Trust or LAQC

Question from Byron updated on 22nd February 2011:

I currently own a property in an LAQC which for the last two years i have claimed depreciation on (around 20k) and received the tax refunds. I have signed a Relationship Property Agreement with my partner so we each have our own property. The property isnt likely to become cashflow positive for some years so what should i do? Would i then keep running this company at a loss and then accumulate the losses against future income, or should i bite the bullet and move it into a trust so I can start gifting. I may be able to become a Contractor as such in the next few years and thought that it would be possible to become an employee of my trust, which also owns this property, and then reduces my overall tax bill? Is this thinking logical? My house is likely to sell for 20k less than i paid for it so I don't think I will need to repay any tax on depreciation.

Our expert Mark Withers responded:

If the property is producing losses even without depreciation the LAQC should be able to flow these losses back to the shareholders and allow them to be claimed. A trust though canno't distribute tax losses so often not seen as appropriate unless it has other income to offset losses against. A trust offers asset protection though where you company does not.

If I understand you correctly, your second question relates to billing your contracting income from a trust. This will have no tax benefit now that the trust and personal rates are aligned at 33%. The trust assets would also be exposed to the business risk. Attribution rules also still apply if you are predominately billing one customer. IRD are also taken a keen interest in the inappropriate use of trading trusts in light of the Penny Hooper tax avoidance tax case that is topical at present. I'd suggest you use a more conventional arrangement for your contracting. 

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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