Tips for a New Financial Year

13th April 2014

As we have just rolled past the 31st of March for another year, it’s a great chance to review these items for your rentals and your business.

1. Is your shareholding right?

Many property investors use a Look Through Company (LTC) to enable the profit or loss to flow through to the shareholders.

Has your situation changed?

• Are your rentals starting to make a profit rather than a loss?
• Have you just won Lotto, inherited some money, received a redundancy payout, or otherwise have a large amount of extra cash that you are going to use to reduce your rental’s mortgage?  If so, this is likely to reduce the losses, and in some cases result in a profit instead.
• Have you added extra dwellings or income streams that will now give an overall profit?
• Has your or your partner’s income changed?  For example, if the husband was the higher income earner but has now lost his job or gone back to study, then having the losses of the rental still going to him might not be appropriate anymore.
• Have your interest costs increased and changed your profit to a loss?

All these situations are examples of where it may be appropriate to change the shareholding in your LTC.  If there is a large loss, we want the shareholding, and therefore loss, going to the highest income earner.  If there is a profit, then we want the shareholding going to the lowest income earner (and therefore lowest tax rate), or we might look at a Trust for asset protection and long term flexibility with allocating profit to beneficiaries.

We recommend reviewing your situation and if you think your overall result has changed (profit to loss, or loss to profit) we recommend giving Ross a call on (07) 839 2801, or email us here.

For business owners, often an LTC is used with a Trust being the shareholder, so that the business profit flows through to the Trust, and then the Trust is able to distribute the profits to the beneficiaries.  If you have a business operating through an LTC, it is important to consider if this structure is still working correctly for you.  If you were expecting large losses or you still have individuals owning the shares, then it would be a good time to review your structure.

2. Who is director or has the right to become a director?

For many Companies there is only one director (maybe the husband who operates the building business for example).  What happens if this person dies, or becomes incapacitated, or if there is a relationship breakdown?

If you are not a director and own 50% or less of the shares in the Company, then under standard rules you have no control and cannot appoint yourself as a director.

Obviously you could go through the courts to have yourself appointed as a director but this may be time consuming or expensive.

Another option is to have a simple shareholders’ agreement, whereby the minority shareholder (maybe the wife in the building company that owns 1%) has the right to appoint themselves as a director.  This means in a worst case scenario such as death, the minority shareholder can become a director and then operate the Company.  In a relationship break up, this means at least both parties would be directors and have some level of control and say.

If you are currently a director but have a minority shareholding, then you need to be careful that the other shareholder could remove you as a director.  So having a simple shareholders’ agreement giving you the right to be a director could still be important!

3. WIP and Income in advance for businesses and especially builders

As at 31/03/14 we need to know the amount of Work In Progress (WIP) and Income in Advance for businesses.  This is especially important for Tradespeople and Builders as often they will have done work that is not billed, or received deposits for work they haven’t started as at 31/03/14.

If you think you have WIP or Income in Advance but are not sure how to calculate this, please contact me on (07) 839 2801 or here and I can help you with this.

4. Chattels Depreciation

If you have purchased a new investment property since the last financial year, it is a great time to review if you should get a chattels valuation done.  Have a look at www.valuit.co.nz.

A chattels valuation gives the value of the chattels so that we can then depreciate them.  We have done some articles on this in the past (www.cswaikato.co.nz/blog) so I will keep this quite short.  The chattels depreciation is then an expense for tax purposes so will either increase your refund or reduce your tax to pay.

A chattels valuation costs around $400 and for a new property is extremely worthwhile.  For older properties, it will be less worthwhile and the key items to consider are:

• Carpets
• Curtains
• Dishwasher
• Stove
• Heat pumps or heating.

If the value of these is $5,000 or more, then it would make sense to get one done.  If you are not sure, it is best to ring Terry le Grove at Valuit and he can discuss this with you further.  There are lots of smaller items that also depreciate, or large items like driveways that depreciate over a long time.  All these little bits do add up, and a few months ago we put some examples in a newsletter of clients saving over $10,000 from chattels depreciation.

5. Personal debt to deductible debt

Do you have a large personal debt but either:

• Some equity in your rentals?
• Or a large shareholders’ current account?

If so, it might be possible to restructure some of the personal debt to make it tax deductible.  If you let me know that you have read this article, I’m happy to speak to you for 10 minutes for Free to see if it is worth exploring this further.

6. Do you just own 1% of a Company and your partner the other 99%?

Often for tax purposes we have the lower income earning partner owning 1% of the LTC, so that the majority of the losses go against the higher income earner’s tax.  But what happens if you have relationship issues or your partner dies?

We recommend for relationship property that you check this with your lawyer.  Another option is to draw up a share option, so that you have the right to buy 49% of the shares for a set price at a future date if you want to.

If your partner dies, your partner’s Will should say who the shares go to!  But do you have up to date Wills?  This would be a good time to discuss this with your lawyer and just to check that your Wills are up to date and that the shares would transfer to the right place upon death.

Year End Questionaires

You should have already received your annual financial statement checklists so that you can start to put together your financial information for us to complete your 2014 financial statements and tax returns.  If you have a standard 31st March balance date and you haven’t received your questionnaires, please let us know here.

Cambridge Office

Did you know we have an office in Cambridge which is open Tuesdays to Thursdays from 8am to 4pm?  If it is easier for you, you can drop your year-end records into Jenny at our Cambridge office.  Also Ross is available for meetings in Cambridge on Tuesdays.

Contact details are:

Beban Associates
Unit 5a, 53 Alpha Street
Cambridge
Ph: (07) 827 7244

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?