Restructuring: The Three D’s With the continuing effects of the economic downturn ‘kicking in’, interest rates on the increase, commentators predicting a flat property market, and expected changes in the upcoming budget, another wave of individuals may be contemplating downsizing, debt reduction or disposing. The purpose of this article is to highlight in a brief and general way some of the legal issues to be mindful of. Downsizing Downsizing for property investors usually involves the sale or transfer of a rental property or two. The following are some of the matters to consider: • If the property is held by a company or trust then the sale needs to be in the best interests of the company or the beneficiaries of the trust. • There may be depreciation recovered on the sale that is subject to tax. • Valuations of the property may be required if the parties are not dealing at ‘arms length’, to avoid gifting issues. • On the sale of shares in a company (rather than the sale of the asset itself), or amalgamation of one company into another, there are ‘minimum continuity of shareholding’ requirements to be considered to ensure tax losses and imputation credits are saved and not forfeited. There could be tax losses to be set off against taxable income before the sale of shares where that ‘minimum continuity of shareholding’ may be broken. Debt Reduction Debt reduction raises further issues that may need to be considered. The cost of breaking fixed interest rate repayments may be significant. The lender may not be prepared to accept repayment of a particular loan on a property sale and may require all sale All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information. May 2010 – July 2010 Page 2 of 4 © 2010 funds to be re-paid. The lender also may not cooperate in the release of a security such as partial discharges of land or the release of personal guarantees. New criteria may be imposed on the re-draw of funds. Dispositions For commercial property dispositions there are a number of issues to consider. These may include: • The GST status of the transaction and whether GST is payable or not. • The ‘associated persons’ rules, affecting dealers and developers, that impact on tax gains that would otherwise escape the tax net. • Commercial tenants may be looking to change premises not only to reduce costs but as a result of lease inducements, incentives (such as rent free periods) or lease surrender payments. This raises issues as to whether they are deductible expenses or not. The tax treatment for each party will depend on how the deal is structured and the tax profile of each party. Often in fixing up one problem by a disposal you can create another. For example, the transfer of a leaky property to a trust or company. This amounts to a change of ownership. While this may have estate planning benefits for the transferor, it will prejudice any claim the trust has in regard to the leaky problem, as it will break the causative link against the territorial authority. Acquiring the property with knowledge of the leak may also amount to contributory negligence. If the transferor has already lodged a claim with the Weathertight Homes Tribunal this must be terminated. With some projects put on hold due to the downturn, it is important to check that resource consents are still valid. A resource consent will lapse on the date specified in the consent unless it is implemented or an application is made to the consent authority to extend the lapse period. In some instances, such as water and discharge consents, these will need to be transferred (e.g. if you are disposing of a beach property). Sometimes restructuring may involve a change of building use (e.g. disposing of flats to a company that operates serviced apartments) that may require notice of a change of use to the territorial authority.