This article was originally created for Hayes Knight (now Nexia Auckland).
Home > Updates > Not all structures are created equal
Time and time again I have new clients coming to me with structures that are just not right for their circumstances. On the odd occasion it’s because their situation has changed, but more often than not, it’s because they have not sought appropriate advice and have just set themselves up the same as what their neighbour/ relative/ colleague/ mate has done.
If someone is going to the trouble of setting up a structure to hold their business or investments in, they need to also invest in expert advice. Having the wrong structure in place can very quickly eat away at any profits or positive cash flows you were counting on and substantially reduce your return on investment.
After all, you would seek the advice of an eye specialist if you needed eye surgery; similarly you should seek the advice of a structuring expert when it comes to setting up an appropriate structure for your specific needs.
When putting a structure in place, ideally you are seeking to achieve three key outcomes; asset protection, estate planning and tax efficiency. Unfortunately these outcomes do not always work in harmony with each other, which is why a cookie cutter approach is not the answer.
The most common entity used for holding a business is a company as it provides a great deal of flexibility and generally limitation of liability. And trusts are typically used for holding passive investments. But there are many other options that also need to be considered; look through company, limited partnership, general partnership, sole-tradership.
Which option is the right option for you can only be determined after gaining an understanding of your specific circumstances; tax profile, income streams, attribution requirements, future plans, wider associations, family circumstances, international transactions, non-resident owners or beneficiaries etc. The structure needs to be flexible, in terms of the ability to bring on a new partner or deal with an exiting partner without unnecessary tax implications. The structure also may need to take into account New Zealand’s international tax rules such as transfer pricing, thin capitalisation and deemed income.
It is also counter-productive to have a structure that is fairly complex when the activity in the structure does not warrant it, although an unscrupulous accountant is unlikely to complain about the larger fees involved!
Once an appropriate entity has been determined it is then a case of ensuring the entity is owned by an appropriate taxpayer, or taxpayers, to achieve asset protection, estate planning and tax efficiencies.
So before you go ahead and set up a structure, make sure you obtain sound tax advice from the Hayes Knight tax experts – that way you will not be forcing your square peg into a round hole.
Shelley-ann Brinkley Associate – Tax Consulting T +64 9 414 5444 E firstname.lastname@example.org