The new association rules imposed by Parliament are affecting many business concerns that deal with real estate development and construction of multi-family housing. Take a look at how these rules have changed rental property policies in New Zealand and how many of the loop holes previously found to bypass the government’s regulations have now been closed.
Change of Use
Change of use is one of the new association rules affecting property owners who purchase rental real estate with the intent to hold it for other purposes. This applies to property bought for “dealing and development purposes”. One way to get around this rule is to change the ownership structure of the real estate so that its use is not governed by the association rules.
A dealer or developer of rental properties need not worry about the application of the new association rules to existing properties but they will apply to any purchases after the rules went into effect in October and all future investments.
Formerly, the business of dealing and development could be separated from property investment. New tests determining association have closed many of the options for this type of business structure and attempts to avoid the tax debt will likely result in the IRD seeing it as tax evasion. A property that is deemed to be associated according to the tests is now subject to income tax on a sale occurring within ten years of purchase or even within this time period following the completion of improvements.
Construction of Rental Properties
Businesses directly involved in the erection of new housing are subjected to complying with the new association rules for any buildings not yet completed when they went into place. In addition, improvements to existing properties are subject to the current regulations and tax implications. If the building is sold within 10 years of making improvements, there is a tax liability that applies.
Deciding to change the structure of a trading trust set up to engage in property dealing and development may not be the best choice. The new tests will probably determine an association but the benefits of asset protection and income distribution flexibility usually outweigh the changing of business structure to avoid tax liability. If this is a concern, it is best to keep the real estate for the ten year minimum required by association rules.
Each situation is different. It is best to be aware of how the new association rules affect your business concern and make a decision on structure depending on the most favourable scenario for your finances and future goals.