Straggle Muster 175 - 16/12/2005
Companies Explosion with Tony Haisman, farm accountant
In recent years we have seen an explosion of trusts and companies being formed. While companies have always been a common form of doing business particularly in the commercial world they are not that common down on the family farm. In our Gore office for example we now have over 200 registered companies, some 5 years ago there was less than 50.
What has this meant for us and our clients, essentially things have therefore become more complicated and annual accounts more expensive. There are more rules and regulations surrounding a company than there are for simple partnerships. Numerous clients want to be companies and in particular Loss Attributing Companies and in some cases all they own is a rental property. Sometimes as an accountant you really have to question whether the additional regulations, fringe benefit tax and costs involved in a company justify its use, for example in a simple contract milking situation. However many accountants advocate complex structures and the use of companies & trusts. Good for the accountant, however I'm not always convinced it's good for the client.
Companies do have their place in business they provide some tax benefits, some farm succession benefits, limited liability benefits and other benefits. Although personal guarantees provided to lenders essentially eliminate the limited liability factor. Protection from unsecured creditors and the general public are still worthwhile benefits, although the last time I read the newspaper it wasn't full of farmers losing the family farm to lawsuits by the general public. Even the beekeeper / OSH scenario in the North Island was over 10 years ago. So the use of complex business structures for asset protection purposes may be a little 'over stated'.
Obviously corporate farming and farm syndicates are a different issue all together and often the company structure is probably the best and possibly only suitable structure. I only question the simple family farm situation where you have in reality only a relatively small business (although somewhat valuable) put it into a complex structure of companies and trusts. The result is most families don't understand it and therefore become more reliant on their accountant and other advisors. Perhaps many clients and accountants have lost sight of the KISS principle.
So what's driving the large increase in use of trusts and or companies?
1. Apparently the public trust office has "sold" over 20,000 trusts since it advertising campaign where the school kid in the photo runs off with the family home and assets. No doubt trusts can be very good for protecting assets. With the biggest concern being the protection of assets from the son or daughter in law, not the general public at large. Given the Property Relationship Act, civil unions and the dramatic increase in property values, the protection of the family farm is paramount and trusts are an excellent tool in achieving this.
2. Government policy (in addition to the above legislation)
- Top Marginal tax rate of 39% is unattractive to many (or all people), although this doesn't kick in until a partnership makes over $120,000. While often not the case, farms do have fluctuating incomes and people will do everything they can to avoid the 39% tax rate. People generally don't mind paying their share of tax, but put 39%, GST, fuel taxes .. (the list goes on) and people tend to draw the line. So only the wage and salary earners pay the marginal tax rate. Gotta love that 'rich tax.
- Social welfare, for example take a family with 4 kids, say they have a taxable income of $50,000 and own a farm worth 3 million (600 acres). It is possible for this family to receive over $11,000 in family support. How to do this? simple really, put the farm into a trust and enjoy the government hand outs. They make the rules and rules are for fools and guidance of wise mean or so they say. After the election lollie scramble, (to give away billions of "non existence money"), the working for families hand out is only going to get better. Thus the incentives to use trusts and other entities will only increase.
There are of course other legitimate reasons to use trusts and companies. But government policies are essentially a driving force behind a lot of change and this will only continue. Even the IRD acknowledges this, in fact only one individual in all of New Zealand appear somewhat ignorant to reality. Still great to be a finance minister and hold so much power.
Enough ravings. hope everyone has a great Christmas and lets hope the overdue correction in the dollar comes sooner rather than later.
Tony Haisman
Malloch McClean Gore Ltd
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