Would IRD view this as tax avoidance?
Question from YINGGUAN updated on 26th November 2009:
The interest payment for the unit is about $150/week now, but the rent is $300/week, this means I'm making profit from rental property, and have to pay tax at the end of year.
Both my wife and I own the properties, and we both earn about $70,000/year. If we set up a LAQC now and sell the rental unit to it at current market value, take the money out to pay off some principal of my new house. Also we may claim the loss on rental property now, but I'm not sure if IRD will be happy about this, Will it be considered as tax avoidance? Thank you very much for your help.
Our expert Mark Withers responded:
The test for tax avoidance tends to be whether there is a commercial reason to undertake the restructure or whether the arrangement is simply designed to defeat the incidence of tax. Having said that, taxpayers are allowed to arrange their affairs to minimise tax provided the arragements are within the framewark of the law.
It would certainly have been better to have determined your LAQC restructure before renting the property out and buying the next home but despite this there may well be legitamate commercial reasons to still undertake the restructure.
Your arguments would be strengthened if you also took the opportunity to review your wider asset planning affairs, for example, if you moved your home to trust at the same time that the rental went to the LAQC any tax savings would probably be viewed as incidental to the overall rearrangement thus reducing the risk of the arrangement being considered tax avoidance.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.