I spent a couple of hours with a legal/tax advisor on Thursday discussing the most appropriate business structures to invest in real estate. In regards to the added benifits other than asset protection when using a company to trade rather than personally there didn’t seem much of a difference. Here’s a couple of things we discussed.
1. Company only pays 30% tax instead of a maximum of 48.5% personal.
This is correct and benificial in the form of increased money available as operating capital, however, when withdrawing profits from the company for personal use, if your personal tax rate is 48.5% you will be required to pay an additional 18.5% tax on your drawings. Similarly, if your tax rate is around 10% you will be entitiled to a tax refund of 20%.2. Deductable expenses.
As far as he was aware there are no deductions exlusively available to a company when investing in property you can not claim trading personally. Clarification on this – all expenses personally incurred to make a profit on investments can be claimed on your personal tax return.On the other side of things though, expenses incurred under a company/trust name can not be offset against personal income, this would relate mainly to depreciatation. I’m a bit unsure on this one though because couldn’t a loss be distributed at the end of the accounting period just the same as a profit?
Some other points of note also:
Finance will be impossible to obtain under a new company/trust name without the guarantee of the directors, given this wouldn’t it serve no useful purpose in forming a company for personal protection if you have be guarantor anyhow?
Trading as a company/trust increases the accounting time/obligations and expenses, as well as increasing the start up cost in setting up the structures.
In regards to asset protection, if any property is tied to another through mortgages etc then they have no protection from each other. If the properties are all purchased through a company, unless they are tied up in individual trusts they are all accessable by outsiders if they come after the company for any reason.
When deciding on the level of protection do most investors think in terms of protecting the assets if someone comes after you personally, or protecting yourself if someone comes after your assets? My opinion is that you can take steps to protect both without the assistance of complicated company/trust structures unless your personal/investing is high risk or your doing things unethically/illegal.
Can anyone out there point out some errors in what I’ve mentioned for me or add some pros/cons for both trading personally or through a company structure? Your opinions would be both interesting and very helpful, I think this is an area a lot of people are unsure on and an area where there are no specific ‘best’ structures. At the end of the day everyone needs a different stucture based on their personal situations, but the general knowledge will help everyone find what’s right for them.
Thanks guys, Leigh [8D]
I have gone over a lot of these issues with my accountant, and for my situation at the moment, it is best to continue operating under my name…
What you said sounds about right, and yes, you will be up for a number of expenses if you establish a company…you could even consider an over-seas company which will cost about twice as much as an aussie company, but all profits will be tax free. The only problem is when you want to bring the money in to the country, you will be hit by the tax man, but there are ways around this, but it gets quite complicated. But imagine if you like to travel O/S to a particular company regularly….
It all depends on your own situation, how much profit you are making, and how far you want to take your investment business! In the end it will be down to you and your accountant and what you feel comfortable with…
Not much help am I?
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]Another issue which hasn’t been addressed here is CAPITAL GAINS TAX….
If a CGT ASSET such as a property is owned by an individual for a period greater then 12 months they are entitled to a 50% discount on the Capital Gains Tax payable…whereas a company has no such exemption…
This is where TRUSTS come in as they have similar asset protection features as a company but when the profits are distruted to the beneficiaries they are entitiled to the CGT discount..
Gaining the 50% is a major consideration as it could be the factor that makes or breaks the deal…
Pete
Leigh, great thread to start as i’m sure many people wonder about this when they start to invest in property.
From what i understand, the 2 main reasons for a trust are asset protection and tax bonuses.
As you’ve pointed out, a trust is especially beneficial if you are in a litigious career and you’re seeking asset protection. If someone sues you or your business, and you own the assets personally, you could lose everything.I’ve also been told that it’s always best to set up a trust (with a company as trustee) to invest through, even if it’s your first property and PPOR. The reason being, that it provides a lot more options down the road if you want to develop or transfer ownership of the property for whatever reason. And of course there are also the tax benefits.
If you control a trust that owns the assets, you officially “own” nothing, but you have complete control. For followers of Richard Kiyosaki, this is what he means when he says you should control your wealth, not own it. I’ve heard of a surgeon who owns nothing. His only personal assets are a few suits…but the Brighton mansion, 5 IP’s, shares, yacht, Mercedes Benz, Rolex watch etc. are all owned by a trust.
When you control a trust, just about every expense can be tax deductable. Dale Gatherum-Goss, an accountant, wrote up a list of “unusual” tax deductions that can be claimed. A few that i can remember off the top of my head include:
– xmas presents to relatives
– movie tickets
– cd’s + sound systems
– travel allowance
– sex toys (now THAT got your attention!!)Most people know that you can claim travelling costs to visit your IP. For example, My 2 flights a year to Queensland and Melbourne are claimed on my tax because i am inspecting their condition… plus i also make a little holiday out of it.
But with a trust, a travelling allowance can be paid to you which is effectively receiving tax free money! The background to this is politicians are paid an allowance for travelling away from home that is shown as income, but they can then claim the same amount as an automatic tax deduction. The same laws apply to us as well.
So, the trust can pay you a daily allowance for any travel away from home and this allowance is a tax deduction to the trust that will reduce it’s profit. That allowance is income to you and your accountant will offset this income by the automatic tax deduction so that the income is effectively tax free to you. This tax deduction is regardless of how much you spend. That is, you might be paid an allowance of $200 a day but only spend $20 on food and $40 for a hostel for the night, but you can still claim the $200 per day as a tax deduction. And the best bit is that no receipts are necessary at all!As willi pointed out, it’s also not good to buy property through a company name as they’re not exempt from the 50% discount on CGT, but trusts are.
The main advantage of a trust is that it does not pay tax on a profit or positive income. Instead, it distributes the net income to the beneficiaries of a trust who then pay tax on that income at their marginal rates of tax. This is usually done in such a way as to distribute the net income to those beneficiaries who will pay the least amount of tax…which is especially good for families.
If you look at the way the politicians spend our taxes, you’d be a fool not to minimise your taxes.
That’s why every single politician, wealthy business owner and most accountants operate through a trust/company structure. I personally think it’s worth doing and hope to do so soon.It would be great if Steve could reply to this post and give us a rundown on options available and pros/cons of each…i believe he’s an accountant?
Another version of a trustee is to not use a company but a person as trustee. This option can cut down on the costs of maintaining the legal structure.
I don’t believe that when starting out initially, properties should be bought in a trust as statistics show most people only buy 1 or 2 properties and the fees and time maintaing such structures would sap most of the cashflow profits for a couple of properties.
Just some thoughts
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