Which structure to use for rentals whilst living overseas

Question from Jarrod Rendle updated on 15th November 2006:

I am planning on renting out my current home, moving into another and then renting that out too in a couple of years. Both will then become negatively geared rentals and I would like to travel the world a bit earning here and there and probably end up in Australia and living there for the long term (up to 10 years at least). Exactly what is the best structure to hold these rentals in if I plan to live overseas: Trust, LAQC, own name, Other? What is the most cost-effecient option and just what are the tax implications? Also, how long would I need to live back in NZ for so as not to pay capital gains tax if I have to sell one. I realise that I will need to see an accountant, I was just wondering what the general idea is before I get to that point. Thanks heaps for your time in advance.

Our expert responded:

One of the primary issues to consider when going overseas is what your tax jurisdiction will be. If for example, you are living in Australia, and therefore become an Australian tax resident (and as a result are not an NZ tax resident), you will be subject to capital gains tax in Australia if you sell an NZ property. Another issue is that any NZ company owned 25% or more by an overseas tax resident, must be audited here in NZ. For a company or LAQC where you own the shares, this represents an additional compliance cost with the audit fees. And thirdly, losses incurred here in NZ by an LAQC may be offset against NZ income only, so if you are living in Australia, you can't use any NZ losses to offset against your Australian income.

Add to that, that LAQC's generally only have losses for the first few years of owning a property before you move into a tax paying position. In relation to your home which you plan to turn into a rental, this needs to be transferred to an entity anyway. The original purpose for buying the property was for your home and therefore, the interest will not be tax deductible. Check out the archived questions for this column on www.landlords.co.nz to see how this process is dealt with. Taking all of that into account, owning property through your own name or an LAQC will be inapprorpiate. While you will get the tax benefits for the first couple of years, changes will need to be made at the time you go overseas.

I would recommend that you use a special purpose trust. There are still some traps here to avoid, in terms of ensuring your trust has NZ residency and doesn't become an Australian tax resident. I still think even with that complication, a trust will be your best option for the long term. As you say, you'll need to see an accountant who will be able to discuss these issues and more with you in greater detail. Bon voyage!

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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