Partnership basically is the amalgamation jointly of two or other persons or entities in a normal undertaking or endeavor. From an accounting, taxation and legal position of view, you can trade your partnership in the course of various trading vehicles including companies and LAQC’s (loss attributing qualifying companies), joint ventures, special partnerships, general partnership, limited partnerships, or Trusts.
Each trading vehicle should have an agreement made between the partners to the investment outlining their obligations and their rights. In a company for example, this is done in the shareholders agreement. In a enterprise, the enterprise agreement. In a joint venture, the joint venture agreement etc.
Which Trading Vehicle?
Selecting the right structure is a mix of analysing many factors and choosing the vehicle that produces the most benefits for your specific situation circumstances.
A brief summary of things to consider would include the following (regarding partnerships from a property investor‘s context):
1. The Implications of Asset Protection (including limited liability versus unlimited liability for actions of the partnership, and liability for the banking obligations of the business by the partners)
LAQC’s require shareholders that are electing into the LAQC regime to personally guarantee the IRD for income tax. This can be managed for small shareholders, but is one asset protection consideration that must be looked at.
Also to be reviewed is the question of whether your proposed structure is making wealth outside of a trust, and if so is it possible to both have your losses accessible and contain capital gains inside your Trust for asset protection and avoiding future gifting problems?
2. Flexibility of ownership
Can you modify partners without triggering depreciation recovered? The answer is ‘Yes’ for an LAQC, ‘No’ for most partnership circumstances.
3. Flow through of tax losses: will the trading medium let you access the losses?
4. Flow through of capital gains: will the trading vehicle allow simple access to capital gains at the end of the investment, or do you have to liquidate (for example a company will require liquidation unless it is a qualifying company to access capital gains tax exempt in NZ).
5. Cross border tax considerations: for those investing off shore or cross-border, have you thought in the course of the complex tax issues that arise? Like capital gains tax, non occupier withholding tax, the implication of the New Zealand Accrual rules and foreign exchange movements, and double tax on dividend income.
In general as consultant property investment accountants, we recommend the use of an expert chartered accountant to help you with these issues.
Paul Easton works in marketing for Mathew Gilligan – an accountant and partner at Gilligan Rowe & Associates Ltd (GRA). GRA is an accounting firm specialising in property and business accounting in New Zealand. Search Engine Optimisation by Digitalawol.com