Newsletter

KNOW YOUR RESPONSIBILITIES AS A TRUSTEE

30 OCTOBER 2009

Trusts have become an increasingly popular asset management and planning tool over the past few years.

Under a Trust structure the Trustees are responsible for managing the assets of the Trust for and on behalf of the beneficiaries.

To ensure that Trustees fulfill their obligations to their beneficiaries it is strongly recommended that they ensure that proper Trust records are maintained including preparing annual financial statements and minutes. Preparing a tax return only, does not in itself meet these obligations.

Trustees should be aware that beneficiaries are legally entitled to seek information about the performance of the Trust for which they are a beneficiary.

We have encountered problems in the past with Trusts that have not maintained adequate records; problems have often arisen as a result of beneficiaries exercising their right to receive information about the performance of the Trust but the Trustees have failed to maintain appropriate records and cannot provide the information being sought.

Another common instance where maintaining proper Trust records is beneficial is when there is a change in the circumstances of the beneficiaries of the Trust, for example through a matrimonial dispute or the death of a beneficiary. In addition to their responsibilities to the beneficiaries existing Trustees also have a responsibility to new Trustees when there is a change in Trustees.

While there are many benefits to using a Trust structure, we urge all of our clients who have either formed a Trust or are Trustees of a Trust to ensure that appropriate records are maintained. The longer Trustees proceed without maintaining the necessary Trust records the harder it becomes to reconstruct the information when it is required.

If you would like to discuss this matter further or any of the other topics included in this edition please feel free to contact me or any of the other Directors, we also welcome any comments or feedback you may have.

Kind regards

John Ballard
Director

TAX ON SALE OF LAND AND BUILDINGS

Considering buying an investment property or making improvements to a property? Contact us about any tax problems before you buy.

If you are contemplating investing in rental property or improving an existing property (other than the family home) – you now need to be doubly careful to find out whether that property will be caught for tax when it is eventually sold.

On 6 October 2009 new associated persons tests for land transactions came into force.

These tests result in an expansion of the definitions of who is related to whom for tax.

The actual taxing provisions for land have not changed. These provisions have always caught land bought with the intention of resale and profits from most subdivisions. In addition they tax gains on land acquired by a person who was associated to:

• either a dealer in land or a developer of land at the time that land was acquired – where the person sells the land within 10 years of acquisition
• a builder when the person started an improvement to their land – where the person sells the land within 10 years of completing the improvement
• a dealer, developer or builder who sold you the land – whenever you eventually sell that land.

Therefore if you are associated to a dealer or developer at the time you acquire land, or you are associated to a builder when you commence an improvement to land – that land will become tainted by association and any profits will be taxable, unless you hold the property for 10 years.

Under the old associated person rules many people may have acquired property and avoided being tainted. This may be due to the investment structure used to hold that property. Such properties should remain untainted from dealing and development activities, but they could subsequently become tainted by association to a builder – if they now commence improvements to the land.

With regard to acquiring additional investment properties, most existing structures will no longer prevent the new properties from being tainted by dealers or developers. A common anti-tainting structure used two trusts, one to hold investment properties and the other to undertake development activities. It is most probable that both trusts have a common settler, so under the new rules the two trusts will be associated. This association will not affect properties already acquired before 6 October 2009, but it will affect all subsequent property purchases.

The new rules also include an aggregation of interests rule which means for the purposes of testing association, a domestic partner is deemed to hold the shares of their spouses company and vice versa. If the deemed holding is ‘greater than or equal to 25%’, that person is deemed to be associated to the company. A similar test applies for associating two companies, but the aggregation limit is ‘greater than or equal to 50%’.

The rules also included a tripartite test which in simple terms says, A will be indirectly associated to C, if A is associated to B and C is associated to B.

As a result of these expanded associated person tests, it will be very difficult to prevent tainting of future investment properties if you or one of your businesses is involved in building or dealing in or developing land.

If you are not directly involved in these activities, it will be important to review your property investment structure to ensure that no one involved with your structure will taint any future investments. This will mean before making a property purchase a trust should check existing and proposed new trustees or appointers to ensure tainting is avoided.

If you are considering buying any property or improving a property we strongly recommend you talk to our Tax Manager Jim Martin before making the purchase. He will be able to advise you of any potential associated person exposure and possible steps you can take to reduce that exposure.

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JENNY AND GEOFF LODGE THEIR SUCCESS

Not ones to miss an opportunity, clients of the firm Jenny Arscott and Geoff Clarke decided to try their hand at running a homestay by developing Willows Reach Lodge in Kumeu.

While Jenny and Geoff have plenty of business experience, owning and running a homestay was a whole new venture for them. They developed Willows Reach Lodge with the idea of offering guests a tranquil retreat to relax and enjoy a unique country experience.

While their guests are able to relax and enjoy the Lodge and its beautiful surrounds, anybody familiar with the programme Hotel Inspector, knows that actually owning and running a Homestay is not for the faint hearted.

Not that Jenny and Geoff will be calling on the Hotel Inspector anytime soon as they have just been nominated as a finalist in the Auckland Tourism and Rodney District Council Hospitality Awards known as the “Manaakitanga Awards” in the Outstanding Accommodation Experience category.

While we can’t guarantee you a prestigious tourism award, UHY can guarantee that we can assist you throughout the whole process of purchasing and running a business including providing valuation services, accounting and tax advice, cashflow forecasting and other consultancy services all aimed at making you and your business a success.

Congratulations Jenny and Geoff on your success and for anybody looking for a wonderful relaxing break the address for Willows Reach Lodge is 252 Boord Crescent, RD1, Kumeu, Auckland or view at www.willowsreach.co.nz

Has your business recently received or been nominated for an award or have you been successful in growing your business? If so, let us know, we would love to spread the word about your success?

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PROPERTY SEMINAR

In conjunction with Stuart Wills of Mortgage Link and Steve Miles of Barfoot & Thompson, UHY recently held a very successful property seminar at our premises at 22 Catherine Street, Henderson.

The seminar covered a wide range of topics relating to property ownership and investment including:

• Market Trends and Property Identification
• Cashflow and tax consequences of owning property including deductibility of interest and legal expenses
• Financing
• Ownership Structures
• Special Tax Code available for salary and wage earners who own rental property
• Trading vs Investing in property.

We have a number of partners who specialise in investment property so please contact us if you have any property related queries.

If you were unable to attend the seminar or if you want a copy of our presentation please contact us and we will arrange to forward you a copy.

Subject to demand we are happy to hold another seminar, so if you were unable to attend our earlier seminar and would be interested in attending if we held another please contact us.

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TAXING MATTERS

Taxing matters provides a summary of topical tax information relating to individuals and business.

GST Late Filing Penalties

From 1 April 2008 late filing penalties apply for late GST returns. The late filing penalty for a taxpayer on the invoice basis is $250 and $50 for payments basis.

Children Receiving Income

Some children can receive income up to $2,340 tax free. The main requirements are the child is under 15 or under 18 and still at school.

Independent Earner Tax Credit

Did you know that if you are a New Zealand tax resident and have annual income between $24,000 and $48,000 for the tax year (1 April to 31 March) you may be entitled to a tax credit.

The Independent earner tax credit (IETC) came into effect from 1 April 2009. Subject to meeting the criteria stipulated by the IRD both employees and the self employed are entitled to receive the IETC.

From 1 April 2009 if your annual income is between $24,000 and $48,000 you’ll receive a tax credit of $520 ($10 per week). The IETC reduces between $44,000 and $48,000 by 13 cents for every additional dollar earned over $44,000 and the eligibility to receive the IETC ceases altogether when your annual income exceeds $48,000.

Employee Tax Deductions

Employees are generally not able to claim any expenditure against their salary and wages, however there are two common exceptions to this as follows:

1. Expenditure incurred in preparing a tax return is deductible, including for salary and wage employees
2. Insurance premiums relating to income protection insurance are deductible including for salary and wage employees

For further information regarding the above, or for any other tax matters please contact us.

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UHY HAINES NORTON – SUPPORTING THE COMMUNITY

UHY Managing Director, Grant Brownlee is a Trustee of the Corban Estate Arts Centre (CEAC) located on Gt North Road in Henderson (Corban’s Hill). CEAC is run from the old Corban homestead which now houses an art gallery and shop. Grant’s ties to CEAC however, go back to his great grandfather, Assid Abraham Corban, who purchased the 9 ¾ acre site for £320 in 1902.

“As a child the old Corban homestead gave me a great sense of belonging and identity”, says Grant. “My involvement in the preservation of the site and development of CEAC sits well with me personally and is aligned with UHY Haines Norton core values which include supporting the community.”

The Trust was formed by the Waitakere City Council in 1999 and took possession of the buildings on the Corban Winery site in 2001, with the aim of establishing an Arts Centre in West Auckland. The emphasis of CEAC is on the promotion and development of arts and culture in and for Waitakere City.

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PASS ME ON

If you know someone that would find articles contained in this publication to be of interest please feel free to pass a copy on to them.

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UHY Haines Norton is an accounting and business advisory firm based in Henderson, West Auckland. We specialise in providing accounting, tax, consultancy and audit services. We are part of the worldwide association of UHY Haines Norton firms operating in over 180 offices based in more than 60 countries around the world.

Disclaimer

The comments in this publication are for general information purposes only. This publication and the information contained within it is not intended to constitute professional advice. If you wish to receive specific professional advice please contact a UHY Director.