Why Property is Always a Good Investment
Jan 4, 2010 accountants
When it comes to investments, there are few that are always as reliable and easy to finance as real estate. Commercial and rental properties allow the investor to actually make money on the deal even while it is being financed. Certainly the real estate market has its up and downs, but the investment will always appreciate, unlike shares in the stock market.
Getting Started
The first place to start is by finding a property. The key to making a profit is to find a high-value property that is offered at a discounted price, and one that is already rented or has good potential to be fully leased – creating a positive cash flow situation.
The next consideration is financing. The home owner who has equity in their house can take out a line of credit against the value of the property. This line of credit, or second mortgage, is used to fund the deposit on the new real estate purchase. With an 80% loan, this gives the investor an idea of the price range they should be searching in.
Example Investment
Here is an example of property deal that would make a good investment.
The property is valued at $375,000 and purchased for $300,000. It brings in rental income of $475 weekly.
To purchase this property, you would need to have $60,000 as the deposit with the remaining 80%, or $240,000, financed by the bank. Using your line of credit as the deposit, this means the property is 100% financed by two different loans with no cash outlay.
After six months of ownership, it is possible to refinance. The property is still valued at $375,000 and with the 80% financing rule of thumb, this means a new loan can be written for $300,000 and the $60,000 initial deposit returned to pay the line of credit loan.
This example illustrates the importance of finding real estate that can be purchased for 20% below value.
Consider, also, that you are receiving rental income the entire time. With a rent amount of $475 weekly, this translates to $24,700 per year, giving the investor an 8.23% return. When the loan is financed at a less than 8% interest rate, this results in a positive cash flow. Purchasing the property through an LAQC allows the investor to take a deprecation allowance on taxes and receive a refund.
All in all, this is a win-win situation. There is no cash outlay, rent pays for the expense of the loan and associated maintenance costs and fees, and ownership allows for a refund cheque from the IRD. The longer you hold on to the property, the more likely it is to rise in value, providing an even larger return on investment over time. Obviously property investment is quite worthwhile.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
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YB 11, Associated Persons, and the Trust to Appointor Test
Jan 3, 2010 accountants
Recent changes made by the Finance and Expenditure Select Committee affect many property investors in regards to trusts set up for the placement of assets. The definition of associated persons was just one new area that complicated things for the investor; the Trust to Appointor test cited in section YB 11 is another area that perhaps needs further explanation.
Associated Persons Rules
The association rules apply to the relationship between land dealers, real estate developers or builders, and other business entities involved in buying and holding property. The rules were put in place because of a concern that associated businesses would work together to buy a property for the express purpose of holding it and avoid the capital gains tax.
An unexpected by-product of these rules is that professional advisors who are designated as appointors to an otherwise unrelated trust are considered an associated party. The appointors’ assets, as well as those of his or her other clients, are also considered tainted under these rules.
Taxation Remedial Bill: Section YB 11
What YB 11 states is that a trust is associated with its appointors. The association exists because of the tripartite test whereby an association exists between two parties where both share a common associate, such as a professional appointor.
However, upon examining this test more closely, the common entity is not subject to the test twice. For instance, if a professional appointor for Trust A also holds the Power of Appointor ship for Trust B, there is not an association between these trusts. This tripartite provision states that the common associate (the professional appointor) is associated to both trusts by means of the same test – and applying the same rule twice is not allowed by YB 14.
The associated persons rule does not necessarily work as it should, however. It is possible under the current test for an appointor of a trust used for property investment to also be a shareholder in a development company or a settlor of another trust involved in property development. With the rules as they stand, this would allow the association.
Of course, most appointors would be negligent if they accepted an appointor ship to two such trusts or held stock in a related company. Should this situation come to light, the client’s assets could be subject to a 30% capital gains tax when sold within a decade, as well as any assets acquired over the period of association.
Even if there is not outright negligence proven, other situations, such as when a client begins the business of real estate development at some time during an association with the appointor without telling him or her, could also result in the same consequences.
Until the new rules are further sorted out, it is advisable to be very careful when appointing a professional to manage a property investment trust.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
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Proposed Changes to the New Zealand Tax System
Jan 1, 2010 accountants
As one year ends and the next begins, interest regarding the future of the tax system is natural. In regards to property laws, many of the changes being considered by the Tax Working Group could prove detrimental to those who invest in real estate.
For some time the government has been proposing various modifications that will result in higher taxes being paid by property investors. It is unlikely that any of the proposals will result in immediate change but it is a good idea to become aware of what’s on the table.
As it gets closer to the time when a definite determination will be made – most likely soon after the beginning of the year – it is appropriate to consider how these changes may affect investors.
It is expected that the following revisions will be considered for inclusion in the new tax system:
* While individual tax rates will decrease, the rate of GST will increase in order to make up for the deficit. Corporate and trustee rates will become more closely aligned.
* The tax rates are expected to change drastically but tax laws will most likely remain unchanged in regards to assessments of capital gains and equity. The government’s stance is that it is disinterested in instituting sweeping changes at this time that could negatively impact a strengthening economy.
* There should be no surprises in the federal budget, either. Should any new tax rules be implemented, such as a risk-free rate of return investment property tax which has been bandied about, the legislative process is such that it will take some time before they are enacted.
* Throughout the year of 2010, additional options in the tax rules are likely to be debated and subject to public review. The Tax Working Group will probably propose several options rather than strongly back only one. This will allow the government to select the most favourable to stand behind and bring to public review.
* Tax changes regarding property investments will most likely be considered at some time in the upcoming year during the budgeting process. It would not come as a surprise if the deduction for building appreciation is denied. Whether or not it would apply retroactively is in question.
The tax program currently under review in Australia will probably influence the decisions for future tax structures in New Zealand. Depending on the results of the Henry review, our tax laws may or may not change as expected.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
Tags: accountant, accountant services, accountants, business accounting
What Happens to Assets Without a Trust During Divorce?
Dec 31, 2009 accountants
For the married couple, it is truly essential that an estate is properly structured, legally protected, and the disposition of assets in the case of separation clearly defined. If you have not yet started a trust for your assets as a property investor, perhaps this scenario will convince you of the need to do so.
The Case of the Trust-Less Divorce
In most cases, divorce is a messy matter. It is highly unlikely that the two parties will be able to reach an amicable agreement as to the disposition of assets. Even with a trust, in the absence of a Property Relationship Agreement a legal battle may ensue because there is still the issue of what to do with the assets in the trust.
Of course, the first step will be hiring a lawyer for each side. As we all know, legal fees can quickly add up to thousands of dollars. Consider the property investors who have a $500,000 house listed as an asset. Is a combined $100,000 in legal fees worth the argument? It may not make much sense, but this is what many couples end up doing – paying money to fight over a property that is still mortgaged.
Then again, during a divorce few people are going to act rationally. More often than not they are hurt, and those hurt feelings cause them to fight. Because legal issues can take months or even years to resolve, this must makes the pain last longer. The lucky couple engages a trustee who can help calm them both down and move them toward some agreement. The unlucky couple has no one to advise them thusly, or chooses to ignore attempts at resolution.
If an agreement cannot be reached, the next step is to go to court. It will be up to the court to decide the disposition of assets.
The Importance of a Property Relationship Agreement
If there is a trust in place without a Property Relationship Agreement, then the court must also review the terms of the trust, including how it was set up, how it has been run since its inception, who is in control of it, what assets have been transferred to it, and the amount of outstanding financing that is secured by the trust’s assets. Obviously, this could take some time.
Following the review, the court will set out its orders. Another individual could be put in charge of the trust, as trustee. The court will have to decide how much money is awarded to each ex-spouse. No matter what happens, someone is likely to be unhappy about the outcome.
The best way to avoid this scenario is for the property investor to create a trust where the assets are placed immediately. Following that, the creation of a Property Relationship Agreement which designates disposition of the assets is essential. A married couple may even want to consider creating two trusts, one for each spouse.
The time to protect your property is now.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
Tags: accountant, accountant services, accountants, business accounting
Changes Coming to New Zealand’s Tax System
Dec 30, 2009 accountants
As the end of the year rapidly approaches, the Tax Working Group is hard at work reviewing the current tax system of New Zealand. The Tax Working Group is a consortium of professionals in academics, government, and industry whose expertise shapes the proposals presented to the government.
The current proposals are expected to produce greater equity in the system and broaden the tax base to be used as funding for anticipated decreases in the rate for personal, corporate, and trust taxes. Property investors will be affected by proposed changes to the capital gains and land taxes as well as the addition of a risk-free rate of return income tax.
What’s Going to Happen?
Shortly after the beginning of the new year, the public can expect to be notified of the results of the review. What will the upshot of these proposals be?
More than likely major reform is coming. When it happens is questionable. Public and committee reviews will probably defer the chances changes are enacted any time soon.
Corporate and trust top marginal taxation rates will come into alignment (the 30-30-30 option) with Australia and be assessed at the same rate. Regular corporate and trust marginal taxation rates will also match those of Australia. Currently the Australian rate is set at 27% but that is expected to decrease to 25%. Clearly these reforms are meant as an economic boost.
How Will These Reforms be Funded?
Funding to make up for the shortfall in trust and corporate tax returns will obviously have to come from somewhere. Right now it appears as if the decreases will be financed through:
* The GST increasing to 15%. This is an easy and quick fix. * Imposition of ‘rifle taxes’ that are assessed on capital gains from rental and commercial properties. In addition, existing rules will be more rigorously enforced. * Speculative investors held to tax liabilities. Presumably this will reduce the risk of creating a market bubble based on speculative real estate investments. * Government spending will be reduced in order to effect cost reduction and economise current holdings. This is in direct opposition to a Labour type of government model.
Imposing a stamp duty on land transactions might be quite beneficial to the new tax program. Its progressive nature is both fair and equitable as well as being a simple piece of legislation that is easy to enforce. This would also reduce the practice of speculation by taxing the investor’s margin.
Only time will tell exactly what the Tax Working Group will propose to the government in the upcoming year but do expect change on the horizon.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
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Inheritance Issues: No Surprises
Dec 29, 2009 accountants
Are your children going to be surprised after your passing by what they do or do not inherit? Perhaps it is time to sit down and have an honest discussion about the terms of your will.
This issue comes to light on the heels of a case that was tried in court last fall. The case involved a deceased man whose daughters were not notified of his death, nor did they inherit any part of his estate, per his will. There was only a public notification to creditors, of which there were none that came forth. The daughters tried to make a claim two years after their father died but the courts denied the motion. They were left with nothing, just as the father had wished.
This ruling is in direct opposition to historic cases where the courts were more sympathetic for the cause of the surviving children. Clearly there is no law stating that parents must leave an inheritance to their children. Luckily there were no creditors to lay claim to the estate and the man’s surviving partner received the inheritance.
How This Affects the Property Investor
In the previously mentioned case, the father drew up a will that designated the public trust as executors. For the investor, this is not a good plan.
It is advisable instead to place assets in a company trust, not one under your personal name. This type of legal structure protects any assets – including real estate – from creditors, the Official Assignee, and duties paid on gifts. This also allows the trust to be passed directly into another trust specifically established for surviving children upon the parent’s death.
Another good idea is to draw up a Memorandum of Wishes and ensure that it is kept updated. This will inform the trustees of exactly how your assets should be handled after your death. Along with the Memorandum of Wishes, a will should also be filed. Your will designates the disposition of personal assets outside the company trust.
Why go to all this trouble? For one thing, family relationships tend to change over time. Not all family members get along with each other throughout their lives. Having the proper legal documents in place before you die means that your assets will go where you want them to go and be safe from claim. It also relieves any possible family disputes over an inheritance someone feels entitled to.
As a property investor, it is important to think of all possible scenarios when planning an investment strategy. Take care of the necessary paperwork now, before it is too late. This is an action you won’t regret.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
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Property Investment and Bank Securities, Part I
Dec 28, 2009 accountants
An important consideration as you expand your real estate portfolio for investment purposes is reducing the risk of losing assets in the case of insolvency due to bank securities. How you structure your business and its financing will largely determine how safe you are from the possibility of losing the property and its accrued equity.
First we present a bit of background.
Banks and Gearing Rules
Simply put, gearing rules dictate financing structure. The general rule of thumb is that a 20% deposit is required to purchase residential property whilst 33% is preferred for commercial or larger properties. New Zealand also requires an interest cover rate of 2.5 to 3%, which is determined by the formula of rent + income / interest expense.
It is important to figure these percentages in the equation when considering the viability of a real estate purchase. Do you have the necessary cash flow to seal the deal?
Financing Strategy
One way to minimise risk of losing assets and equity is to finance with a split loan structure. This refers to using two lending institutions.
With the first bank, finance a property investment using the real estate and a personal guarantee as security. With the second bank, put down a deposit using family trust assets. As soon as it is viable, refinance the loan with the second bank based on revaluation of the property as the sole means to secure it. In this way you eliminate any guarantees that could result in loss of the real estate and other assets.
Of course, this type of financing relies on the set up of a family trust. Do this now, and also institute a gifting programme for allotment. In the above scenario, you will need to refrain from giving the second bank security over the trust. Realise that this will probably be an automatic term of the loan, but it can be denied. Without a trust in place, the personal guarantee you give to the first bank in the above example places the property at risk.
In order to receive the most favourable terms at the bank, consider using a broker to do the negotiating for you. This allows you the strongest position from which you can stand firm and ensure that the security requirement does not eventually cause the loss of property. The trust must not be put at risk, nor should other assets.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
Tags: accountant, accountant services, accountants, business accounting
What Happens to a Trust in the Case of Divorce?
Dec 27, 2009 accountants
When financial woes hit a married couple the unfortunate outcome is often a divorce. Of course, this means the division of assets, along with the usual amount of bickering over that division. But if those assets are in a trust, what happens?
The Creation of the Trust
For the property investor or any other type of investor, a trust is always recommended for placing assets. Do take some care, however, before creating the trust. An individual’s rights to the assets are affected by this legal structure, so it is a good idea to consult a lawyer.
Property Relationship Agreement
In the case of a married couple, the two parties should also enter into a Property Relationship Agreement (PRA). This component is essential for laying out exactly what happens to the property in the future, particularly in the case of separation. The PRA prevents the parties from having to go to court and argue the disposition of assets.
The PRA covers such matters as who owns what assets before they are placed in the trust. Additionally, the disposition of those assets upon separation is laid out in exact terms, such as provisions for sale of property and using the assets to repay outstanding loans.
The agreement is implemented by lawyers if the necessity arises. Any amounts outstanding after payment of liabilities and proceeds from sale are divided between the parties, who each now have their own private trusts.
Two Trusts Are Better Than One
Another option for the married couple is to create two individual trusts right away, one for each spouse. This allows each spouse to transfer property that was owned before the marriage into a private trust, such as family heirlooms or inherited property.
Often, the couple will each get half the value of the family home added to their private assets. The trust should also include a PRA that specifies disposition of the home upon separation.
Any additions to the trust do not have to have the spouse’s approval, provided that they are not named co-trustee. Property that is inherited during the marriage can be added to the recipient’s private trust. As well, each spouse can designate the assets they bequeath to beneficiaries – a great option for couples who have children outside of the current relationship.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is a Chartered accountant firm specialising in property in New Zealand. Search Engine Optimisation by Digitalawol.com
Tags: accountant, accountant services, accountants, business accounting
How to Choose The correct Accountant or Lawyer
Oct 13, 2009 accounting
If you live outside of New Zealand but have corporation connections in NZ or are thinking of moving to NZ then there are a few principal considerations to make whilst choosing an accountant or a lawyer.
The specialist you choose possibly will make all the difference to your bank balance and your stress levels!
There are important considerations for people to make whilst considering investing or moving to New Zealand. some are obvious and selected are not. Having an experienced professional company to lend a hand you pass through the issues and deliver good value is important.
pro services are central because getting the right guidance is important if you are migrating to New Zealand, and expatriate returning home to NZ, or an investor. Knowing how to reduce your income tax legally and understanding the implications of certain legal structures possibly will make all the difference whilst it comes to protecting your material goods and cash flow.
In New Zealand there is often much cross-over relating the services that accountants and lawyers give.
This means that when you are selecting these services, the purpose should be to decide on a specialist organisation that can represent your interests in both areas?legal and accounting.
As an example, an offshore financier or new immigrant to NZ would typically require a expert who can put forward information that relates to the implications of taxation and other matters relating to migration to New Zealand. Also to be considered are the ownership options that are available plus the differences between certain structures as part of asset planning. Usually, taxation guidance is usually given by an accountant, whereas guidance about asset protection and relationship material goods is usually handled by a solicitor.
There are nonetheless a select group of professionals in New Zealand who can work in both of these different but very chief areas. Additionally, when making a choice as to the proper specialist to employ, you will almost certainly call for someone who can specialise in their field. If you are caught up in estate investment it would also be a good idea to find a firm who can present expert know-how in this area.
There are several aspects where the two services do not cross over ?as an illustration, conveyancing. Conveyancing is where property is purchased or sold and involves the transferring the funds from the purchaser or receiving them on behalf of the vendor – depending on the position. It also involves dealing with the lending institutions as well as overseeing the correct registration of the new ownership on the title. Typically in NZ, solicitors will have limited awareness when it comes to tax and accounting issues.
Offshore investors or new or returning migrants regularly use accountancy practices that are joined with above-board services that can present the basic taxation and accountancy services along with the over-arching asset protection and structuring instruction and recommendations that you would generally obtain from a lawyer.
About the Author:
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is an accounting firm specialising in property and business accounting in New Zealand. Search Engine Optimisation by Digitalawol.com
Tags: accountant, accountant services, accountants, accounting, business accounting
Do You Have A Monetary Game-Plan For When You Pass away?
Sep 11, 2009 accounting
Being Chartered Accountants we are often faced with solving the fiscal affairs of clients passing away without warning. If plans for monetary management have not been put in place, this can cause serious problems for those left after. Here’s a uncomplicated checklist that can help. It’s our responsibility to ensure we do these things before we expire:
1. Log the name of your bank account numbers and passwords. Keep this information confidential. Put it with your lawyer or your accountant or better still, both professionals. Make certain that the document is only to be opened and understand upon your end.
2. Document a written note to your spouse or family, your lawyer or your accountant. Stipulate the steps that ought to be taken on your passing. For instance, does someone owe you some money which hasn’t been recorded in say your monetary statements but which you intend composed on your death? Do you would like to contribute your organs?
Document your desires so they are easy to stick to and have no vagueness? Again, specify that the document ought to only be opened and understand upon your end.
3. Do you have a existing Will? Make sure you do and that your lawyer, accountant and your spouse have a duplicate of that Will.
4. Do not retract or stop a life insurance policy without having an substitute policy set up.
5. Keep a duplicate of your life cover policy with your lawyer, accountant or partner.
6. Make sure the policy for life insurance is recorded in the names of the Trustees of your Family Trust.
7. Go ahead and have a Trust, but ensure that chattels that are business are not mixed with property that are business related. For example, put personal belongings such as your family home in your Family Trust and keep your business chattels, such having the status of the shares in your business in your Trading Trust.
8. Have a existing Memorandum of desires for each of your Trusts. Tell your surviving Trustees in your Memorandum of wishes accurately what you wish done with the chattels of the Trust when you expire.
9. Leave a photocopy of your recent Memorandum of wishes with your lawyer, accountant and present family.
10. Do you have a game plan for your corporation if you are a business owner? What exactly should happen on your passing away? Who should be put in power until your Trustees or your Executors can resolve matters? Document this in writing in detail. If you have a feasible business this plan will certainly be significant to ensuring your operation survives after your death.
11. Keep in mind to leave a set of house keys, company keys, and so on with a acquaintance so that someone has access to your business and your home. Keep in mind, if you live alone, pets and pot plants still need consideration and care. There will undeniably be other factors that should be considered and there will be many more suggestions you can find. The above is not planned to be a full list. If you follow these suggestions it may make things easier for those left behind so that they can on with grieving their loss.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is an accounting firm specialising in property and business accounting in New Zealand. Search Engine Optimisation by Digitalawol.com
Tags: accountant, accountant services, accountants, accounting, business accounting