Should I establish a company or remain individual owner?

Question from Richard updated on 22nd January 2008:

Hello, My wife and I intend to buy a section(for about $300,000) with the intention to build for retirement purposes in 5 years time, and need to borrow approximately 60% to do this. To ease the burden of the high mortgage repayments on this land can I claim the GST back on purchase price if: We set up a company to purchase this, with the intention of on-selling the section to ourselves for much the same price(in say, 5 yrs),and obviously paying at least the same GST back to IRD ?

Our expert responded:

While this sounds like a good idea in theory, the problem is that it will be an associated party transaction. This means that when the house is built, if you set up a trading trust (you can't use a company unless you want to be tainted as property developers), the trading trust must sell the property to you at market value. The likely outcome of that is that the market value is going to be more than what you paid for the section and to build the house, so that you will have to pay back more GST than what you originally claimed, as well as the trading trust is likely to make a profit which means that you have income tax to pay as well. Even if you don't build the house on the section, and end up just selling the section back to yourselves, it's likely that it will be more than the 300k that you paid, meaning a higher GST bill and an income tax bill. All in all, I think you are better off not doing anything, just keeping the section in your own name and bearing the cost of the interest.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.



 



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