Structures

by Shawn O’Grady
3 Minute(s) to read

Structures

With the new year comes the tradies off doing odd jobs, many flouting with liabilities they have no idea about the implications. It seems every year I am asked similar questions or people think they need a Trust when they need a company and vice versa.

Company

There are certain advantages to having a company.

  1. It is easy to rearrange ownership. You only have to change the shareholding. You might want company ownership while there are losses but trust ownership when there are profits. You may also wish to rearrange the proportion of ownership. All you have to do is sell some shares instead of going through the more expensive process of conveyancing.
  2. A limited liability company can reduce your personal exposure to risk. Apart from a personal guarantee you may have had to give for a mortgage, you would not be personally responsible for any other company debts unless you contributed to the claim. The claimant would have to sue your company not you. This is especially important when it comes to staff, and potential warranty claims (think leaky homes).
  3. The tax rate for a company 28% tax rate. However, when accessing the profit from the company you need to top it up with the difference in the tax rate (previously 5%, soon to be 11%) or wind up the company provided the assets have been sold.

Trust

A trust, in some respects, is like a company. Assets owned by a trust are separate from yourselves, and though you may be the trustees, you do not own them.

  1. If you require long term care when you are old, your assets have to be sold to pay for this. A family trust helps to protect those assets. Since you do not own the assets in the trust, they cannot be sold to pay for your maintenance. However, any money owing to you can be claimed from the trust. This needs to be looked after to be effective, but it does still work if done right.
  2. If you are in business your personal assets are constantly at risk. A limited liability company is not foolproof protection. For this reason, people like to use a family trust to protect their assets. Most start by putting their home in the trust or trusts.
  3. The major disadvantage of using a trust to hold rental properties has been removed with the adoption of the ring-fencing rules, this means that no rental losses can be offset against personal income. But by using trust we can distribute the profits to beneficiaries at the marginal tax rates so if one partner is home looking after the kids then they can receive income from the trust without any care of whether their a shareholder or not

A deluge of Tax changes

  • The Privacy Act 2020 came into effect from 1st December 2020.
  • The Trust Act 2019 changes came into effect from 30th January 2021.
  • From 1st April 2021, Along with the 39% tax rate change for earners over $180k income
  • There are a number of other changes, from vehicle km rates, through to GST and RWT changes.

End of year planning

As the 31st March tax year-end is fast approaching.

Firstly, you have until 16th March to make use of the $5,000 threshold for “low value assets”.

You can write off assets up to the value of $5,000 acquired on or before 16th March 2021.

For assets purchased on or after 17th March 2021, the threshold will be reduced to $1,000 going forward.

Companies may consider paying dividends out to use imputation credits prior to the 31st March 2021, so that the shareholders are taxed at 33% rather than 39%. You might also do so because the shareholders might have an overdrawn current account which you want to get into credit.

 

 

HAVE WE GOT YOU THINKING?

Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz

Keep an eye out for  April’s article!

 

TAX DATES TO REMEMBER

  • 20 March. 2021 - monthly employers PAYE payment…
  • 28 March. 2021 - Bi-monthly GST Return for Jan/Feb 2021…