Property Investing using a company

The same serviceability requirements are required for companies, as individuals. They will need to see 1/2 years trading income, or if it’s just acting as a holding company the income of the director/s.

Obvious downside is lack of CGT discount, though there is the upside of max taxes at the company rate.

I have written about the benefits of using a company before. The major benefit in NSW is that a company gets a separate land tax threshold where as a trust gets no threshold. This could save nearly $7k per year in land tax which makes up for losing out in CGT when sold. Also a company can retain income and pass on franking dividends down the track so potentially zero tax.

Why it may be a good idea to use a company to own property

Companies are generally not recommended for holding growth assets in. This is mainly because:

1. No access to the 50% CGT discount
2. Income does not retain its character – e.g. capital gains incurred by the company come out to the shareholders as dividends and no capital gains.

But companies can be good structures for the ownership of property in several ways.
1. Asset protection – liability is generally limited to the company itself and the directors and shareholders are generally not liable for the debts of the company.

2. Ability to retain income. unlike trusts a company can hold its income, pay tax on it and distribute it at a later date.

3. Ability to own the shares via a discretionary trust which will aid asset protection if the individual were to go bankrupt.

4. Land tax threshold is available in most states – this is a biggie in NSW.

Take for instance a person who has used up their land tax threshold. They will pay land tax in their own name or if the property is owned by the trustee of a discretionary trust.

I have done some modelling with a hypothetical property valued at $500,000 with the land being 50% of the value of the property, CPI at 4% (land tax threshold increase) and values increasing by 6% pa.

If the property was owned for 10 years and then sold it the approx capital gain would be $339,606

An individual at the top tax rate would pay approx $79,807 in tax. Plus approx $60,987 in land tax over the 10 years = $140,794

A DT distributing to an individual on the top tax rate would be the same.

A DT distributing to a company would mean approx $101,882 plus land tax of $60,987 = $162,868

However, a company would pay $101,882 (30%) in tax plus there would be no land tax at all as the property is under the threshold.

However to be fair the trustee of the trust may be able to distribute to 5 individuals who each have no other income. In practice I have never seen this happen, but it is a possiblity. This could mean there is no tax payable at all, other than the land tax of $60,987

But if the trustee distributed all the gain to a non working spouse then they would pay $54170.17 in tax plus the land tax of $60,987 = $115,157

Summary Income tax and land tax payable:
Individual owner at top marginal rate before the gain = $140,794
DT flowing thru to a person on the top marginal rate = $162,868
DT flowing thru to a person with no other income = $115,157
DT flowing thru to 5 persons (adults) with no other income = $60,987
Company = $101,882

But it gets better.

Say the shares of the company were owned by a discretionary trust. The trustee of the trust could receive franked dividends from the company. There would be a tax credit for taxes the company has paid. This money could then come out potentially totally tax free to the 5 adults who are not working, assuming they are beneficiaries of this trust. That means no land tax at all and no income tax at all.

But even if there are no non working adults the company can retain the income and once the person or persons behind the company has stopped work they can cause the company to make a dividend payment to them, via the trust, when their income is low enough to maximise the use of the franking credits. It is therefore also possible that they could end up getting the money out of the company totally tax free and land tax free.

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get your own legal and tax advice before trying this at home

If the company is controlled by the members of the superfund then no the SMSF couldn’t acquire residential property owned by the fund – only business real property.

Cattleya wrote:

Tracey, no worries, the more the merrier.

Terry, many thanks much appreciated. I will contact you trough your company.
err.. which one do you prefer, the Loan Experts or the Property Tax Solutions, please?

Thanks,
Catts

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Depends what you are after. Setting up companies is legal advice – my law firm http://www.finlaw.com.au. The Loan Experts Pty Ltd is a mortgage broking firm.