To Trust or not to Trust, which is the best option?

Question from Katrina updated on 3rd April 2009:

My husband and I have been living in overseas for the past 3 years. We are NZ citizens but not NZ residents and we are planning on returning to NZ in the next couple of years. We own two houses in New Zealand that are currently in two different trusts. Which is best; keep them in a trust and merge the two trusts into one? Or get rid of the trusts and set them up as a company? Are there any implications because we are not NZ residents if we set them up as a company? Look forward to your reply Katrina

Our expert responded:

With a question such as yours, there are a few hooks which must be looked at on a case by case basis, so I will answer generally and you must make sure that you get advice specific to your situation.

Firstly, if an NZ company is 25% or more owned by overseas tax residents (that is, for tax purposes, they are not NZ tax residents), regardless of whether or not those residents are New Zealanders or not, then company legislation in NZ requires the company to be audited each year that this situation applies. This is not a big deal if you're a property investor, however, it does bring in an additional compliance cost for which there is no value. In this situation, at the very least, the shares in the NZ company should be owned through a NZ resident trust.

However, if the business (including rental property) is conducted through a NZ resident trust, there is no audit requirement at all. In considering whether or not to move properties between different entities, there are some hugely important issues to consider prior, such as why are you transferring the property and are you going to trigger depreciation recovered?

These issues in themselves can be extremely costly if not dealt with properly. In terms of whether or not to merge two trusts, that will depend on why there were two trusts in the first place and what your plans for the future are.

There may also be some concerns as to whether or not the trusts are NZ trusts, as some countries have different rules to NZ for determining the tax residency of a trust. This could mean with a country such as Australia, if the trust has not been dealt with properly and you are now living in Australia, your NZ properties in what you think is your NZ trust, are now subject to Australian capital gains tax.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth.  She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.



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