Please use this thread to discuss the issue of using companies in which to hold wealth as mentioned in the April 2005 newsletter.
Regards,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Steve,
I must confess I havent read the April newsletter so my comments may in fact be rather ignorant. Anyway I’ll give some of my thoughts on the topic in general.
Firstly I am always perplexed as to why an individual wants to hold accumulating assets in a company. Although the income earned will only be taxed at a rate of 30% the real problem lies when you realise an asset. Companies are not eligible for the 50% CGT Discount and this can have a dramatic impact on the actual profitability of an investment if held for more than 12 months.
The other problem with companies is the lack of flexibility with respect to distributions. Sure you can make your children, wife and parents shareholders but what happens when you have another baby. Do you issue new shares to the baby and then have to consider the general value shifting provisions and potential capital gains tax on issuing of the shares.
However as discussed many times on the forum there are soo many benefits associated with trusts. Flexibility of both distributions of both capital and income, ability to apply the refinancing principle and possibily convert non deductible debt to deductible debt (noone has been able to show me how you can do this with a company), improved asset protection (although with recent case law and potential changes to the bankruptcy laws structuring even this correctly is something that seriously needs to be analysed).
There certainly are some drawbacks to trusts but there are avenues for addressing these drawbacks.
Anyway these are my thoughts. For those that ultimately want to take advantage of the corporate tax rate I don’t see why you cant setup a shelf company as a beneficiary and then distribute any income to that company to take advantage of the corporate tax rate but ensure that the capital gains are retained in the trust where they can be distributed to an individual and they get the benefit of the 50% CGT Discount. Hey to me its the best of both worlds.
Look forward to hearing from others.
While I am more familiar with the NZ tax system I find the use of companies for investment enables you to defer part of your tax liablility by taking advantage of the difference in company tax and personal tax rates. A company can always pay a wage, interest or dividend to an individual(s) and stay within the minimum tax bracket.
While a company cannot take advantage of the CGT discount, this would not be a problem if you are adopting a long term buy and hold strategy with the emphasis on positive cashflow.
Also, shares in companies are more easily transferable than changing the legal title of a property. Perhaps you decide to put a property into a trust for example, its a simple share transfer.
Company structures are especially good when you involve other shareholders as people have different goals and wish to cash up at different times. You can buy them back at a later date or find someone else to buy into your company.
The use of shares as a form of creative finance. You can sell a share of a company to raise additional capital.
Limiting liability is another advantage.
Company and trust structures work well for me however everyone’s situation is different and if you are limiting yourself to 1 or 2 IPs or buying with the intention of selling for capital gain then it’s probably not worth worrying about.
Cheers
JeffIbuy
You can still achieve the benefits of the difference between the company tax rates and individual tax rates by transferring the income to a company as beneficiary but without the disadvantage of the loss of the CGT discount. In fact your logic is flawed because the longer you hold the asset the greater your capital gain will be and the larger the loss of the CGT discount. Remember one day you will want to realise this asset and someone in a trust will pay 50% less CGT than if you held it in a company.
Transfer of shares will bring in the general value shifting (GVS) provisions and this could trigger CGT (even though you havent sold the property). Nasty. A carefully worded trust deed will include a whole range of beneficiaries so it will generally not be necessary to add an additional shareholder and the disadvantages of doing so. Imagine having to pay CGT on an asset you havent even sold. This can occur when you issue new shares. The market value substitution rules come into play. So no it is not a simple case of a share transfer.
Who is going to want to buy shares in a company that holds an investment asset such as a property. Not anyone who doesnt want to take on the company’s liabilities. Did you realise that most listed property vehicles are trusts. I can think of a few that are trust Westfield Property Trust, General Property Trust…cant recall any companies.
Trusts can easily be structured for limited liability. In fact with a corporate trustee a number of limited liability strategies can be put into place.
I have purchased property in my company name ie ABC Investments as trustee for AB Trust Fund.
If I sell the property after 12 months what are the taxation implications if the profit is paid directly into my super fund and would this be the best way to maximise the tax paid?Mareeta,
The profit would be earned by the AB Trust and then a distribution made to your Super Fund.
Unless there is something unusual happening in your fund, the Super Fund would then include 33.3% the capital gains distribution received as assessable income.
Super Funds pay a flat 15% tax on their net taxable income.
The other comments on companies are well made. Perhaps an important area that was not touched on in the newsletter are the possibilities of CGT roll over (i.e. deferral).
In the US you can defer the payment tax if you roll the property gain into another property deal. This concession is not available in Australia (for real estate), but is, in some circumstances, available for businesses.
As always, see your accountant for specific advice as needs be.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
If you are conducting a “business” then a trust will still be eligible for any or all of the small business CGT concessions ie. the active asset exemption, small business rollover provisions and retirement exemptions. However certain tests in all cases must be applied to obtain these concessions (even for companies) and if the assets are held in a discretionary trust then it is essential to ensure that you have a CGT complying trust and ensure that you discuss matters with your accountant well before seeking to avail yourself of any of these exemptions. There are a whole myriad of rules and ways of structuring things that need to carefully considered. Pros and cons of any approach taken. This is quite a complex area of tax law and certainly not something that I could fully cover in an internet forum.
Another advantage of trusts is when you get into the area of cloned trusts and how they can be used to avoiding triggering CGT and if the deed is carefully drafted also avoid stamp duty on transfer of the asset. Again a highly complex area of tax law and something you should discuss with your accountant.
We have purchased our own home using our family trust. We have since learned that this might be a bad idea. Can anyone provide any pointers on who we should talk to regarding un-doing this? Or any other advice? We’d ideally like to take it out of the trust and put it in our own name.
Coastymike,
I’m not sure if you are aware but in NZ we are not subject to capital gains tax on property (yet) unless you are considered to be “trading” in property or a developer. The key factor here is your “intention” when you buy.The buy and hold strategy I adopt is more of a “never sell” strategy – hence, even in Australia CGT would not become a problem. The properties I do sell tend to be non-performing properties therefore capital gains are normally at the lower end of the scale.
As for the selling of shares in a company to raise capital – I do this occasionally for specific property investments and a new company is formed. A couple who had invested with me, recently separated and their shareholding was handled by their solicitors with little involvement from me – it may have been different if all three of us were on the title. The tax situation in their case would be the same either way.
Deferring part of your tax liability. In NZ company tax is 33% and the highest personal tax bracket is 39% for earnings over $60k – why pay 39 when you can pay 33% until you personal income is reduced eg retirement. I believe Aust Company tax is 30% to the highest personal tax rate of 48.5% – as you said you can set up a company as a beneficiary of the trust.
Personally I have a much higher goal than a few IP’s therefore the tax advantage of the particular structure is not the top priority. The ease of using the structure as a management tool, avoiding bureaucracy, raising finance, limiting liability from a domino effect etc etc are all factors in achieving my ultimate goal.
I use trusts and companies to protect my assets but as I said, everyone has different needs. You just have to remember not to miss the opportunity because of the requirement to pay tax.
Cheers
JeffJeff,
Thanks for that. Sometimes it is easy to forget that we have other forumites from NZ. My comments purely relate to Australia and the tax regime here so thanks for providing some valuable insight into the NZ environment. I plead total ignorance on NZ tax law so it is always good to be learning something new.
Hi Steve
Thank you for your reply and knowledge in relation to my query on the 30 April
Kind Regards
MareetaOriginally posted by geoff_b:We have purchased our own home using our family trust. We have since learned that this might be a bad idea. Can anyone provide any pointers on who we should talk to regarding un-doing this? Or any other advice? We’d ideally like to take it out of the trust and put it in our own name.
Geoff
How did you come about buying your PPOR in a trust? and why do you think it a bad idea now?
If you transfer it, there will be stamp duty and possibly CGT to pay.
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
Was at Masterclass in Brisbane and keen to try a reno and sell within 12 months and possibly part fund a long-term buy and hold.
I understand many use the company as trustee for trust setup. Is it common for people to use the company to do short-term projects such as renos or developments or should this be a strictly ” no trading company ” when it is acting as a trustee?
Should short-term projects done in a completely seperate structure?
Would appreciate anyone’s thoughts. Best wishes
Markus
Markus
I have heard an accountant suggest a new structure for short term project like renos. This is because the ATO could class you as a ‘trader’ ad the properties as trading stock. If this happened you could lose access to the 50% CGT discount. You would not want to lose the discount on the buy and holds, so a separate structure would help ensure that doesn’t happen.
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 the info Terry.
Hi there,
I currently have a company set up in conjunction with my brother, but it does very little trading. In order to improve the company’s balance sheet, I was considering using my building skills to renovate properties. I am aware of the CGT problems etc, but if our intention is not to buy and hold but to turnover x number of properties per year, would the profits then be classified as income rather than capital gain? If anyone has some experience or advice, it would be most appreciated. I don’t want to head down the wrong path. Thanks.Jon
Jon,
A seperate structure for undertaking developments were the income will be treated as revenue rather than capital is wise.
However a trust will provide a higher degree of flexibility with respect to distributions. Although the company will pay a tax rate of 30% on profits it may be possible to in fact pay a much lower rate by using a trust. You may decide to distribute to children (if under 18 penal rates will apply but still some benefit), wife, brother, sister, mother, father, etc. Sure you could setup all these people as shareholders but what if you leave someone out or you want to remove a shareholder and transfer their shareholding to other people (the General Value Shifting Provisions may come into play).
Similarly what if you want to transfer the renovated property to a related party or even yourself and minimise your stamp duty obligations on the transfer. This is very difficult with a company but very easy with a unit trust.
Jon,
A seperate structure for undertaking developments were the income will be treated as revenue rather than capital is wise.
However a trust will provide a higher degree of flexibility with respect to distributions. Although the company will pay a tax rate of 30% on profits it may be possible to in fact pay a much lower rate by using a trust. You may decide to distribute to children (if under 18 penal rates will apply but still some benefit), wife, brother, sister, mother, father, etc. Sure you could setup all these people as shareholders but what if you leave someone out or you want to remove a shareholder and transfer their shareholding to other people (the General Value Shifting Provisions may come into play).
Similarly what if you want to transfer the renovated property to a related party or even yourself and minimise your stamp duty obligations on the transfer. This is very difficult with a company but very easy with a unit trust.
Have a chat to your accountant but generally a trust will provide a higher degree of flexibility that other structures.
Could you have an Australian Trust and Corporate Trustee could be NZ company, so you don’t pay CG, if you wish to sell?
Any Comments?If you live in australia you will pat tax at the australian tax rate.
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