Marlborough Property Investors' Association
Changes to qualifying company regimes are definitely on their way - despite details still pending - which means investors need to thoroughly review their structures.
That is the advice from property tax expert Mark Withers, of Withers Tsang, who says the changes to the QC and LAQC regimes is the biggest issue currently facing property investors.
"It will touch pretty much the entire property community in one shape or form," he says.
Revenue Minister Peter Dunne put out a release yesterday saying that the draft legislation for the QC and LAQC regime will be released later this week.
It currently looks like investors can either opt to stay in the QC regime and forgo claiming losses within the company, or they can opt into a flow-through entity, which will allow for claiming of losses, but that will tax profits at the shareholder's personal 33% tax rate, as opposed to the company tax rate of 28%.
Until the draft legislation is released, Withers says investors need to thoroughly understand their position in terms of whether their companies are making a profit or a loss - and that needs to be calculated without claiming depreciation on buildings.
"Lots of investors will become profitable under new depreciation rules where they were making losses previously," he says.
The significant drop in interest rates will also make a huge difference to people's balance sheets.
Withers says before investors decide what new regime will work for them, they need to ask themselves: "If I can't claim depreciation any longer, do I have a profit or a loss?"
Another option could be to restructure into a limited partnership, or trust.
Withers says one positive in yesterday's release is the fact Dunne said there will be no tax consequences in moving to a new structure from a QC or LAQC. Traditionally, if assets are sold to another entity, the sale would trigger depreciation claw-back.
Withers says the worst thing investors can do is put their heads in the sand. They need to have their position sorted in the next five months, before legislation is introduced on 1 April, 2011.
"Sitting back and doing nothing will result in the worst possible outcome," he says.
"[But] before making decisions, get the facts, get the facts, get the facts. Anything else is like playing chess with your eyes closed."