At the recent Sydney property masterclass it was suggested that we invest using a company/trust structure. If the income earned in this trust is then distributed to the beneficiaries, (namely myself and my husband), how is this more tax effective than holding the property in our own names. We both already have the same marginal tax rate. (I can see how it is safer, but not more tax effective)
Thank you
Marianneeg. What about your uncle’s cousin who has taken one year off work to have a child? No income, so they may be able to accept a $6000 distribution and pay no tax on it. That may save you $3000 in tax.
or you could distribute to a company that you own. Companies pay a max 30% tax.
Terryw
Discover Home Loans
Mortgage Broker
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
I will be watching replies to this one as well . I plan to talk through this topic with my accountant this week . I am interested to know more of how a paper company can borrow money to buy property even with the guarantors in place . Even then , I fail to see at this stage how this isolates me from the debt if the company goes pear shaped . Gav
Dodgee
If you are using a new company to borrow, it is generally not much harder than getting a loan in your own name. The directors will have to give personal guarrantees, so the lender will look at their income etc.
It doesn’t isolate you from debt. If the company cannot pay the loan, then the bank will come after you personally.
ps. I would not recomend anyone use a company to purchase property unless it was a trustee company acting for the trust.
Terryw
Discover Home Loans
Mortgage Broker
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
Thanks for your reply. Its my understanding that the Uncles cousin with the baby would then have the right to that money, even if the distribution was done in the books rather than as cash ie the trust would be showing $6000 liability “Loan to Uncle’s cousin”. This could be a problem dont you think?
The idea of a coy as beneficiary is great, (other than its getting complicated), but worth it if you’re on the top marginal rate.
MarianneYes, they will have to declare the income. But hopefully they would give it back to you (or you wouldn’t give it to them).
Terryw
Discover Home Loans
Mortgage Broker
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
Marianne,
Originally posted by Unicorn:The idea of a coy as beneficiary is great, (other than its getting complicated), but worth it if you’re on the top marginal rate.
This sounds good at first glance, but there are issues to consider:
Once the funds are in the company then they’re company funds, with rather strict rules governing their use. If you want to continue using those funds then you only really have two choices: pay them out as a dividend or find a way to invest them while avoiding having them deemed a dividend.
If you pay them as a dividend, then the tax implications would depend on who the shareholders are. If they’re yourselves, on the top marginal rate, or a trust where you’re the only beneficiaries, then you’ll be back to the top marginal tax rate and have gained nothing by using the company.
If you decide to invest them without doing that, then you either have to have the company invest them in its own name (where you’d lose the 50% CGT discount) or find another way that would be arms-length enough to avoid having a deemed dividend. The rules are pretty tight when it comes to using company funds for personal reasons. There’s not much you can do without it being deemed a dividend unless it’s the equivalent of a commercial, arms-length transaction.
And if you do invest within the company itself, you continue to build up the retained earnings of the company with the ongoing dilemma of how to get the funds out without paying more tax. While the shareholders remain on the top tax rate, this will always be a problem.
As Terry has suggested, investing using a company structure is typically not a good idea. Making trust distributions to a company may not be much better, as it would leave you in the same situation with those funds.
This is all just general information based on my own knowledge and experience, and should not be construed as any form of advice.
GP
Having a company / trust structure to buy your properties simply offers you asset protection in your case.
The reason why a company is used as a trustee is that a trustee cannot be a beneficiary (correct me if I’m wrong). Secondly, it offers another level of protection if the company is sued. As the assets are held in a trust, and the company is a $2 company, then your assets are safe.
As for the income, a trust is used for income splitting which is only as good as the number of beneficaries you have on a lower marginal tax rate. If you and your husband are already on your top marginal tax rate and have no children to split the income from, it won’t be any more tax effective than having the property under your name.
If purchasing property under a company, Terry and GreatPig are correct. You’ll need to look at the pros and cons first before proceeding as well as costings.
Hope this help
Martin
Martin
A trustee can be a beneficiary. I am a trustee of my trust and a beneficiary.
Terryw
Discover Home Loans
Mortgage Broker
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
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