Why you should never buy an appreciating asset in

Your post does not seem to ask anything but I have to say that I can think of many reasons in favour of buying appreciating assets in a company structure. What is the point you are making?

TMA

Most companies holding appreciating assets also utilise a trustee company (of which the trading company directors are also directors of) and a trust. Impact of taxation is minimised.

TMA

I would say yes seeing a company pays their own tax whereas and employee is paid in after tax dollars.

TMA

I have personal experience with this restriction, and have had numerous headaches trying to live with it. To be a little fair to myself, I got into the situation before the 50% CGT discount was introduced, and a company structure otherwise seemed like the best idea at the time.

One thing I think that is often overlooked is the real tax rate when using a company structure if the shares are owned by a high income earner. It’s all well and good to say there’s only a few percent difference between the 30% company rate and the 24.25% top marginal rate with 50% discount (although those few percent can be a lot of money if the amount is high enough), but one also has to consider what they’re going to do with the money once it’s in the company tax-paid. The way I see it, there are only two real choices: take a dividend and use it, or use it within the company.

Taking a dividend when the shareholder is on the top marginal rate means the funds will ultimately have been taxed at 48.5% (including Medicare levy). That’s suddenly looking a lot worse than 24.25%. Having the company owned by a trust may be better (if you think of that in advance), but then why not just buy the asset in the trust in the first place?

Using the funds within the company, on the other-hand, can be quite a nightmare (assuming we’re talking investment rather than active business). To continue investing in the company structure leaves you stuck with the problem of no 50% CGT discount, and trying to invest through another structure using company funds can be something of a minefield. One foot wrong and it could all become a deemed dividend – and forget the franking credits. The rules are pretty tight.

As an illustrative example, consider some figures:

Say you have a $100,000 capital gain over a period of more than 12 months. In the hands of a high income earner, tax would come to $24,250 (ignoring any deductions). In a company, initial tax would be $30,000, but if a high income earner took it as a dividend, the final tax bill would be $48,500 (ie. the shareholder would pay an extra $18,500). If they tried to use it in the company but managed to get it deemed a dividend, I believe the tax would be the initial $30,000 then another 48.5% of the $70,000 dividend – or $63,950 in total. However, if it was in a trust and distributed equally to three beneficiaries with no other income, then each would get $33,333 and pay tax on $16,667 – by my calculation about $1,800 each or $5,400 odd in total (excluding Medicare levy). Even a single beneficiary with no other income would only pay about $11,000 in tax, plus Medicare levy.

I know which amount I’d prefer…

Cheers,
GP

Note: these are only general comments based on my personal experience and should not be construed as any sort of advice.

I bet Neil Armstong hoped Albert was wrong!

Ive been advised by tax lawyers that the word asset protection should be used in conjunction with the word ESTATE PLANNING. Why ?

Because if the reason you transfer your assets into a trust is to protect them then the question might be to protect them from whom. Creditors ? Well then the bankruptcy laws of 24 months do not apply where the sole purpose was to defeat the creditors. So be careful otherwise even those assets you thought were protected might be clawed back.

Remember there are three major reasons for structuring 1. estate and retirement planning 2. asset protection 3. taxation planning.

Munjy,

I’m only going from limited knowledge here, but…

Not so. Only expenses can be claimed, where an expense is a non-recoverable outgoing. When an asset is purchased, all that’s happening is an amount of cash is being replaced with an equivalent valued asset. There is no expense (except possible transaction costs).

Most assets fall in value after purchase, which amounts to an unrecoverable expense, thus they can be depreciated to allow that loss of value to be claimed. However, land generally appreciates over time, and thus there is no loss that can be claimed.

Then I think the property held by the business might become trading stock. By my understanding, trading stock has to be valued at the end of each financial year and any loss or gain in value taken into account for tax purposes.

Not sure how that ties in with depreciation though. Perhaps in a property trading business depreciation doesn’t apply – but this is just a blind guess.

Cheers,
GP

Hi TMA
Well thats a good reason then

“Do you find it more advantageous to rent as apposed to having your own PPOR?”

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There are three general entites in which you can buy a house (this is for your PPOR):

~Own Name: No Capital Gains Tax if you sell (big reason for most people); Cannot deduct rent from company/personal income; Little asset protection (you lose the court case, you can lose the house); Zero accounting/tax costs (V. easy).

~Company: Pay full CGT tax (so 30%); Comapny can use the loss from the property to reduce their profits (so good if you work for your company – pay little to no income tax); Quite easy accounting; Must pay current market rent and be seen as arms length (extra admin for ATO req.); Property falls under the companys liability (so if you get sued you probably won’t lose it, but if the company does, you may have problems):

~Trust: Pay 50% discount on CGT (so 15%); Trust can use losses from the property to offset future earnings; Hybrid trusts can “transfer” (via ‘units’) the loss to personal income; Downside is accounting can get quite comlicated esp. if “transfering” the loss; Must pay current market rent and be seen as arms length (extra admin for ATO req.); Best asset protection (IMO) if you get sued you can protect your assets (with a company as trustee it is very difficult for anyone to get your assets).

I think this sums up the

Hellman