How do I work with an accountant during due diligence?

An accountant will guide you through your property purchase during due diligence from a purely commercial perspective. Most importantly, the accountant will help you decide how you should own your property once it’s bought.

In this article, you’ll learn exactly what you need to know about how to work with an accountant during the due diligence process.

What will my accountant do for me?

An accountant will advise you, the investor, on how you should purchase a property from a commercial perspective.

The accountant isn’t generally going to tell you whether or not to buy a property. Their advice is about how to do it in the most tax-efficient way.

Property accountants break down the transaction of buying a property, more than a normal accountant would.

The initial conversation with an accountant usually happens during the second half of due diligence, but your relationship with your accountant will extend well beyond that 10-day time period.

The key components to talk about are:

• Ownership structure (how best to own the property)
• The contract (GST, due diligence dates and settlement)
• Ensuring you don’t trigger the “bright line” test (NZ’s capital gains tax)

Accountants will also look at the sale and purchase agreement to check it over for other things like whether GST needs to be paid or claimed back.

Do I have to use a property accountant?

Any accountant can file your tax return. But it’s a very wise decision to use a property accountant, especially if you’re an employee and don't own a business where you’d already have an accountant.

You want someone who specialises in property.

Matt says property accounting is different from other accounting. It’s simple to do the tax return because there is one source of income, which is your rent.

But property investment as a discipline is the hardest it has ever been.

The costs are higher, there is more tax, more legislation, and it’s more regulated.

“Remember you are getting into business as a property investor. Treat it like a business and you’ll have more success,” Matt says.

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Most property investors, with an average of 3 to 4 properties, are deploying more working capital than most small businesses in New Zealand.

Think about it: Most Auckland properties are worth over a million dollars. So if you have 4 properties, you might have $3-4 million worth of debt and you’re running a decent-sized business.

So it’s a good idea, from conceptual mindset, to treat your property investment like a business. Set up a good structure, keep good records, and keep a good accountant who specialises in what you need.

Matt says these days investors need to have a plan. They can’t expect to meander through the next 5 years and come out the other end with 4 properties like the good ol’ days.

“You can still do it and be successful, but you have to think about it. You have to get good advice.”

What will we talk about during due diligence?

When you first talk to your accountant you’ll discuss what you need to do now, and what you’ll need to do later, post DD.

The most important topic will be ownership structure (more on this below). You not only need to decide which one to use but also a timeline for getting it set up.

It’s also a good idea to use this initial conversation as an opportunity to test the relationship and gauge if you would like to work with them in the future.

Matt says he hears a lot of investors say: “I was going to use my parent’s accountant,” but once they’ve made it through the initial conversation, they decide it’s best to look elsewhere.

If you need a recommendation, Opes Partners has reviewed the Top 5 Property Accountants in New Zealand.

Filing future tax returns and talking through this process should also be on the list for this first conversation.

Most investors want to know what sort of paperwork they need to send to their accountant. It’s really simple. Accountants have access to all your information … your salaries, shares, dividends, and property income, through Inland Revenue Department files.

They then use this to file your tax return to keep things simple.

What’s the difference between a trust, a “look through” company and owning a property in your own name?

It’s important that you don’t pay more tax than you need to. But, if you own your properties in the wrong way, you will almost certainly overpay.

Arguably the most important part of working with a good property accountant is minimising the tax you pay.

You do this by discussing different ownership structures with your accountant.

Usually, most investors will choose one of the following structures:

• Hold property in your own name
• Set up a trust
• Use a “look through” company (LTC)

Each structure comes with its own tax pros and cons, and each will be the best structure for different people.

Disclaimer: you’re about to read a few examples of where investors can save on tax by choosing the right structure. This is to show you what’s possible for different people. Please don’t try and figure this out for yourself. You won’t realise how unique your situation is until you talk to a property accountant.

Let’s start with trusts.

A trust is a separate legal entity, which owns assets on behalf of beneficiaries (usually you).

These can be useful for higher-income earners. That’s because the top income tax rate is 39%, whereas the trust tax rate is 33%.

So if someone on the top tax rate owned a property with a $10,000 profit, they’d pay $3,900 if holding the property in their own name.

But, if they owned the property in a trust, they’d save $600 and only pay $3,300 in tax per year.

But the cost of the trust also needs to be factored in so that you don’t save $1000 in tax but end up paying $1500 in trust management, for example.

A trust also allows you to transfer the ownership of property and other assets out of your own name so they can be protected, while still maintaining control over them.

This can also be useful for business owners and directors who face higher risks of litigation, being sued, and so don’t want to own as many assets in their own name.

Let’s move now to Look Through Companies, which used to be LAQC’s.

A Look Through Company (LTC) is a very useful re-structuring tool, because it takes on the tax rates of its shareholders.

Let’s continue with the high-income earner above, where she has a tax rate of 39%. Let’s say that her partner is a stay-at-home dad who isn’t earning an income right now. So his tax rate is 10.5%.

In this case, the lower-income earner might own 99% of the shares in the “look through” company and 1% of the shares could be owned by the higher income earner.

So if there was a property that earned $10,000 worth of profit, $9,900 of the profit (99%) would be taxed at 10.5%; the other $100 of profit (1%) would be taxed at 39%.

That means the property would pay a total of $1,079.50. That’s $2,221.50 less tax paid than if the property was owned in a trust.

Let’s now move on to holding a property in your own name.

This means that profits and losses go out to you individually. But there is very little tax flexibility and unlimited liability.

However, it is the cheapest ownership structure to set up and administer, because you don’t have to set up a new entity or file annual returns for that trust or company.

So if the amount of tax you would have to pay is the same whether you own the property in your own name or use a trust, then it’s often cheaper to just own in your own name. That way you don’t have to pay $2,000+GST to set up the trust.

There are other options and considerations. For example, if you as the investor already have a trust set up, this is something the accountant will also discuss with you.

You won’t realise how individual your situation is until you talk to an accountant. So it is in your best interest to get advice so you don’t inadvertently set yourself up to pay more tax than you have to.

What should I ask an accountant during due diligence?

It’s hard to know whether you’re getting good advice from an accountant or not. After all, tax is technical. But you can ask three key questions to test if your accountant instils confidence.

Firstly: “What’s the best ownership structure if I want to minimise the tax and protect my assets?”

Follow this up with: “What are the benefits for me using this specific structure?”

Finally, it may be worth asking the accountant if they are a specialist in property accounting or what specific experience they have in this area.

As an additional test, Opes Partners Managing Director Andrew Nicol says ask the accountant about depreciation. This is an area of accounting that has changed, as is often misunderstood by general accountants.

You want to hear something along the lines of: “You can only depreciate chattels, so you will need to maximise those, and you need to get a chattel valuation”.

This has changed since pre-2011 when you could depreciate the value of the building itself. Some accountants forget the tax change didn’t affect chattels.

$50,000 of chattels, correctly depreciated, can save an investor $16,500 in tax (over time), if on a 33% tax rate.

When should I talk to the accountant?

Usually, investors will contact an accountant during the second half of the due diligence timeline.

Your initial discussion with an accountant may only need a short phone call, potentially followed up by a video chat.

Quite commonly, investors will not meet accountants in person. Only people with very complex setups like business owners, high net worth individuals, and people with multiple trusts will meet in person.

An investor won’t actually start working with an accountant full-on until it comes to tax time, which is any time from April onwards, starting from the next year.

What is the difference in advice between a lawyer and an accountant?

Accountants and lawyers have similar, but different roles to play during due diligence.

An accountant will look at the purchase transaction with a commercially driven focus.

This means they consider risk, taxation, and liability protection.

A lawyer will give zero commercially-driven advice. Their primary concern isn’t the amount of tax you’ll pay. Instead, solicitors approach a transaction from a contractual perspective.

That means delving into the nitty-gritty of the sales and purchase agreement to protect you legally.

What happens if I decide to buy the property under a trust but I signed the contract personally?

This is the nomination clause’s time to shine.

Found in your sales and purchase agreement, the nomination clause allows you to sign the contract in one name and then transfer the contract to someone else (like your trust) later.

Happily, nomination clauses are automatically included in all contracts, but make sure you don’t cross out the part in the contract that says [Your Name] “and or nominee”.

Investors are advised to sign the contract first, complete due diligence, and then once the contract is settled, having gone unconditional, this can be looked at.

A nomination clause is great because it gives you the time and room to investigate what structure will work best for your property purchase.

Developers will almost always agree to a simple change in ownership like this.

So a trust or a “look through” company doesn’t need to be set up until closer to settlement.

What does working with an accountant cost?

Initial discussions with an accountant are usually free.

A ballpark figure for working with an accountant is $1200+GST for a year. It’s up or down from this figure depending on how complex your situation is.

This will differ based on the company you work with. For example, it could cost you an annual, fixed-fee service of $1150+GST for your first property. All additional properties could be an additional $200+GST each.

Structuring could range from $800 - $2000+GST as a one-off cost. But again this is dependent on what is done.

Looking for more information about due diligence?

If you're looking to learn more about due diligence, check out these articles about: how to work with a solicitor during due diligence, how to get finance during due diligence, how to get insurance during due diligence, what to do during a site visit, and everything you need to know about signing a sales and purchase agreement in NZ.