Bad Structuring Costs $25,000 for Simple Deal in Extra Taxes!
18 October 2018
Bad Structuring Costs $25,000 for Simple Deal in Extra Taxes!
A common example of very bad planning, structuring, and property accounting advice, is where someone wants to buy a property, subdivide it, sell say three sections, and keep one section.
What often happens is the property is purchased in a GST registered trading entity, such as a company. The trading company does the subdivision, sells the three sections, and then sells the last section to their holding entity.
There are two major issues with this:
- The section is taxable for life. As it was originally purchased by a trading entity, for a trading purpose, then the holding entity takes over this intention. So, any gains on the section will always be taxable.
- Extra GST and Income Tax will be paid (see example below). A key concept in New Zealand tax is that related parties must interact at fair market value. So, the section must be sold from the trading entity to the holding entity at fair market value.
The example below shows that $7,908 of extra GST is paid, (just on the one section that is held), plus $17,397 of income tax on that one section! Thus, combined, $25,304 in extra tax!
EXAMPLE
|
|
GST incl. |
GST |
GST excl. |
|
Property Purchased |
600,000 |
78,261 |
521,739 |
|
Subdivision Costs |
150,000 |
19,565 |
130,435 |
|
Fencing, roading & other works |
100,000 |
13,043 |
86,957 |
|
Legal |
7,500 |
978 |
6,522 |
|
TOTAL COSTS |
857,500 |
111,848 |
745,652 |
|
COST PER SECTION |
214,375 |
27,962 |
186,413 |
|
SALE PER SECTION |
275,000 |
35,870 |
239,130 |
|
PROFIT PER SECTION |
60,625 |
7,908 |
52,717 |
|
Tax at 33% |
17,397 |
||
The key is getting advice early on, well before settlement, so that there is time to structure the deal in the most effective manner for tax. Time for lawyers to complete agreements, if needed, and time for finance to be rearranged. This example could quite easily be done another way, so that the section isn't taxable for life, and this would also save the $25,305 in extra GST and Income Tax on the section held.
Kind regards
Ross Barnett
