Structuring foundations

Kevin asks:
(updated on Friday, February 28th 2020)

We are looking to buy our first home. We are a professional couple (both working full time in permanent jobs) with two kids under five. I am on 33% tax rate while my wife is on 30% but she will stop working in a couple of years to be a full time mum.

My wife is working from home at the moment for up to 10 hours/week. My parents will also soon be living with us and we will get some income from them, like boarders. We have accumulated a large deposit (of around $400,000) to buy our first home and our plan is to buy investment properties after that.

So what's the best structure for our situation which is tax efficient and why? And what's the rough cost to implement the suggested structure? Also, for the future, which option is the best if we do contracting work?

 

 

Our Experts Answer:

Starting with the home, my recommendation is to establish a family trust for it. There is no tax benefit to be gained in doing so - this is about protecting the home and providing the cornerstone of an effective long-term estate plan, so that ultimately any inheritance you leave behind for your children is protected from any risks that they may be exposed to in the future.

When you then buy a rental, my first suggestion would be that you leverage off the equity in your home, implementing what we describe as a “split loan” structure. This means you borrow as much money as you can from a new lender using the investment property as security. You then borrow the remaining funds required from your existing lender that has the home as security.

A company will likely be the best structure for the rental property. As to the shareholding of that company and its tax status, those are matters that would need to be determined bearing in mind the specifics of the property that you are buying.

Speaking as to why a company would be appropriate though, it allows for you to clearly separate the borrowing associated with the rental activity and what interest is deductible and what interest is not. It also means you generate a shareholder loan account if and when you inject funds into the company over time, which can be used to your advantage from a tax planning scenario.

In terms of contracting, as a general rule we would suggest contracting via a company because it provides a layer of limited liability protection. It also would allow for you to most seamlessly remunerate a non-working spouse who provides services to assist with the contracting activity.

As far as cost of establishing such a structure is concerned, this is going to vary depending on the specifics but generally speaking for the establishment of the trust and accompanying gifting and estate planning documentation you would be looking at between $2,500 and $3,500 excluding the legal costs associated with the purchase of the property.

Heartland Bank - Online 1.99
Kainga Ora - First Home Buyer Special 2.25
HSBC Premier 2.25
Westpac Special 2.29
TSB Special 2.29
BNZ - Classic 2.29
ASB Bank 2.29
ANZ Special 2.29
Kiwibank Special 2.35
ICBC 2.45
SBS Bank Special 2.49
Heartland Bank - Online 2.35
HSBC Premier 2.35
ICBC 2.45
TSB Special 2.49
SBS Bank Special 2.59
BNZ - Classic 2.59
ASB Bank 2.59
China Construction Bank Special 2.65
Kiwibank Special 2.65
The Co-operative Bank - Owner Occ 2.69
AIA 2.69
HSBC Premier 2.89
SBS Bank Special 2.99
The Co-operative Bank - Owner Occ 2.99
AIA 2.99
Westpac Special 2.99
ICBC 2.99
ASB Bank 2.99
China Construction Bank Special 2.99
BNZ - Classic 2.99
TSB Special 3.19
Kiwibank Special 3.19
Heartland Bank - Online 2.50
Resimac 3.39
Kiwibank 3.40
Kiwibank - Offset 3.40
Kiwibank Special 3.40
Bluestone 3.49
Select Home Loans 3.49
ICBC 3.69
Heartland 3.95
The Co-operative Bank - Owner Occ 4.40
The Co-operative Bank - Standard 4.40