PONSONBY PROFESSIONALS

TALKING TRUSTS: LUCY & JIM

Lucy and Jim had been in a relationship for a number of years. Jim had three children from an earlier marriage and they had one child together.

For the first few years they kept their assets separate and then when they decided that this was going to be forever, they agreed to pool their assets and buy a home together. That extended to eventually a bach in Mangawhai as well.

Jim was CFO in a large company based on the shore. When Lucy and Jim purchased their bach their lawyer told them it would be a good idea to think about putting their assets into a trust. He said that because of Jim’s quasi director role and also the fact that he was potentially an officer of the company for Health and Safety purposes, it was wise to ensure that their assets would be protected in a trust. Even though Jim had more cash to put into the trust assets and also children from a previous relationship, the lawyer said that just one trust between the two of them would be fine. He said that they didn’t need to over complicate things.

He also went on to say that the cash going into the trust to purchase the home and bach should be lent to the trust. He said that while we no longer had gift duty in New Zealand, it was best to be conservative and leave the amounts going into the trust owed to each of Lucy and Jim. He said that this would mean in the event that they separated they would be able to get their original amounts out of the trust and he wasn’t a big fan of gifting anyway.

Lucy had a nagging thought at the back of her mind that this didn’t seem to be quite right. She wondered whether she should go and get her own independent advice, but didn’t say anything as she really wanted to show unity with Jim. But she did remember some friends talking about this and saying sometimes with blended families one big joint trust was not always a good way to go. She also wondered about whether she and Jim needed to do new wills, but the lawyer didn’t say anything, so she didn’t raise it. Lucy knew that she and Jim would be marrying soon anyway and she thought that would change things when they were husband and wife. Once the estate planning exercise was completed, Lucy was owed $250,000 by the trust, being the equity that she had brought to the relationship and Jim was owed $1,050,000. Their wills remained the same and said that if one of them died, the other would receive all the assets and then once they both died Jim’s children and their joint child would share in all the assets. They had also did a memorandum of wishes advising the trustees that all assets would be held until they both died and then distributed to all the children equally.

Sadly not long after the trust was established and after Lucy and Jim had married, Jim had a massive heart attack. He was on life support for three days and then died. Lucy was devastated, but felt a sense of relief that they had addressed their asset planning position before they had got married.

Lucy went to see the lawyer that she and Jim had gone to. He seemed to be a bit blasé about the whole thing and one of her friends recommended she go and see a lawyer that specialised in asset planning and trusts. When Lucy went to see the lawyer she was horrified to find that when she and Jim married, by law, their wills become null and void. This meant that Jim’s will was invalid and his estate would be governed by the Administration Act. Lucy was relieved for a moment because all of their assets were in trust, until she remembered that the trust still owed Jim $1,050,000 because the previous lawyer didn’t agree with gifting.

Under the Administration Act this mean that Lucy would be assigned $150,000 of the debt owed by the trust to Jim as well as 1/3 of the balance and the remaining 2/3 ($600,000) would be owed to Jim’s children who could demand payment of the debt. This would mean that the trust would need to sell the bach to pay out Jim’s children and also pay tax on the increase in value given the brightline test rules. This was far from the outcome Jim and Lucy had envisaged when they first went to the lawyer for advice.

It is so important to seek specialist asset planning advice. Often people don’t think that their circumstances are complicated but there may be legal twists and turns that you don’t think of and that a specialist will be able to help you navigate.  PN

Tammy McLeod

The Government has recently announced changes to the deductibility of mortgage interest against residential rental income.

Currently when owners of residential investment property calculate their taxable income they can deduct the interest on loans that relate to the income from those properties (claimed as an expense). This reduces the tax you need to pay.

Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next four income years until it is completely phased out. This means that in the 2025–26 and later income years, you will not be able to claim any interest expense as deductions against your income. If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021. Interest on it will not be able to be claimed as an expense from 1 October 2021. Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.

For tax purposes, a property is generally deemed to be acquired on the date a binding sale and purchase agreement is entered into (even if some conditions still need to be met). A property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.

If you acquired a property before 27 March 2021, you can still claim interest (for loans that already existed for that property) as an expense against your residential property income, but this amount will reduce by 25% each income year until the ability to deduct the interest is completely phased-out from the 2025–26 income year. Percent of interest you can claim:

1 April 2020–31 March 2021 100%

1 April 2021–31 March 2022 (transitional year)

1 April 2021 to 30 September 2021 - 100%

1 October 2021 to 31 March 2022 - 75%

1 April 2022–31 March 2023 75%

1 April 2023–31 March 2024 50%

1 April 2024–31 March 2025 25%

From 1 April 2025 onwards 0% If you acquired a residential property on or after 27 March 2021 and take a loan out to acquire it, you cannot claim interest on that loan as an expense against your property income from 1 October 2021 onwards. This means you’ll pay more tax on any property income you receive. You can still claim other expenses such as the cost of insurance and rates.

If you’ve made an offer on a property on or before 23 March 2021, but the offer is accepted after 27 March 2021, and you could not withdraw the offer before 27 March 2021, your property will be treated as if it was acquired before 27 March 2021, meaning you can claim interest as an expense until the ability to deduct it is completely phased-out.

If you are considering purchasing a residential investment property, consideration should be given to how you structure the debt and where it sits from a deductibility point of view.

For more information on any of the above topics, please contact us at Johnston Associates. (LOGAN GRANGER)  PN

JOHNSTON ASSOCIATES, 202 Ponsonby Road, T: 09 361 6701, www.jacal.co.nz

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.