Dividends are normally treated as income, not capital gain. Are you sure that’s not the case in a NZ LAQC as well?

You may want to take a look through this stuff to answer that questions:

http://tinyurl.com/4nhgh

In particular, the first part about Controlled Foreign Companies and attributable income from them. An older version used to be downloadable as a PDF file, but I can’t find it on their site now.

And if you’re feeling real keen, you can look through the tax act as well:

http://tinyurl.com/466q3

Part X is the bit you want.

Finally, I’m not familiar with NZ company rules, but are you sure that capital gains in a company are in fact tax free and not taxed at the company rate?

GP

Chris,

Here’s the exact wording of that part of the transferor trust provisions:

So unless there’s been an update to those rules recently, the less than market consideration clause only applies to non-discretionary trusts.

Also, what the provisions say about trust control:

and:

Note the generality of their definition of control, and also that it applies to associates of the taxpayer as well as the taxpayer him/herself. Then there’s more than a page of definitions about what an associate is, enough to cover pretty much everyone.

GP

If it’s CGT then hopefully you should be able to get the 50% discount if the property has been held for more than 12 months.

Did the ATO mention his, or specifically say you wouldn’t with a foreign property?

GP

Brenda,

Regarding the shares, I wouldn’t personally put all that money into one share, as it leaves you too exposed if it falls – even with a blue chip. With $70K, I think you could buy at least half a dozen different companies without brokerage making too much of a dent (especially if you bought them yourself through an online broker).

Also, when you buy shares at that price (sounds a bit like NAB), you’re getting low risk with relatively high yield, but at the expense of slow growth (and generally slow decline, if that’s the way it’s going, which is one reason why it’s low risk). Even so, with those big banks like NAB and CBA, the share price fluctuates up and down quite a lot within a relatively small range, so if this was only for the short term, you’d want to make sure you were on an up-trend otherwise you’d be better off having your money in the bank rather than in its shares (same yield but no capital loss).

As always, if you want better returns you have to accept higher risk, and compensate for that by spreading your money around a bit and watching your investments closer.

Not sure what you mean by it taking 18 years to show a profit. If the share price doesn’t fall, then you’re showing a profit from your first dividend, as you can always sell the shares and get your initial capital back. The dividends don’t have to have covered the capital cost for the investment to be showing a profit (although it would be nice to be able to tell the tax man it did []).

Another alternative is to invest the money into managed funds – either share or property. Easier than doing it all yourself, but again, likely to have lower returns. But I wouldn’t be putting the whole lot into just one of them either. You could look at something like Steve Navra’s share fund, which at last report was returning about 17% over 9 months, but of course past performance is no guarantee of future performance, as they say.

And of course this is all just general comments based on my own opinions, and should not be construed as any type of advice.

GP

FBT exempt.

GP

By my understanding, if the company buys the laptop for him, or reimburses him for it, then it’s from pre-tax dollars as laptops are exempt from FBT, even if used for private use. So as a salary sacrifice he would only be sacrificing the cost of the laptop itself from his gross salary, not the cost + tax (income tax I mean, not GST).

If he’s unsure of the details, he should speak to his accountant or company accountant (sorry, financial controller []).

GP

What do you consider “significant”?

The difference between the discounted CGT rate for someone on the top marginal rate and the company rate is 5.75% (allowing for the Medicare levy). If you sell a property for a CG of say $100,000, that “insignificant” difference is $5,750. If you’re dealing with higher-end properties that might give gains in the $1m area, then it becomes around $57,500. You can give me that “insignificant” amount any day! [].

But that’s only the start. After the company has paid this extra $5,750 tax, the rest is then company money, the use of which is governed by some pretty strict rules (look at it sideways as an individual and it will be deemed a dividend). If the company shareholder is on the top marginal rate, getting the funds out to use personally would involve more tax – ultimately giving the full 48.5% tax rate on the initial amount.

In my opinion, as someone stuck in this predicament right now, owning capital appreciating assets in a company structure is NOT a good idea.

And if you do use a company for business or income-only type assets, I’d consider having the shares owned by a family trust rather than an individual, to give more flexibility in distributing dividends (although there is an issue to do with distributing franking credits from a trust).

I’m also told there’s a new rule pending release that would turn interest-free or cheap private loans TO private companies into capital, making it difficult to start a $10 company and get sufficient funds in there to use. Don’t know how that rule will turn out yet though.

GP

Geoff,

If you haven’t already sorted the issue out, you could download and take a read through this:

http://law.ato.gov.au/pdf/tr97-23.pdf

While not the easiest thing to read, it goes over the definitions of repairs, renewals, and improvements and what’s deductible and what’s not.

Cheers,
GP

Gumshoe,

As your intention is to develop the property to sell for a profit, rather than use it for generating income, then I don’t believe you’ll get the 50% discount. I think you’ll end up paying tax on 100% of the profits.

However, I’m not an accountant and this is just my understanding, so seek your own professional advice. An accountant may convince you that you are mistaken in your intentions…

GP

I think the issue is more that they may be able to force the trustee to buy back the units themselves – although I’m not sure if a unit holder has that right. It may depend on the trust deed.

If the units just matched a personal loan from the bank though, then I suppose they wouldn’t really be an asset to you, since if the trust bought them back I presume the bankruptcy trustee would have to repay the bank first (although I’m just guessing how that would work).

GP