TalkTax

A word of encouragement before you discontinue your investment LAQC or make any voluntary disclosures to the IRD – make sure you consult your accountant or tax advisor and consider all the relevant facts.

It appears there has been something of an irrational and hasty response to IRD’s Revenue Alert (www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra0701.html) and related information advising of IRD’s investigation into personal homes being sold to LAQC’s.

The IRD alert itself is actually pretty “low key” and is careful to include a disclaimer that not all scenario’s will amount to Tax Avoidance as determine by section BG1 of the Income Tax Act. None the less I am a little concerned IRD are missing the point of tax law and venturing into their own interpretations with regard these investigations into property owners using LAQC company tax structures to offset losses against shareholders other income.

The reality is there can be a very fine line between tax avoidance and a legitimate business structure that is set up and operates within the bounds tax law.

There are two key considerations that need to be looked at. The first is the technical tax law interpretation and the second is reality of dealing with Inland Revenue should they chose to investigate your company.

Interpretation – Intention & Market Rental

One of the major factors in interpreting the tax law in this area and having a property investment (including but not restricted to LAQC’s) is the taxpayer intention. This intention of purchasing a property and choosing a business structure, in general, needs to be one with the plan or intention to make a return. Especially, the primary intention must not be one to reduce or avoid income tax.

Intention can be a difficult thing to interpret and prove to the IRD.

Ensuring the tenant is charged market rental is one of many circumstances or facts that would support an intention that the property purchase and business structure is one that makes good business sense.

The fact that a shareholder may also be the tenant is of little significance provided your “good” intentions can be supported. The scenario that makes this conclusive would be where an investor purchases a flat or house, rented to a third party and rents (pays rental to another landlord) the one next door of similar nature and rental income amount. In this scenario, assuming an LAQC structure has been used, the investor return and rental losses would be the same if instead the investor chose to live in (their own) LAQC flat and pay rent to the LAQC.

Whereas IRD, it would appear want to argue this would be Tax Avoidance.

Reality of dealing with IRD

Just a word of caution regarding the reality of dealing with Inland Revenue. The Inland Revenue have some fairly wide reaching authority which can, in some instances to allow them to overturn a tax position.

With IRD sensitive areas, such as LAQC’s, even if you have a strong case and a capable agent, and/or Lawyer who is willing to argue your case, the cost of defending your position can outweigh the option of paying the tax IRD assess to be owed.

As I said at the outset the best advice I would give anyone concerned about tax implications for their business or investment affairs, is always to get advice sooner rather than later. More often than not, the benefits (none more so than stress relief) of getting advice will more than outweigh the costs of the advice. If you are concerned about the cost of the advice by all means ask you advisor for a cost estimate or quote before you get the advice.