Merry Xmas all. We have a question for all the professional investors who mainly use a strategy of buy, renovate and sell. What sort of structure do you use for this?
Is it setup and ran as a business so you can claim all expenses or do you find a trust is more beneficial? The advantages and disadvantages of these would be greatly appreciated.Thanks,
DeanHi,
It is likely that the ATO will view your activities as a business given your intention to ‘trade’ properties.
That is, your choice of investment structure (that is, the entity) will not be able to get around the tax treatment of the transaction.
For example, it doesn’t matter if you use a coy or a trust, the profit will be taxed and not subject to CGT.
However, from an asset protection point of view, a trust may be better as it allows you to split income while also securing assets.
It would be wise to have an accountant look over your situation and provide an opinion.
All the best,
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Steve, what do you mean by the profit will be taxed but not subject to CGT?
Any profit is subject to a CGT, regardless of whether you set up a trust or a company, isn’t it? If you set up as a trust or company you simply limit the CGT to 30%.
PS. Got your book as a Xmas present yesterday. Will read it over the next 2 weeks whils I’m on Leave.
We find comfort among those who agree with us – growth among those who don’t. Frank A. Clark.
It will certainly be wise to talk to a professional about this, but my understanding is:
– If you have the property for 12+ month, you only pay CGT on 50% of the profit if you are an individual, partnership or trust. Companies do not get this concession.
– If you have a trust you have a lot of creative ways of splitting your income limiting you to max 30% tax.
– Trusts allow for ultimate asset protetion
– One major disadvantages of trusts are the setup and running costs .
-The other major disadvantage is that you cannot transfer losses to benificaries, you can only claim them against future earning. This could be crucial.
Overall I believe it is the best structure, but I am not sure how the ATO regards this if they deem you to be traders rather than investors.
Good Luck[xmas]Bridgebuff, yes that’s my understanding too. The part I am not sure about is how the 30% max limit is achieved when you use a trust. I know you can distribute the income to other family members or whoever you like, but some of those people may be in tax brackets higher than the 30%, so how is it that the 30% capping is achieved? I am confused as to where the number “30%” comes from. Thanks for your help.
We find comfort among those who agree with us – growth among those who don’t. Frank A. Clark.
G’day Chief,
I hope you enjoy the book!
CGT is really only applicable if no other tax already catches the profit.
In this case, because the profit will be taxed as income (i.e. a trading profit), CGT does not apply and therefore there is no discount. Hence the entire profit must be included as assessable income.
I hope this is a little clearer. I will write an information alert on it in the New Year.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
What is a ‘coy’ that Steve mentioned?
What Steve said about CGT is my understanding also.
We’re in the business of buying and selling also and my understanding is we don’t pay CGT because buying and selling property is our business. We pay income tax on the profits we make like any other business.
It wouldn’t make sense that if Joe Blogs who runs a fish and chip shop only pays income tax on his profits but because we decide to run a business which involves property, that we should have to pay income tax on our profits as well as CGT.
Hope this makes sense.
Cheers,
Kim Anand
[email protected]“Money Can’t Buy you Happiness but it Does Bring you a More Pleasant Form of Misery”
My understanding is that CGT does not apply if you are classed as a trader. A trader is someone that makes money by buying and selling. In this case there would still be tax to pay, but it would be all income tax – no 50% discount.
Whichever way you go, I think a trust of some sort is certainly worth looking at. It will still allow tax minimisation and asset protection.
Trusts can help cap tax at 30% as they can distribute to a company as a last resort. Company tax rate is a flat 30%.
Terryw
Discover Home Loans
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Originally posted by Terryw:
Trusts can help cap tax at 30% as they can distribute to a company as a last resort. Company tax rate is a flat 30%.While certainly theoretically possible, wouldn’t that defeat the purpose of a trust entirely?
Although i certainly don’t profess to be an expert in this area, if someone was happy enough to be taxed at a flat rate of 30% wouldn’t they be better off as a company rather than a trust? Granted the costs of establishing a trust are minimal, but setting up a company just to be a beneficiary of a trust would seem kind of pointless….
My personal view (not advice) than unless you have limited potential suitable beneficiaries or have very high turnover, that a trust would be a considerably better option.
Hi All,
I think the confusion around the 30% tax capping in a trust has to do with the beneficiariess, ie.are they individuals or a company. If the beneficiaries are individuals, the profits of the trust are distributed to the beneficiaries who then pay tax at whatever their marginal tax rate is. In a discretionary trust, you would channel more income to the lowest income beneficiary. However if the beneficiary is a company, then a flat tax rate of 30% applies. In this case, appreciating assets do not attract the 50% CGT discount when sold.
Steve – the spiel for Wealth Guardian mentions that you should not put appreciating assets in a company structure. Does this include company as beneficiary in a trust? My understanding that to achieve true asset protection in a trust, you should have a company (non-trading shelf company) as trustee of the trust, rather than an individual, but the beneficiaries can be individuals. Why do some people have a company as beneficiary? especially now that you need to earn more than $75K per annum to pay more than 30% tax anyway.
Thanks, Luisa
Thanks for all the feedback, especially you Steve.
I’m still a little confused as to why you just couldn’t register a ABN and run it like any business. This would be a lot cheaper than setting up a company or trust and would it be possible to claim all the renovations as expenses. Also you or your partner could become an employee of the business which would help in qualifying for finance with the banks. Am i on the right track here or have i missed something.
Thanks,
Dean
But running this as a business has many risks associated that you can avoid in a trust. Imagine something goes wrong. If you trade as an individual, you could loose everything, including your personal home.
You do not need to have one partner as an employee in a trust. At the end of the year you can just choose how you want to distribute the profits from the trust to minimize tax. Eg One partner has a job and earns $50,000 and you made $80,000 profit with investing. You can now split the profit $15,000 and $65,000, so that both partners stay under the $70,000 mark and the top marginal rate.Originally posted by Bootlace:Originally posted by Terryw:
Trusts can help cap tax at 30% as they can distribute to a company as a last resort. Company tax rate is a flat 30%.While certainly theoretically possible, wouldn’t that defeat the purpose of a trust entirely?
Although i certainly don’t profess to be an expert in this area, if someone was happy enough to be taxed at a flat rate of 30% wouldn’t they be better off as a company rather than a trust? Granted the costs of establishing a trust are minimal, but setting up a company just to be a beneficiary of a trust would seem kind of pointless….
My personal view (not advice) than unless you have limited potential suitable beneficiaries or have very high turnover, that a trust would be a considerably better option.
Hi Bootlace
What is the purpose of a Trust? One purpose is asset protection, another is tax minimisation, but the ‘official’ reason is to pass or hold assets for the benefit of a class of beneficiaries.
In a discretionary trust, the trustee has the flexibility of distributing income/capital to a wide range of beneficiaries. So normally the trustee would distribute to all the beneficiaries who would pay tax at a rate of less than 30%, then they would consider distributing to a company or individuals and paying more tax. Most trust deeds allow a company to be set up at a latter date and still qualify as a beneficiary. So with trusts you have the option.
If you had the company owning an asset, then the profits would have to be distributed in accordance with ownership of the shares – very inflexible.
Terryw
Discover Home Loans
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Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Originally posted by Dean and Kristy:Thanks for all the feedback, especially you Steve.
I’m still a little confused as to why you just couldn’t register a ABN and run it like any business. This would be a lot cheaper than setting up a company or trust and would it be possible to claim all the renovations as expenses. Also you or your partner could become an employee of the business which would help in qualifying for finance with the banks. Am i on the right track here or have i missed something.
Thanks,
Dean
Dean
I think you have missed something,as the term ‘business’ is a bit of a misnomer. A property can only be owned by a person or a company (or a combination). ‘Business’ is not a legal entity. Registering an ABN in your own names means that you are a sole trader. ie you the individual is the business. You cannot employ yourself, even if you could it wouldn’t make any sense, as you would be paying yourself a wage, and claiming a deduction while at the same time paying tax equivalent to the deduction! Also, having an ABN doesn’t mean you can claim more deductions. It still depends on the purpose of the expenses.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.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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