurbished. For a brand new property, there will be a high value in chattels circa $50,000+ for driveways/carpets/appliances etc. It will make financial sense to get a chattels valuation completed.
- If the cost is included in the building valuation (i.e. not separated out as a chattel) then there will no depreciation.
- If apportioned as a chattel, then the carpet can be depreciated at 25% which is $3,750 for the first year. Assuming a valuit site visit and report cost of $500 and the property owner is paying 33% marginal tax, then the tax savings amounts to $1238. It makes perfect financial sense to get a chattel valuation in this instance with the payback being less than 5 months ($500 divided by $1238).
Valuit will ensure you are claiming the correct amount from year one and we utilise the report, as IRD support if required, to claim your full entitlement over the lifetime of the property chattels as specified by the IRD.
A detailed schedule of chattel descriptions and depreciation rates can be found by clicking the following IRD link.