Hi All – I thought I'd make my first-ever post a tricky one
I own/run an overseas (USA) Internet business, which could if necessary be relocated to a non-listed country which would enable all my income ("Branch Profits") to be classed as non-assessable non-exempt. That may not be relevant, but is worth keeping in mind.
I bought a block of land a couple of years ago ($400k), which is almost all paid off. We are now ready to build a combination business/residential premises (luxury home, with an entire level dedicated to staff offices and engineering workspace etc). It should cost about $630,000 excluding GST to build.
I'm trying to get my head around the best way to structure my income and the build. The business is able to "bring home" around $250,000 per year ($85k for day-to-day expenses, leaving $165k to service my goal.)
Scenarios I've been looking at include:
A) I put everything in my Wifes name (since everyone seems to do this, and there's some asset protection involved). This of course means I've got to get the money out of the business (wages or dividends), so between us, after the tax+medicare on our income, we're handing out around $76,000 in tax every year, and paying $63,000 in GST on the build. I guesstimate it would take about 12 years to pay off the mortgage. If we sell it one day, we get to keep all the sale monies.
I do everything through the business (poor asset protection I know – but read on). In future, the business (which will use the lower level commercial space) will rent the upper level (house) to me for the "reasonable rent" of $500/wk – (I estimate the personal income tax I'll have to pay on the "wages" I'll need to draw to cover this "rent" is about $8500 per year). Now – I am guessing that since the business is building this for itself, and with the goal of renting the upper levels, that the cost of the construction is a "business expense"? If so – it would theoretically reduce my assessable business income tax to nothing for the life of the mortgage. In addition, I should theoretically be able to claim back all the GST as well. Assuming all this is "doable" – we'll pay tax on our normal living expenses ($15k/yr) and tax on rent ($8500) only – which means the mortgage will be paid off in under 5.5 years. If we sell it one day, some tax on any capital gain kicks in, and the proceeds of the sale is "stuck" in the business still of course (i.e. subject to personal income tax if "withdrawn").Are there any rules about this kind of stuff?
I presume it's "allowable" for my business to build and own my home – isn't it? If so, how would "reasonable commercial rent" determined/policed/etc? I mentioned that the land is almost paid off already. Presently, we've paid tax on this already, so it's not much effort to ensure the land itself *is* owned in my wifes name. If we were to do this, and my company signed a contract with my wife to lease the land upon which our house will be built – how does this change the "reasonable commercial rent" policy? Can we just pay (say) half the regular rent instead? Are there rules that compel a private person to rent land to a business at "reasonable commercial rates", and declare that on income tax returns? In other words – can "fring benefits" cancel each other out, or is there some rule forcing us to make up some numbers in order to then be taxed on those rates?
Is it really legitimate to claim back GST through my business, when it's planning on renting the house to me later?
Are there any laws about transferring business assets to individuals at retirement, or any other situations ("winding up"?) where the premises ownership moves to an individual with less harsh tax consequences?
If it really is true that I'm going to pay this off in less than half the time – why don't more people seem to be doing this?
I have also been wondering about the "asset protection" issue. At what point does our government decide that income "belongs" to one company or another? My customers send me money via PayPal for use of an entirely virtual on-line service. Nobody signs contracts etc, and it's up to me to instruct PayPal which bank account to send the money to. If I deposit the money into the accounts of "Company X", even though that company is otherwise unrelated to my online business – is there some point where beancounters are going to step in say it should "belong" to someplace else, and tax me 30% up front?
Thanks for reading this far, and for for any/all comments/suggestions/criticisms etc you care to offer!
Have you got a New York Lawyer/Tax Specialist you could send the book to ?
thecrest | Tony Neale - Statewide Motel Brokers
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Hi Chalkey.
There is so much detail in your question above….
Congratulations on the success of your business.
And it sounds like you intend to build a very nice home/office combo.A few thoughts from me, for what they're worth.
1. Is the land zoned for combo business/residence? Council may not allow you to build this.
I would ask this question first. If they allow it, they may put onerous conditions eg parking for clients, circular driveway for traffic management, operating hours etc. If they don't, then the rest of your questions are irrelevant.
2. Who's name is the land currently in? To change it, you will have to pay stamp duty.
If it is in joint names, you will have to pay half (probably current) value to change it to your wife's name. Or full duty to put it in your business name.
3. If you sell it one day, (eg when you retire if not sooner), who will want to buy it?
If it is not saleable, that could be a problem.As for all the legal and tax ramifications, too hard for me!
May I suggest you get legal and accounting advice, and you may save a lot of money!
For the size of your costs, the fees will be inexpensive comparably.quickchick
Hi "quickchick",
Yes – good thinking, that zoning issue. The property is one acre zoned rural (top of a mountain). There are council rules that I am able to abide by, so yes – all is fine on that front. If I want to expand in future, I expect that's not impossible: A nearby firm of architects have a similar setup to what I want – and they've got a lot of staff.
Quote:And it sounds like you intend to build a very nice home/office combo.I hope so!! I'm not so young anymore, and all my friends have jobs and houses etc – while all I've got is my leisure and businesses (and an empty acre so far). I've got some catching up to do!!!
The land is currently owned by my trust. It was during the course of my most recent tax return that I came to notice that my instructions to my accountant didn't seem to match up with what they'd set up (they promised asset protection, and I see a huge company loan accumulating to the trust. That's obviously not what I was expecting when I said "asset protection"). Anyhow – to cut a very long story very short – I've spent about 20 hours over 2 months talking to about 10 different accountants so far, and I am seriously less than inspired by any of them so far. It's just starting to dawn on me that these folks perhaps don't know too much about any of this kind of thing – as bizarre as that may sound? It *seems* relatively simple to me; shuffle some paper, and cut the build cost of my house by *over* 50% all-up. All those accountant meetings later, and I still can't figure out why none of the earlier ones mentioned this, nor why the most recent one didn't endorse this (relatively new #
idea of mine when I raised it.Possible future sale isn't something I'm too worried about (nor really interested in; the home is suitable for retirement) – I showed a photoshop mockup to an agent and he said he'd have no problems selling it. Good idea to think of that possible catch too tho.
There are various issues with running the business overseas and tax. The ATO will want to assess you on your world wide income and now it is in the USA you will get a tax credit for tax paid there because of the double tax agreements. If you move it to a 'non listed country' (a tax haven) it is possible but you will still need to declare your interest in the business – whether it is owned by a company with nominee shareholders or a special trust etc. It may be possible do lie to the ATO and get away with it but you need to be careful – look at project Wickenby.
For the house, it sounds like it is in your name now. If you transfer it to your wife there will be little asset protection because of the clawback provisions of the bankruptcy act. See the case of Cummins who was a barrister that transferred his half of the house to the wife in 1973 and later went bankrupt (after not lodging a tax return for 45 years).
If your US company wants to buy the house it can, but there is little asset protection if the company is sued for a business related matter. If the company is providing you with living space then there are fringe benefit issues. There is also loss of CGT exemption and land tax exemption as it can't be your PPOR. You would also be up for stamp duty on the transfer to the company. There may also be corporation Act issues such as directors duties not to personally profit at the expense of the company etc.
There may also be stamp duty issues on transferring it to the wife. I think the exemption may only apply if there will be both of you on title.
For the business question it would be the party contracting with the buyer who gets the income. So if your company owned an online site and the client was paying for viewing videos for example it would probably be the owner of the site who would get the money. But the owner of the site could pay licensing fees, or sublease the site out etc and get some income diverted elsewhere pretty easily.
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
Hi Terryw – WOW – thanks for such a detailed reply!!!
Overseas tax: if I did this, I'd obtain a private ruling beforehand; I'm not interested in anything illegal! My situation is extremely unique – my income is 96.5% untainted, and my business is a PE: 100% located in and automatically operated from overseas – qualifying me for the "Branch Profit" treatment (section 23AH) or the summary here: http://tinyurl.com/288kbed – the treatment applies equally to listed and unlisted countries, with the exception that the term "Permanent Establishment (PE)" is defined by the foreign countries legislation in listed countries, rather than by our legislation (clarifyable by a private ruling) for all others.
I think this is not relevant however; profits that accumulate in my business untaxed can only "get out" via unfranked dividends or PAYG, so they end up getting taxed as normal anyhow. My assumption is that if the "profits" get spent by the business on house construction – they're not "profits" anymore – they instead reduce my assessable income down to zero – so it makes no difference whether the money was non-assessable in the first place, if there's none left over to be assessed on at the end?Ownership: the land is owned by a discretionary trust presently – my wife and myself are the beneficiaries. Interesting to hear about Cummins!! Stamp duty on transferring this doesn't bother me too much; I can work out how much that will cost, and I am hoping to be able to work out how much benefit might come from any transfer, so I'll just choose whichever option "costs less". (eg: If, hypothetically, it's possible and legitimate for us to pay no rent on the house, in exchange for the business being allowed to construct on my Wifes land; this might save us $8.5k/year in the tax on the rent we're not having to "pay". That's in the same ballpark as stamp duty anyhow, so that small upfront cost saves us loads in long term expenses. I said "hypothetically" deliberately – I'm pretty sure this exact situation would *not* be legitimate; but I'm hoping to find out what *would* be legitimate, and how much it would cost).
US company: I don't have any established US structure – merely "servers in racks." That said – should I *be* sued by an American, and loose, I'm of the vague understanding that if I merely ignore it and choose never to go to America – there's nothing they can do about it. I say "Vague understanding" – this advice was accurate (and cost me $30,000 in US legal fees to obtain) 8 years ago. I'm *assuming* it's still current.
Terryw wrote:If the company is providing you with living space then there are fringe benefit issues.Can you elaborate on what these issues are, and in particular, can you think of situations where it would be permissible for the business to charge the tenant less rent (in some way that avoids the tenant or business paying extra tax of course)? Do you know any good "fringe benefits for dummies" resources I could peruse?
CGT exemption loss: Yes – I'm aware of this drawback – and the even bigger problem of the entire sale amount being "stuck" in the business and subject to full marginal tax if "extracted" later.
PPOR and land tax: I'm a newbie, and didn't even know land tax existed. It seems that in QLD, no tax is payable for land worth less than $350K (companies) or $600K (individuals). I assume their idea of VOLA roughly matches the councils idea (on my rates notice), so I'm way below those thresholds already. Thanks heaps for mentioning this one!
Terryw wrote:There may also be corporation Act issues such as directors duties not to personally profit at the expense of the company etc.Yikes! This sounds like a deal-breaker. Do you know more about this? Myself and my wife are 50%/50% company shareholders, and I'm the director. Do these "Issues" apply to private companies? By "Issues" – do you mean that ASIC or someone could sue me (deal breaker!), or, do you mean that a if a shareholder sued me – I'd loose? (non issue – I'm not going to sue myself). Is this anything that anyone could "find out about" if neither shareholder ever complained about it?
Terryw wrote:For the business question it would be the party contracting with the buyer who gets the income.Interesting answer; I own a patent, which could relatively easily be transferred to a new company to build the house, so licence fees might make sense – and that might hopefully provide some asset protection too.
It sounds like you have a great depth of experience. I'm very grateful for your answers – thanks!!!!
Hi Chalkey
Sounds like you have a real good business. You should really get some expert advice as there are a number of things you can do, legally, which can assist you in asset protection and tax reduction. eg you may be able to legally cease to be a resident in Australia for tax purposes while still being able to spend a lot of time here. You could chose another country with a much lower tax rate. Some countries treat foreign trusts as exempt from income tax – and other countries treat foreign royalty income, for example, as income which is exempt from tax. So you could possibly set yourself up in country X, live in country Y, be a tax resident in country Z and receive royalty income from your patent in country W (ran out of letters sorry, so going backwards) – and you may be able to reborrow the money from your company in country W and claim a deduction.
Anyway, I think you misunderstand something. If your company is earning $100,000 pa profit and you build or buy a house for $100,000 this does not mean your company taxable income reduces to nil. Although you may have spent $100,000 this is not classed as an expense, but a capital cost, and capital costs are not claimable up front in one hit, but over a number of years – 40 years for houses at 2.5% pa.
For the directors duties have a quick look on the ASIC site and look into the Corporations Act. There is probably little chance of getting sued if you and the wife are the only directors.
eg s180(1) duty to exercise power and duties with adegree of care and diligence of a reasonable person
s 181 the duty to act in good faith in the best interests of the company
improper use of information
improper use of position
conflct of duties etc
etc
There are also many common law duties. this is a very complex area of law.There can be civil and criminal penalties for breaching the corporations Act.
You must remember a company is a separate legal person and you should not treat it as its assets were your own. There are cases where a minority shareholder (family) took court action because of something. Sometimes there may be problems that only become known if the company where to go in liquidation – then the liquidator may start asking questions such as why were the 2 shareholders living in the company house on less than market rents. etc. Problems could arise in the future too if shares are passed on or sold to another family member and then questions are asked etc.
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
As for FBT this is also a complex area which i don't know much about.
But, basically if you receive a benefit from your company the company or yourself may have to pay extra tax on the value of the benefit received. Some things are FBT exempt, such as laptops used for work, but most things aren't -such as use of a company car for personal trips.
Best to ask an accountant this one.
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
For the patent you should look at transferring it to a separate entity, trust maybe, and then licencing it. This will give the entity royalties and it will be quarantined from the other assets – subject to the clawback provisions of the bankruptcy act of course. The entity may even be a foreign one.
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
"Capital Cost" – you're spot on once again – I had no idea about any of this, and the law makes it crystal clear that I can't get any useful deductions when constructing anything with my residence in it. Actually – not really "crystal" at all – that's some of the worst gobbldegook legislation I've ever seen… but it's clear to me nonetheless. http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s43.1.html
I'm very glad you pointed this out – I'm back to the private ruling in favor of my overseas "Branch Profits" treatment in order to make any sense out of this. If anyone's interested – I'll come back in in a few months, and post the outcome of my application and any comments/experiences to go with it. I've another appointment in 7 days with another accountant about this stuff again, so I'll post an update after that too.
I just had another thought… FIRB
I wonder if there's any advantage to my overseas establishment being the actual entity that constructs the house? The general purpose of overseas investment is described on their web site: "The Government seeks to ensure that foreign investment in residential real estate increases the supply of dwellings and is not speculative in nature." – so I clearly qualify. I think there's also some chance that GST doesn't apply either? I don't think suppliers are supposed to charge GST to overseas buyers.
Man this stuff can get complicated!
http://www.firb.gov.au/content/real_estate/residential.aspI can't even begin to imagine what happens in regards to capital gains or even income tax in the case of an eventual sale either…
I can't see any benefit in using your overseas company in owning the house. Only disadvantages.
If you want the business to pay for some of the costs, then this can be done by diverting income to a new trust for example.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
Constructing from abroad seemingly changes some rules – so for example – while Australians need to pay "commercially reasonable rent" to live in a company house – that may not be the case in the foreign countrys tax system. Same goes for capital gains tax and company/income tax on proceeds of an eventual sale. There are a stackload of disadvantages though; it would be tough to set this up without it looking like a "scheme" (anti-avoidance problems), paperwork doubles, accounting costs double, all the rules triple (not only needing knowledge of Aus tax+building law, but also Foreign laws for these, as well as the additional area of foreign investment laws/regulations).
The idea only occurred to me because the source income for the house is already coming from overseas.Quote:If you want the business to pay for some of the costs, then this can be done by diverting income to a new trust for example.My best understanding of Div 7A is that trusts are no longer (since 2008) beneficial in terms of costs or tax releif? To move money from a business into a trust, it either needs to go out as a loan (needing eventual repayment, plus interest, all taxed), or be distributed to the beneficiarys (tax at full personal marginal rates). Do remember though: I am not an expert.
You could, for example, divert royalty income to a trust. Once the money is in a trust, a discretionary trust it can then be diverted to other individuals and entities if they are also beneficiaries of the trust. The trust doesn’t pay tax but the beneficiaries will. So you could have one trust which is under taking a separate business of rental properties which are running at a loss. The loss of this trust can be offset by a distribution from another trust with an income, so that no tax will be paid on this income. Many other things are possible too. Thats why you need to work out a complete structure probably with multiple entities – so segregate investments and make it flexible in terms of taxation.
I am not sure about the foreign company rules, but your company may be required to register with ASIC if it is conducting a business here or property real property. I am unsure if this would also make it subject to the Corporations Act or not.
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
Wow – 2 trusts – now *that* is interesting. Given as what I've already got is a discretionary trust owning the land, it also sounds significantly less expensive to set this up than anything else as well. Ignorring for a moment the capital gains and tax-on-resale issues: this kind of advice (if it works out!) stands to cut $1M off the price of what I'm doing. Words can't express how grateful I am for all this kind help!!
I do everything through the business (poor asset protection I know – but read on). In future, the business (which will use the lower level commercial space) will rent the upper level (house) to me for the "reasonable rent" of $500/wk – (I estimate the personal income tax I'll have to pay on the "wages" I'll need to draw to cover this "rent" is about $8500 per year). Now – I am guessing that since the business is building this for itself, and with the goal of renting the upper levels, that the cost of the construction is a "business expense"? If so – it would theoretically reduce my assessable business income tax to nothing for the life of the mortgage. In addition, I should theoretically be able to claim back all the GST as well. Assuming all this is "doable" – we'll pay tax on our normal living expenses ($15k/yr) and tax on rent ($8500) only – which means the mortgage will be paid off in under 5.5 years. If we sell it one day, some tax on any capital gain kicks in, and the proceeds of the sale is "stuck" in the business still of course (i.e. subject to personal income tax if "withdrawn").
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