Will LAQC changes encourage investors to sell?

Question from Alamat updated on 18th November 2010:

Can you give me your thoughts on a predicament I and many property investors are in as a result of the Budget? My wife and I (though an LAQC) own a few rental properties for various reasons. When we decided to invest and use the LAQC advantage of reducing personal income tax we did so on the basis of the tax law at that time - around 2003. The Budget now makes theses investment marginal if not loss making. If we now decide to sell all the properties - because the model has changed - do we have a good case to argue with the IRD that we should not have to pay depreciation drawback on these properties as THEY have changed the rules. Property investment is/was encouraged by the Government as being long term venture ( min holding 10 years) - we planned long term based on their rules etc I am sure you see my point - and if it applies to us - it will apply to many others selling out.

Our expert Mark Withers responded:

*This answer was correct at time of answering, 4th June, 2010

The changes to the LAQC rules are far reaching and a final position is not yet known because the legislative changes are still open for submission. I can't really agree with you that the budget was all that bad, sure, depreciation is gone, but that was only a timing advantage, you have swapped this for a permananent tax cut of 5%.

Rents will almost certainly start to rise making your investment returns a whole lot better. To achieve this though you obviously have to actually raise them! LAQC's will still have their place in the world. Losses will still attribute to shareholders. Yes there is a loss limitation but 99.9% of LAQC owners will be guaranteeing their company debt which is counted in the partner base calculation.

Careful planning is needed now though to assess the companies profitability with a view to reviewing shareholdings prior to the changes. After the change, a transfer or sale of shares will trigger the underlying disposal of the company assets to the seller which of course leads to depreciation recovery.

I can't see most property LAQC's opting out of the regime though because it would make it very difficult to extract capital gains without the dividends being taxed. The only way out would be to liquidate the companies. If you intend transfering properties out of companies and believe your building may have fallen in value you will need a registered valuation to prove it. Suggesting that this may somehow be possible simply because the govt has changed the rules on you is, to be blut, living in dream land.

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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