Gidday all,
I am new to investing. I am interested in the buy and hold method. The accountants & advisers I have spoken to tell me to buy in my own name as company costs are too high. I have also read that a company is the way to go.I’m a little lost. any tips from you gurus who are structured for now and the future would be appreciated immensly.
Thanks in anticipation
Adrian
[email protected] [
]Hey Adrian,
Interesting question with the structuring!
Your accountant may be right in suggesting you put the property in your own name at this stage of your wrapping career, assuming you do not earn over $50K a year. If you do earn more than $50K a year, your accountant is probably trying to sell you on the benefits of -tve gearing.
Costs of having a company structure is about $1k setup (which is deductible over 5 years) and an annual fee of $200 to ASIC (plus annual accounting fees of course!). The benefit is that you can defer the tax paid on profits until you pay yourself a dividend. The disadvantage is that you cant offset any losses against you own name to reduce tax, however they can be carried fwd indefinitely to offset against future profits in the company.
Have you asked your accountant about a family trust? Relatively cheap to set one up (about $500 max) and no annual fees. Trusts just allow you to minimise your tax and are great if you have a partner and/or family [
]. Trusts have the same issues as companies in that you have to carry fwd the losses and can’t offset them in your personal name.There are advantages to both structures which would take a long time to explain on this forum, but if you are looking to buy and hold a positive cashflow property that will appreciate in value, the best structure would be a family trust as it also provides you with more advantages (like 50% discount on capital gains) when you come to sell.
Hope this helps a little. Let me know if you want some further clarification.
Cheers
[
]Big Ads
Hi Adrian
Welcome to our world of investing. Big Ads’ advice is very good. It might be costly now, but think of the future. How long do you want to be investing in B & H property? How many properties do you need to own so that you can live off the passive income and become a full time property investor?
So what if the cost is $1500+ for a company and family trust now. This cost is nothing if you divide it by the number of years you intend to invest in property. Let alone take into account all the advantages of the structure. In 3,5 or 10 years time you will reflect and either be thankful that you created your structure or be saying “if only”.
I know which way I would go. If your accountant won’t do it, find another accountant who will.
I get fed up with -ve people who try to hold me back from what I want to do with my investments and my life. So I change direction and find +ve people who are keen and interested in helping me achieve my goals.Hope this is helpful
Cheers
NessieHello there,
I’m glad you posted this question, as I’m having trouble working things out myself. Not the structure, but how money flows between the entities. I’m just going to start writing what I understand to be correct. If I’m wrong, please somebody jump in and correct it. Otherwise, myself, and potentially anybody who reads this, will assume it’s correct.
Seemingly the following structure provides the most asset protection and tax minimisation. Note, however, that it is also the most expensive to set up:
Trustee: Company T
Discretionary Trust: XYZ Trust
Beneficiaries: You, Company BNote that if you had a family, you would add them to the list of beneficiaries. Also note that you are the director of both Company T and Company B. So you own everything, and you control everything, but you can minimise the tax you pay on the money you earn, and you can protect your assets from litigation.
Having a company as a beneficiary effectively caps the tax rate of the distributions to 30%.
Company T acts as the trustee of the trust. Whenever it buys something, it writes “Company T as trustee for XYZ Trust” in the purchaser field.
Company T never really owns anything. Everything it buys belongs to the trust. Similarly, the profit that it makes does not belong to it – it belongs to the trust.
Once a year, the nett income of Company T, effectively the income of the trust, is distributed to the beneficiaries in whatever proportions seem best at the time (you can do this because it’s a discretionary trust, as opposed to a unit trust where the distributions are fixed). So the money is divided in such a way as to minimise the tax paid. For me, that means all of it goes to Company B as my marginal tax rate is more than 30%.
My questions to follow in the next post….
Mark Leet.
And now my questions…
1. How does money get from Company B back to Company A so it can buy more things for the trust? Obviously I’ve got access to all the bank accounts, but how is it done from an accounting point of view, as these are all supposed to be separate entities?
2. If you remove Company B, and make Company T the beneficiary instead (so it’s both trustee and beneficiary), doesn’t that negate the asset protection benefits of the trust? i.e. If Company T was sued when it was only the trustee, it has nothing to lose. If Company T was sued when it was both the trustee and the beneficiary, it has all my money to lose (seeing that I would distribute everything to the company to minimise tax)?
3. Can beneficiaries be added to a discretionary trust at any time, or must they all be specified when the trust is created?
I hope this has helped, and I hope that someone can help me.
Thanks,
Mark Leet.
Hi Mark!!!
How’re you going?
Adrian, I’m not sure if you went to Steve’s seminar, I assume you didn’t, but there was an accountant there named Mr Paul Harper, from Jeena Partners. I know he’s hugely busy, but I believe he has a kit that helps people to structure their affairs in the best possible way for investing. He’s brilliant and I’m sure Steve would agree with me (especially because he’s a key note speaker at Steve’s seminar).
If you want his details, just leave a post or email me. Bye the way, I don’t work for him! It can’t hurt to find out more anyway. You could always ring up your local CPA advisory service, but I’m not sure how much help they would be.Cheers
Sooshie [
]There are no problems, only solutions!
Hi Mark,
Your question raises many issues in tax law, let me try to answer them in the order asked:
quote:
1. How does money get from Company B back to Company A so it can buy more things for the trust? Obviously I’ve got access to all the bank accounts, but how is it done from an accounting point of view, as these are all supposed to be separate entities?Assume a profit of $100. When the funds are ‘distributed’ to Company B (“B”) at the end of the year, it is common practice for the funds not to be physically paid from Company T to Company B. What actually happens, is that for tax purposes Company T as trustee for the XYZ Trust (“XYZ”) ‘distributes’ the funds to B via a loan owing to B. i.e. the funds stay in the bank account of XYZ for the XYZ to use, however a loan to B of $100 is also shown in the balance sheet of XYZ.
Unfortunately as you have correctly said, they are separate entities and tax law (Division 7A of the Income Tax Assessment Act 1936) says that you must physically pay the loan to B within 1 year of the distribution [
].quote:
2. If you remove Company B, and make Company T the beneficiary instead (so it’s both trustee and beneficiary), doesn’t that negate the asset protection benefits of the trust? i.e. If Company T was sued when it was only the trustee, it has nothing to lose. If Company T was sued when it was both the trustee and the beneficiary, it has all my money to lose (seeing that I would distribute everything to the company to minimise tax)?Not 100% sure on this one but as far as I can see it, this may not be the best structure to use for the asset protection issues you have outlined above.
Might I suggest you use a company to operate your wrapping business (not for buy and hold strategies where there is capital growth potential). If your business is in a company, you limit tax on profit to 30%. You can have Trust B as the shareholder and as you want to take money out for yourself, the company declares a dividend to B who in turn distributes it to you. Of course you pay tax at marginal rates, but this is unavoidable unless you go for tax evasion (which I do not reccommend
). Still not great asset protection, but in general asset protection is used by professional staff (medical doctors, lawyers) to reduce their personal exposure by not holding any assets in their own name.quote:
3. Can beneficiaries be added to a discretionary trust at any time, or must they all be specified when the trust is created?This depends on the specific trust deed but you can usually add additional beneficiaries through alteration of the deed. If the trust is a family trust, usually the trust automatically includes them (ie if you get married,have kids etc).
I suggest you sit down with a GOOD accountant and explain what you intend to do before you formally set up your structure to help you minimise tax[^]. Make sure the accountant fully understands Division 7A of the ITAA 1936 before you start planning.
Good Luck!
[
]Big Ads
Interesting discussion about structuring.
Wanting to set up a discretionary (“family”) trust and having property purchased by that trust, I have been told by a couple of people that a “hybrid” or “hybrid discretionary” trust is the best option for asset protection. This evidently combines features of a unit trust with those of a discretionary trust.
Interestingly, the people who set up my self managed super fund do unit trusts and discretionary trusts but don’t do the hybrids – the person I spoke to said his legal people don’t want to do them. He also said the legal people said a few years ago that setting up self managed super funds was a fad that would go away!
Anyway, would appreciate comments on the hybrid trust issue.
Des
RE: Structuring For WRAP and Buy/Hold
It seems that the common consensus is to use a discretionary “family” trust for Buy/Hold strategy and to use a company for the WRAP business. While I do understand the reason behind this i.e. potential capital growth for Buy/Hold and less growth for WRAP; why would’nt you want to use a discretionary trust for the WRAP business as the continuous income steam can be distributed to several beneficiaries. This income stream can be huge if you have a large portfolio of WRAP properties. I would welcome comments from those who already have structured their affairs one way or the other.
Cheers……….johnbgoh
Hi Des
You asked about Hybrid and/or hybrid discretionary trust. These were a type of unit trust which gave the trustee discretion to allocate income and capital between different clases of units; in other words importing some aspects of a discretionary into a unit trust. Since the Federal Govt. tightened up the rules with respect to Super Funds being able to invest in unit trusts which in turn borrowed funds, Hybrid Trusts have gone out of favour.
Hope this answers your query.
Cheers
Nessiequote:
And now my questions…2. If you remove Company B, and make Company T the beneficiary instead (so it’s both trustee and beneficiary), doesn’t that negate the asset protection benefits of the trust? i.e. If Company T was sued when it was only the trustee, it has nothing to lose. If Company T was sued when it was both the trustee and the beneficiary, it has all my money to lose (seeing that I would distribute everything to the company to minimise tax)?
3. Can beneficiaries be added to a discretionary trust at any time, or must they all be specified when the trust is created?
I hope this has helped, and I hope that someone can help me.
Thanks,
Mark Leet.
Mark,
Company T cannot be both trustee and sole beneficiary, otherwise the trust disappears!
Additional beneficiaries can be added later, but it costs to have the trust deed amended (each time).
A good read for laymen is Nigel Renton’s book ‘Family Trusts’ – borrow from library or buy!Terry
FinanceQuote:thanks to everyone for your replies.Hi Sooshie,
No I haven’t been to steve’s seminar
I would like Mr Paul Harper, from Jeena Partners details thanks
please email me @ [email protected]cheers
Adrian
Greetings!
I guess the good news is that Paul and I are working on a joint product that outlines the issue of structuring in more detail.
The notes are 55+ pages of notes are finished but we are still finalising the audio. I expect the product to be ready in early 2003.
Big Ads… you’re not a closet accountant are you? [
]As for the hybrid issue… I think Dave said it best when he said “why pay for champagne when all you need is beer?”.
Do you need a structure like Kerry Packer if you’re not Kerry Packer, but really a Kerry Packer wantabe?
And I must admit that IMHO anyone mad enough to set up an offshore structure to avoid tax needs a serious kick up the investing pants.
Bye
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi all,
Steve, If you feel like ‘Yoda’, I know why your moves are as good as his. Personally, after the week I’ve had I feel like ‘Jabba the Hun’. I think I may have put my foot in it somewhere in this posting…
Got to get some sleep…
Sooshie [
] [|)]There are no problems, only solutions!
Hi,
I’ve sent you an email regarding the info you requested.
Cheers
Sooshie [
]There are no problems, only solutions!
]
]. Trusts have the same issues as companies in that you have to carry fwd the losses and can’t offset them in your personal name.
]
].
). Still not great asset protection, but in general asset protection is used by professional staff (medical doctors, lawyers) to reduce their personal exposure by not holding any assets in their own name.
The topic ‘Structuring’ is closed to new replies.
