Benefits of Trusts & Companies

[Nathan22]

Hi guys

We are just starting out with our investment journey. My wife and I currently own two dwellings (a duplex property) in Joint Names. (in QLD)

We are now planning our investment strategy and want to get our structure right the first time. I do have a good accountant but just wanted to get some feedback before I run everything past him.

Our goal is to buy as many properties as possible and hold them. I am a builder so hoping to renovate wherever possible to create some equity and gain a higher Cash Flow. We will hold as many of these properties as we can, maybe selling the odd one along the way when needed. We will be buying throughout Aus wherever we find a good investment.

I would like to limit our liability incase of a law suit at any point. Is this still possible by holding properties in different companies?
If I was to have 5 CF+ properties in 1 company does the company pay tax on that income at 30% or does it add to my income as the director and I pay the tax at the relative tax rate?
There is no capital gains concession for companies if properties are held for longer than 12months? (i am planning to hold the properties anyway. But if I was planning to build a new home rent for a year and then sell I should do it as an individual?

And then there is the land tax. I have learnt alot already on this forum, so thanks everyone! I see that buying properties in trusts to keep within the land tax threshold seems popular. Do trusts have the same perks as companies? capped tax bracket of 30%? or does tax and liabilities etc fall back on the individual?

When applying for a loan to purchase property through a trust or a company do my wife and I go Guarantor for the loan? Does this not look as appealing to a lender?

I have so many questions but this is getting a bit long winded for you all. Really appreciate any feedback!

Nath

 

[Terry_w]

Hi guys


I would like to limit our liability incase of a law suit at any point. Is this still possible by holding properties in different companies?

Shares are property that are available to creditors. i.e. the company is a separate legal entity to the director and won?t be directly effected if the director gets sued (independently) but if the shareholder is sued shares can fall into the hands of creditors. A discretionary trust holding the shares will be good asset protection in this regard

If I was to have 5 CF+ properties in 1 company does the company pay tax on that income at 30% or does it add to my income as the director and I pay the tax at the relative tax rate?

Company pays tax on its taxable income, at 30%. But the company may employ someone so it has no income. Or the company may pay the tax and then make a franked dividend to the shareholders who would get a franking credit for the tax paid by the company. Any income received by individuals would go on top of their other income.

There is no capital gains concession for companies if properties are held for longer than 12months? (i am planning to hold the properties anyway. But if I was planning to build a new home rent for a year and then sell I should do it as an individual?

That?s right. A company would pay 30% of capital gains where as an individual would pay a max of half the top tax rate plus medicare.

And then there is the land tax. I have learnt alot already on this forum, so thanks everyone! I see that buying properties in trusts to keep within the land tax threshold seems popular. Do trusts have the same perks as companies? capped tax bracket of 30%? or does tax and liabilities etc fall back on the individual?

When applying for a loan to purchase property through a trust or a company do my wife and I go Guarantor for the loan? Does this not look as appealing to a lender?

Trusts get land tax thresholds in QLD, but not in NSW. Land tax rules are completely different in each state so you need to assess ownership structure based on where you are going to buy.

Trusts also generally don?t pay tax. Income flows through them out to the beneficiaries who pay tax.

You should read the recent thread that I started on ?why it may be a good idea to use a company to own property?

 

[Paul@PFI]

The biggest problem with a company is its low 30% tax rate being a distortion.

Eventually the shareholder/s wants to access the accumulated wealth in the company. That's a dividend and can result in the final tax rate being higher than the top tax rate.

 

[Nathan22]

Shares are property that are available to creditors. i.e. the company is a separate legal entity to the director and won?t be directly effected if the director gets sued (independently) but if the shareholder is sued shares can fall into the hands of creditors. A discretionary trust holding the shares will be good asset protection in this regard


Company pays tax on its taxable income, at 30%. But the company may employ someone so it has no income. Or the company may pay the tax and then make a franked dividend to the shareholders who would get a franking credit for the tax paid by the company. Any income received by individuals would go on top of their other income.

A franked dividend? So once the Company pays the tax, shareholders or directors can then take their share of the profits (franked dividend ?) which has already been taxed, so this amount does not add to the directors taxable income?

That?s right. A company would pay 30% of capital gains where as an individual would pay a max of half the top tax rate plus medicare.


Trusts get land tax thresholds in QLD, but not in NSW. Land tax rules are completely different in each state so you need to assess ownership structure based on where you are going to buy.

Trusts also generally don?t pay tax. Income flows through them out to the beneficiaries who pay tax.

So what are the benefits of purchasing a property through a trust? besides the land tax benefit? If this is in your recent thread just let me know as Im about to flick through and find it.

You should read the recent thread that I started on ?why it may be a good idea to use a company to own property?

Thanks heaps Terry, you're a wealth of knowledge!

 

[Nathan22]

The biggest problem with a company is its low 30% tax rate being a distortion.

Eventually the shareholder/s wants to access the accumulated wealth in the company. That's a dividend and can result in the final tax rate being higher than the top tax rate.

Can you please explain this further Paul?

I was under the impression the money can only be taxed once. When this is through a company it is at 30% and then directors and or share holders take the remaining profits without paying more tax?

Nath

 

[Nathan22]

Shares are property that are available to creditors. i.e. the company is a separate legal entity to the director and won?t be directly effected if the director gets sued (independently) but if the shareholder is sued shares can fall into the hands of creditors. A discretionary trust holding the shares will be good asset protection in this regard


Company pays tax on its taxable income, at 30%. But the company may employ someone so it has no income. Or the company may pay the tax and then make a franked dividend to the shareholders who would get a franking credit for the tax paid by the company. Any income received by individuals would go on top of their other income.



That?s right. A company would pay 30% of capital gains where as an individual would pay a max of half the top tax rate plus medicare.


Trusts get land tax thresholds in QLD, but not in NSW. Land tax rules are completely different in each state so you need to assess ownership structure based on where you are going to buy.

Trusts also generally don?t pay tax. Income flows through them out to the beneficiaries who pay tax.

You should read the recent thread that I started on ?why it may be a good idea to use a company to own property?

Hi Terry,

Im new to this and seem to have stuffed up my last message to you. I quoted your message but I somehow included my questions to you inside the quote.

Could you please have a look through to find them.

Nath

 

[evan1875]

http://somersoft.com/forums/showthread.php?t=107280

 

[Paul@PFI]

Can you please explain this further Paul?

I was under the impression the money can only be taxed once. When this is through a company it is at 30% and then directors and or share holders take the remaining profits without paying more tax?

Nath

You wish. "Taking profits"...Maybe a loan deemed to be a dividend and unfranked altogether. Shareholders have been subject to double taxation since day dot. PJ Keating bought in imputation to address it however its still not perfect.

The company makes a profit of $100. Tax is $30. It then ultimately pays the $70 to shareholders as a dividend with credit for the tax already paid....Ultimately the taxpayers is assessed on the $100 at their marginal tax rate. The 30% company rate is a short term illusion.

So lets think of that $70....Its taxed to the shareholder as $100 incl the co tax credit. If their marginal rate is 49% $49 tax is due. Less the $30 = $19 tax.

So $19 divided by $70 = 27%.

The taxpayer's $100 income has been subjected to 30% + 27 % tax. ie 57% when the top rate is 49%. OUCH.

And some people want trusts taxed like companies...

 

[Terry_w]

Thanks Evan

Also see http://somersoft.com/forums/showthread.php?t=89302&highlight=unit+trust
for the 17 potential advantages of a unit trust

 

[Nathan22]

So $19 divided by $70 = 27%.

The taxpayer's $100 income has been subjected to 30% + 27 % tax. ie 57% when the top rate is 49%. OUCH.

And some people want trusts taxed like companies...[/QUOTE]

Wow. I was unaware of this. Ouch alright!

Thanks for clearing this up for me.

Nath

 

[Terry_w]

You wish. "Taking profits"...Maybe a loan deemed to be a dividend and unfranked altogether. Shareholders have been subject to double taxation since day dot. PJ Keating bought in imputation to address it however its still not perfect.

The company makes a profit of $100. Tax is $30. It then ultimately pays the $70 to shareholders as a dividend with credit for the tax already paid....Ultimately the taxpayers is assessed on the $100 at their marginal tax rate. The 30% company rate is a short term illusion.

So lets think of that $70....Its taxed to the shareholder as $100 incl the co tax credit. If their marginal rate is 49% $49 tax is due. Less the $30 = $19 tax.

So $19 divided by $70 = 27%.

The taxpayer's $100 income has been subjected to 30% + 27 % tax. ie 57% when the top rate is 49%. OUCH.

And some people want trusts taxed like companies...

But in reality the tax on that $100 is still $49 = 49%

But with the company it could be much less, possibly zero by delaying dividends.

 

[yahoo]

The calculation would be $100 divided by $19 = 19%
plus tax to the company 30%

Putting money into a company will work if you have high income one year and lower in the following

 

[Terry_w]

The calculation would be $100 divided by $19 = 19%
plus tax to the company 30%

Putting money into a company will work if you have high income one year and lower in the following

It could also work further down the track - franked dividends paid out say 10 years after the income was earned.