Claiming profits and losses from a Trust

Question from Amin updated on 18th November 2010:

I had placed my residential property in Rotorua into a family trust in November 2007. At the time we were living in it and the intention was to keep this property in family trust for allocating property to kids when they grow up. We had to move to Christchurch last year because of a job change. Hence the property is now rented. We are paying $500 per week in mortgage interests, but the rent does not cover that, meaning we are incurring a loss each year that is not tax deductible. I have two questions in this situation:
a. Can I lease the property to a LAQC that I am director of? This LAQC can then sub-let the property and any profit/loss can be incurred by the LAQC and taxed accordingly?
b. If we sell the property to anyone and make a profit i.e. sell it to a higher value than it was bought by the trust, do we pay tax on it?

Our expert Mark Withers responded:

The loss the property is making is tax deductible to the trust. The only real problem is that this can't be claimed by beneficiaries. It can though be carried forward and used to offset profits in the trust in the future. The property could be leased to an associated entity but the rent would need to be a market rent and the interest costs would still be bourne by the trust so you may achieve very little.

There is also the question of whether the arrangement is solely tax motivated and therefore tax avoidance. Ultimately, you probably need to decide whether the asset protection afforded by the trust is more important to you than the tax saving from offsetting the loss against your personal income.

If the claiming of the loss is the most important issue you should probably transfer the property and debt out of the trust. It seems unlikely a gain on sale would be taxable provided the trust didn't buy the property with an intent to onsell it and provided it is not associated with a builder, developer or trader. 

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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