Grey area for Blue Chip investments

Blue Chip invests clients' money in residential property which it then rents out on their behalf.

But a key element of the deal involves an arrangement that lowers its taxable income.

So Roger Thompson of Staples Rodway, and Michael Stanley of Ernst & Young, say investors should avoid the scheme until Blue Chip can produce an IRD "binding ruling" as evidence that it will not end up in the courts.

Thompson said the tax engineering in the investment scheme appeared to carry a high risk of being challenged by the IRD.

Blue Chip finds investors - it has about 1250 - through eight offices dotted around the country, as well as through Sarnia Financial Services in Wellington, Napier and Auckland, My Insurance Broker in Tokoroa, and Northern Life Brokers in Rotorua and Whangarei.

Properties acquired by investors are leased back to Blue Chip subsidiary Auckland Residential Tenancies, which sublets them to families.

Those tenants pay rent, but Blue Chip has developed a tax treatment which allows, in its own hypothetical example, $350 in rental income to be taken in by ART.

The investor then receives $250 as income, on which he or she pays tax, and $100 as capital payments, on which Blue Chip investors have not been paying tax.

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