“Should I put this property into a trust?”
“Would a company be more tax efficient?”
“Should I distribute the income now?”
These are questions accountants hear regularly, particularly when tax rules change, a significant investment is being considered, or a business enters a new stage of growth.
The temptation is to focus immediately on the tax outcome. But in my experience, that is often the wrong place to start.
Start with the “why”
There is no universally “best” business or ownership structure. There is only a structure that is appropriate (or inappropriate) for a particular set of circumstances.
A trust or company may be used for a range of reasons, including asset protection, succession planning, separating business and personal activities, bringing additional owners into a business, or managing investments.
The structure should follow the objective, rather than the tax rate of the day.
Tax is important, but it should be considered alongside the commercial and family objectives the structure is intended to achieve.
Changing structure is not simply a paperwork exercise
Moving an existing asset from personal ownership to a trust or company may appear straightforward, but the consequences can extend well beyond the tax return.
Depending on the circumstances, there may be tax, GST, legal, financing and compliance implications. There can also be ongoing costs associated with accounting, legal work, Companies Office requirements, trustee obligations and tax compliance.
This is particularly important with property, where a change in ownership can have consequences that are not always obvious at the outset.
So rather than asking only, “Will this save me tax?”, a better question is:
“What am I trying to achieve, and does changing the structure actually help me achieve it?”
Don't let tax drive the whole decision
Tax rates and rules change. A structure that produces a favourable tax outcome today may not necessarily remain the most appropriate structure in the future.
That does not mean structures should never be changed. Quite the opposite as a change in circumstances can be a very good reason to revisit your arrangements.
Starting a business, acquiring property, bringing in a new shareholder, succession planning, changes in family circumstances or a significant change in the scale of an investment portfolio may all justify a fresh look.
The key is to review the structure before making the transaction, rather than trying to fix it afterwards.
A better approach
Before establishing a company, creating a trust or transferring an existing asset, consider the full picture: tax, legal ownership, financing, asset protection, succession, administration costs and your longer-term plans.
A good structure should make sense from a commercial perspective, even when you take the tax rate out of the equation.
Tax planning is about making informed decisions, not chasing the lowest possible tax bill. Sometimes the best advice is to change the structure. Sometimes it is to leave it exactly as it is. The important thing is understanding why.
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.
JOHNSTON ASSOCIATES, Level 1, One Jervois Road, Ponsonby, T: 09 361 6701, www.johnstonassociates.co.nz
