Hi,
I’m in a situation where I own shares in the company I work for and have been holding them in a personal company (NSW registered) which I own 100% of (except for a few non-voting shares held by my wife). Due to a takeover, those shares will very shortly (probably next month) be paid out in cash, and I then intend to invest that money in property and possibly other things.
The dilemma I have is whether to invest using the company or to take the money out and invest in my own (or wife’s) name. I believe it’s too late now to do anything about transferring the shares before the payout, and never did before because of the large CGT hit it would have caused (the cost base is very small).
The way I see it, if I invest using the company, then future CGT is 30% rather than about 24% (I’m on the top marginal rate), and the profits are still in the company. On the other hand, if I take the money out to invest in my own name, I lose a fair chunk of it up-front as extra tax, so have less to invest, and any positive cash flow would be taxed at my marginal rate rather than the company rate. I guess the ideal thing would be to borrow the money from my company, but I gather the tax office takes a dim view of that and will deem it as dividend unless I pay interest, etc. I’ve also had suggested that I could invest some through a super fund, as the CGT rate there is effectively 10%, but I’m a bit edgy about locking up money in a super fund.
So, any opinions on the best path to take? Suffer a tax hit up front but have lower CGT in future (although I’ve heard talk that they might lower the company rate more yet), or have more to invest now but pay higher CGT later and profits still in the company?
Mostly this would be long term investment, until retirement, so the money staying in the company in the latter case shouldn’t be a problem if it’s only dividended out after retirement.
Thanks for any suggestions. This has been driving me batty for a while now – how to have my cake and eat it too!
Wayne
Why not use a trust to invest in property??
They only have to pay 15% CGT and there money can flow through to the company/lowest paid person.If you invest through super, you cannot borrow funds to buy property (i.e. get a mortgage. Yes there are ways around, but why not just use a trust anyway…).
Rgds.
Lucifer_auLucifer,
Thanks for the response.
Since writing that post I’ve looked more through this site, and the Gatherum-Goss one, and noticed that trusts seem to be the preferred structure (presumably discretionary rather than unit trusts).
I’ve ordered the Trust Magic book, but am just wondering why a trust is that much better than an individual, particularly if all trust beneficiaries are high income earners.
You say CGT is only taxed at 15% in a trust. I thought that all profit had to be distributed from a trust each year, and that it would then be taxed at the beneficiary’s tax rate?
Finally, since I already have a company, presumably moving cash from the company to a trust would involve having to dividend it out first, and thus pay income tax on the difference in tax rates. Would the benefits of a trust over a company make it worth doing that?
Thanks again.
Wayne
Wayne
The company must pay tax on its profit, so taking the money out won’t cost you anymore in tax unless you are on a higher bracket than 30% (franked dividends).I would be using a trust to invest in property myself, rather than the company. And using a trust, you may not have to pay any CGT, however if you do, you have more flexibility in reducing the amount.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
Thanks for the response.
Unfortunately in this case I’m on the top marginal rate, so there’s a difference of 18.5% which adds up to a fair sum. And I already give the taxman more than he deserves…
Anyway, I’m going to talk to my accountant about it again shortly.
Wayne
Wayne, is there any way that you could loan the money to a trust that you set up? At the lowest rate that the tax office will let you get away with?
This way the company will still pay 30% tax on the interest it earns, but instead of you paying an extra 18% on it, it is instead being used to build assets for your family in the trust?
Also, a benefit of trusts is that any company you are a director of (I think, Dale’s book will explain more) can be a beneficiary. So at worst case, you can distribute any income to a company and pay the 30% tax.
Also, with companies and trusts, Dale’s book will give you a nice two page listing of personal expenses that could be paid for by the trust or company pre tax – thus saving a potential whole heap of money.
You are on the right track asking questions, and learning, good luck.
Cheers
MelMel,
Thanks for the response.
I’ve read Dale’s book now, plus a number of others and heaps of threads on this and other forums, and have a much better overview of the situation.
is there any way that you could loan the money to a trust that you set up?From the company you mean? That’s exactly what I’ve asked my accountant. However, I know the tax office is not real keen on loans to company directors, so I’m not sure if this would be viewed much differently.
But then I would wonder about the benefit of being able to distribute from a discretionary trust to a company. It would mean only 30% tax, but if the money was then stuck there with no way to get it back in the trust for reinvestment, what would be the point?
Wayne
Wayne, the company would be the last resort, after you had exhausted all other beneficiaries.
If you have others, you could make an arrangement whereby it’s only a book entry that they are distributed the money, and they ‘lend’ it back to the trust to reinvest.
Depending on how much money there is, I would definitely be looking at using some of Dale’s suggestions about ‘spending’ the money pre tax….. I reckon you could get quite creative – but need a good accountant.
I would have thought that the company lending money to the trust is different to lending to a director though….
Cheers
MelMel,
I would have thought that the company lending money to the trust is different to lending to a director thoughI don’t know, but hopefully my accountant will tell me.
And I suppose I could nip over to somersoft.com and ask Dale.
Wayne
Not quite sure where you got 15% CGT through a trust but a discretionary trust can access the 50% CGT discount and, in addition, is able to distribute the tax-free amount to beneficiaries. As TerryW claims this could mean that your CGT liability is nil depending on the beneficiaries that it is distributed to. Capital gains in a superannuation fund are taxed at 15% (not trusts) but as you mentioned you cannot easily access these funds.
Also meant to mention that negative gearing is generally not recommended as a strategy for discretionary trusts as the losses are trapped at the trust level and imputation credits (from any dividends from shares – if you are using the same trust) could be lost. Discretionary trusts for property investment are mainly desgined for positively geared properties not negatively geared ones.
Aussiemike,
Originally posted by aussiemike:Discretionary trusts for property investment are mainly desgined for positively geared properties not negatively geared ones.
So what’s the best vehicle for negatively geared property? Would that be unit or hybrid trusts?
Wayne
The best vehicle for a negatively geared property depends on your taxation status. But generally it is best held by the higher income earner and therefore the higher income tax payer. Some people will try to make things highly complex with trusts, companies, etc. but if the property is negatively geared and you are not in a high liability risk industry (i.e. potential to be sued) then holding the investment in your own name is usually the best, cheapest and easiest option. Not sure why some people want to complicate things.
Aussiemike,
Thanks for the info.
Wayne
[/quote]
So what’s the best vehicle for negatively geared property? Would that be unit or hybrid trusts?Wayne
[/quote]
Wayne the main advantage you get from a Hybrid DIsc Trust is that the neg gearing can go to the highest earner but if you sell the asset the cap gain can be spread amongst any number of beneficiaries.
Cheers
NickmNick,
Thanks for the response.
Wayne
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