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Welcome to this issue of news from Paul Gallagher Legal. We have had an interesting mix of work with our clients since the beginning of the year – especially within the area of relationships and property-related matters. Hence, this is reflected in a couple of articles that you may find of interest. It would be great if you could let us know what you think.
Property investors – don’t be caught unawares
As the property market continues to slow, it is more important than ever for potential investors to be cautious about their investments in property. There is nothing worse than being left with a ‘lemon’ or be faced with a situation where there is something amiss with the property or property agreement.
There are some simple things that can be done to minimise an investor’s exposure to the riskier side of property investment. One of these is to gain advice from a Solicitor to ensure that any paperwork involved with the investment is sound. If the Solicitor is acting upon your behalf then his or her aim is to ensure your rights are protected. Remember, the organisation/party marketing or selling the property has their own set of objectives and agenda.
Know all the details
A situation has been seen recently with the ‘Blue Chip’ scenario where, as One News has reported, “$35 million has been received as deposits on real estate projects not yet built, such as the high-rise apartment block is Auckland’s Mt Martin’s lane”. Some investors in this case leveraged off the equity in their own homes in order to pay the deposit to Blue Chip, with a mortgage covering the rest. Investors in Blue Chip properties were given spreadsheets by a Blue Chip adviser that demonstrated a potential rental return and profit scenario. When Diana Clement was researching an article for ‘Consumer’ and talked with one of Blue Chip’s advisers, she was told that she would not know which property she had invested in until she handed over the deposit. So how can an investor request ‘due diligence’ on a property they do not know the details of before they sign an agreement?
- Diana had some great warning signs to look for when first looking at an investment property and perhaps attending a property investment seminar:
- The seminar presenter or sales person does not tell you what they’re selling
- The literature at seminars is stuck to the walls and you can’t take it away to check out with independent experts
- Presentations that suggest that property only goes up in value
- Being told you don’t need your own accountant or lawyer because an in-house one is provided for free
- Guaranteed rents. Typically the property price is inflated so you actually pay for your own guaranteed rents and, when the guarantee finishes, the true rental price doesn’t pay the mortgage
- Pushy sales people who want a signature on the spot – for fear that you might get independent advice
- Suggestions that there are only one or two properties left. They’re rushing you to stop you asking questions.
Mary Holm had a great tip when she was recently quoted. “Also to work through a ‘worst case scenario’ to see if you could cope - particularly when borrowing to invest. ”
What can you really afford?
As reported in ‘The Business Herald’- Robert Steedman, a Blue Chip investor, is still hearing (the latest around early April) from worried Blue Chip investors who have put deposits on The Stadium apartments. These investors are in the same position as himself. The 174-unit Stadium development is due to be purchased by Blue Chip investors. As part of an unusual Blue Chip investment product, investors paid deposits on the yet-to-be built apartments on the understanding they would never have to actually buy them.
Eighteen months ago, Robert and his wife put a 10 per cent deposit on two $360,000 apartments in the yet-to-be constructed development, on Auckland's Beach Road. They did this through Blue Chip PIP schemes, unusual financial products that paid investors an impressive 16 per cent return on their deposit.But the investors were told they would never need to own the apartments - just before completion Blue Chip would exercise a "deed of nomination" and buy the properties, returning the investor's initial deposit.
Now, with the collapse of Blue Chip, the Steedmans are faced with buying over $700,000 of property they don't want and can't afford. The couple did not consult their lawyer. By the time they took out the PIPs they were veteran Blue Chip investors, having bought into the Gulf Harbour Lodge four years earlier. "And for four years it ticked over beautifully. It was doing exactly what they said it would do. And so when you're offered this other thing, and it was just a short term, quick turnaround thing, you didn't probe and ask too many questions because you thought look, the proof of the pudding ...”
So, our advice for anyone looking of investing in property would be to contact your Solicitor BEFORE committing yourself to any property deal. Paul and Cherie have vast experience with such matters and would be very happy to talk this issue through.
Ph 09 415 9321 or www.lawfirm.co.nz
IRD crack-down on Property Tax
You’ve had an eye on a particular property for a while now. It looks like it will be a great family home - right neighbourhood, close to the things you like and ideal for the family. If the aim of the property purchase is for you and the family to live in, then once the deal is done and dusted, you can move in and enjoy the new environment.
However, if your intention for the property is as an investment of any type, and you are looking to make a profit from the eventual sale of the property, then this is a different ‘kettle of fish’. You may be liable to pay tax upon the property when it is sold. The IRD are resolute that both intentions and reasons for the initial property purchase will define the final tax liability when that property is then resold.
Declare your intentions
If you bought the property with the firm intention of selling it when the prices rise – to make a gain from the increase in the property’s value – the profit is likely to be taxable. However, if you bought the property to provide a home for your family, any profit from the eventual resale will most likely not be taxable - unless you have a history of regularly buying and selling properties. So, you need to ask yourself “why did I buy this property?”. It is recognised however by the IRD that most people buy a property and hope it gains in value over time.
As long as you aren’t in the business of trading in or developing property, or constructing buildings, it’s your intention at the time you bought the property that is important. The IRD has specific tax requirements and obligations for those in the business of trading in or developing property, or constructing buildings. There are also specific requirements when a property is owned by trustees of a trust. The IRD is able to access any statements made to the lending institution to take into account ‘intention’. It can also take into consideration discussions you may have had with the real estate agent, notes on council documents, involvement in the community and terms of financial arrangements among other things.
Tread carefully
nsaTax reports that the IRD staff have been visiting real estate agents warning them that disclosure may be required. Letters are also being sent to clients who have sold properties over the years – the letter may typically start as follows:
“The department has information which indicates that income may have been omitted from your tax returns….”
The letter may not be specific about the property in question and requests voluntary disclosure. We would recommend that anyone receiving such a letter seek professional advice from a Solicitor to discuss the matter as the first response back to the IRD will be critical.
The IRD has put out a booklet which can be accessed through their website www.ird.govt.nz – it is called an IR313 and it outlines potential tax obligations and guidelines for the sale and purchase of property.
In a nutshell, it is advisable to be open and transparent when there is a potential that you may be required to pay tax. Bear in mind that in the 2007 budget, the IRD was allocated $14m of funding to better enable them to crack-down on tax evasion relating to speculative property transactions.
In any case, the first thing we would advise you to do is talk with a tax specialist to make sure you don’t fall foul of the IRD, as there are some stiff penalties if you are found to be liable for tax owing.
Give us a call if you need to talk to anyone about this as we can put you in touch with an expert on tax matters. We can also assist you through the process of identifying potential pitfalls surrounding this issue.
How fair is fair?
Don’t wait until things turn bad to do a ‘contracting out’ agreement under the property (relationships) act. It is more and more common for people to have more than one serious relationship in their lifetime. Often couples get together later in life when they have already had their children and have acquired quite a few assets. This can cause property division issues if the couple separate after a period of time. The Property (Relationships) Act states that the default position is that after being in a relationship for 3 years the couple’s assets are divided equally (the Act does set out exceptions to this rule). Does this seem fair in a situation similar to the one below?
Bill and Bridget have been living together in a de facto relationship for four and a half years. Bill has three children from his previous marriage and Bridget has two children from a previous de facto relationship. All five children live with Bill and Bridget in Bill’s house. Bill and Bridget are very happy together however Bill has been talking to his friend who says he should probably have a contracting out agreement drafted up by his solicitor in order to ‘sort out their assets’. When Bill and Bridget got together Bill’s assets were worth a lot more than Bridget’s.
Bill’s assets are:
- house (solely in his name) $1.5m
- vehicle $35,000.00
- superannuation scheme $1m
- shares $52,000.00
Bridget’s assets are:
- house (solely in her name) $375,000.00
- vehicle $5,500.00
Before you need it
Without a contracting out agreement if Bill and Bridget were to separate after four and a half years, the default position under the Property (Relationships) Act is that each party is entitled to 50% of the assets of the other (unless there was overwhelming evidence to prove otherwise). Given the assets listed above Bridget stands to gain a lot more than Bill does.
Bill comes to see me to discuss a contracting out agreement. Bill says that it’s not that he doesn’t want to share his assets with Bridget, but having been in a failed marriage before he does want to protect what he has worked hard for.
The purpose of a relationship property agreement is to ensure that each person’s assets are protected upon separation. It is understandable that when things are ‘good’ in a relationship, couples don’t want to discuss this sort of thing. However, a contracting out agreement can be flexible. The parties may include what is more commonly known as a ‘sunset’ clause in the agreement which makes provision for them being together longer and then reviewing the agreement after say 3 years to ensure that it is still fair and reasonable.
We suggest that couples at least discuss the need for an agreement, especially where there is a large difference between the asset values. We all tend to wear rose tinted glasses in the early days, however we see a little more clearly when things goes wrong.
If you can relate to this situation or anything similar or know of anyone who could benefit from advice in this area please come to see us, or give either Cherie or Paul a call. People work too hard in life to watch their assets be divided unjustly upon separation.
Starting a business
The thought of being ‘in charge of your own sandpit’ can be a very attractive proposition for someone wanting to start their own business. But, running a business is more than just making your own decisions and being your own boss. It can quickly become apparent to those that have decided to go down the path of business ownership that there are many factors to be aware of. Not all of these are immediately obvious.
This needn’t be a deterent – it highlights the importance of knowing what you need to know and knowing what you don’t know. Statistics New Zealand reports on their website that of the new businesses started in 2001 only 40% of those businesses were still operating in 2007. It makes for quite sobering reading doesn’t it? So, while many of us have been keen to give business ownership a go, a good portion of our start-ups don’t make it. With some good advice and sound business planning, many of those ‘failed’ businesses may still be around.
Know why you want to go into business
Perhaps your reason to go into business for yourself is that you’ve seen, or been involved with, a product or service that you believe has an opportunity for success in the marketplace. But it takes more than a great product or service to create a successful business proposition. To maximise your chances of success, it also helps to have a good plan in place which outlines some of the ‘big’ things, such as the type of business and its structure, cost of formation and administration as well as industry legislation to name a few. Your Solicitor can help you determine your business structure in order to protect your personal situation from potential business issues and to make sure that you can pay the correct amount of tax, as well as claim the business expenses and deductions you are entitled to.
Some people don’t realise that when they start up their own company they'll suddenly have to manage everything from accounts, tax matters, legal matters, financing & cash flow, production, insurance and business risk management, IT, shipping and logistics, sales & marketing and suppliers – whew! It becomes a balancing act of working on the business vs working for the business. And then there are the recruitment issues if you need to take on more staff!
Do the ground-work
It might seem like ‘mission impossible’ at times, but it can also be incredibly rewarding. If you do your research before you start, then you’ll know what tasks you may need to manage. If you find that you have inexperience in any areas, then seek the help and guidance required to fill the gaps. Having a pool of talent - the right people to provide good advice is essential to success. These experts should include people like your Solicitor, Accountant and even a Business Mentor as they will have experience dealing with people in exactly your position and so have been exposed to a variety of different situations.
Educate yourself, upskill, or even get a mentor
It would be ideal if you could have a way of increasing your knowledge and skills before you started your business and then continue to expand upon these areas as your business grows. However, to be fair, most business owners learn by experience as they go along - sometimes bumbling their way through new territory and learning from their mistakes. This is where involving and working alongside a Business Mentor may be a great way to learn from someone else’s experience.
Networking is also an inexpensive way to surround yourself with like-minded business people who may be able to share their experiences. There are local business units such as BNI or even larger organisations such as New Zealand Trade and Enterprise, and there are other free mentoring services such as Business Mentors New Zealand, Biz Information Zone and The Auckland Chamber of Commerce.
Business Mentors now has some 1200 mentors on its books, available through its website or local agencies like Chambers of Commerce. This free service is funded by company sponsorship and money from New Zealand Trade and Enterprise. To qualify, you have to have been in a business for at least six months and employ fewer than 25 staff.
And, more recently the NZTE quietly launched a new scheme -- the small business advisory board grant -- which offers up to $9000 a year to pay for a mentor-based "board of directors". The idea behind the SME advisory boards is that a small company that wants to grow would benefit from having a surrogate board of directors -- a team of two or three mentors who would be paid and meet regularly.
Just like a real board of directors, it could offer a range of expertise. There could be a finance specialist, a marketing specialist, a human resources specialist. This approach is more targeted towards a small fast-growing company or exporter with just a handful of staff. There are conditions to be aware of and NZTE can assist with outlining their expectations of recipient organizations.
www.biz.org.nz website is an ideal first port-of-call for all business information.
Keeping records
You need to ensure you keep accurate records, budget for upcoming tax payments and account for your business expenses and deductions. If your business is expanding you may need to register to additional tax types such as GST, or it may be in your interest to change the structure of your business.
It is important you keep accurate and complete records. Your business records should include banking information, proof of income and expenses, cash books and wage books.
If at any time, you need some good advice, we can help or even recommend someone from the extensive business network we deal with on a daily basis. Remember, we are a small business too and so have first-hand experience with all the intricacies that comes with running a small business.
Snapshots through the Auckland region
Auckland is about to host the Festival of Photography – it is a showcase of great photographic talent. This is an annual festival with many exhibitions and events, and it exposes the wider public to the art of photography through free public access. There is free public access at different locations throughout the Auckland region from Waitakere to Manukau, the Central City and beyond.
So, for something a bit different, pop along to one of the exhibits and ‘expose’ yourself to a cultural and visual feast.
http://www.photographyfestival.org.nz
Cheers from the team at Paul Gallagher Legal.
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