Company structures

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From: Con W


Can anyone tell me of their experience in trying to set up a company structure to build a property portfolio. I have asked a couple of accountants and they always want to push me towards buying in my own name and negatively gearing. Many investment books I have read suggest using company structures. I'd love to hear input from anyone else. Also can anyone suggest a good PI accountant in Sydney?
 
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From: Need a Carpenter? Top Notch carpentry


A very worthy topic for discussion. R.Kiyosaki discusses this issue in his books as a way to shelter investments from litigation, but thats what public liability insurance is for right! The costs for setting up a company and maintaining the books can be expensive. I would appreciate anybody with experience on this issue to make comments.



Regards

Michael
 
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Reply: 1.1
From: Cameron James


You can buy companies off the shelf so to
speak these are previously listed
companies that have failed. You can't
change the name but it is relativley cheap
to use. Accountants have this information.

I am more interested with the pre-tax
dollars aspect of investing through a
business. Your strategy could move
along much faster.

You could also get creative with business
expenses, as these are tax deductible.

I think with more knowledge in this area
you could become very creative with
investments and finance in general.

Don't take my word for it, I am also
interested in this strategy but I am by no
means qualified to give advice on it....yet!

Cam.
 
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Reply: 1.1.1
From: Craig A


I have a building company in SA. I have looked at buying investments through the company but without going into great detail find that banks aren't really interested in lending to companies. Eg. You need very large deposits before they start considering lending a company money. Also the costs of running the company are high, again at least $1000.00 a year. You also have to pay $1000.00 start up cost if you start your company through dial-a-shelf.
I've found that all suppliers I deal with no get me to sign a directors guarantee so if anything goes wrong they have access to my personal assets anyway.
The only benefit I can see with forming a company is that potentially you could rent your own house from your company. This could be good if you have many positively geared properties then you could pay minimal rent on your house thus balancing the books so to speak.

Regards
Craig
 
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Reply: 1.1.1.1
From: Sim' Hampel


Advice given to me by an accountant: you definately do NOT want to hold IPs in a company that trades. I can't remember the specifics as to why, but I believe that it is something to do with the lack of asset protection. If you do want to use a company to hold IPs, I believe you would hold them in a trust with the company as trustee and that company would be non-trading. You would of course be a director of that company and hence have control over the company and the trust.

Someone correct me if I'm wrong.

 
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Reply: 1.1.1.1.1
From: Owen .


I've just signed the papers to set up exactly that structure - IP's held in a Discretionary Trust with a Company trustee. I will be creating additional trusts later too. My reasons for this are -

1. a company doesn't provide much asset protection
2. even with trusts being taxed at the company rate, it's still less than my marginal rate. Positive income IP's only need apply.
3. income distribution flexibility via trust(s)
4. one trust for trading, one for long term investments.
6. the company has no assets or activity. It's just a trustee so it's very cheap to run.
6. tax benefits. Claiming business activity costs, deferring tax payments, carrying, losses etc. All of this helps my cash flow which will accelerate my portfolio growth.

Yes, I have given a personal guarantee using my own home as security (just as I have done for my previous IP's) but the goal is to rapidly remove the reliance on my house and income as soon as possible. As for the additional costs. Yes it cost a few thousand to set up plus on going costs. Hmmmm - spend a few thousand to make many millions of dollars. Sounds like a sound investment strategy to me.

I'm not doing anything like selling my house to the company and renting it back or transferring my current IP's to the company. It would incur necessary costs and they are available for security if I need them anyway. My home is freehold and I like it so I'm staying. I'm using my current income for the tax breaks on my current IP's so that will stay the same until I can get out of the rat race. And I should be able to do that a lot faster with a company structure to work with.

Just my opinion and my strategy. Choose your own goals and decide what will work for you.
 
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Reply: 1.1.1.1.1.1
From: Andrew _


I have also been advised to setup the structure you are implementing but can you tell me the difference between a Discretionary Trust and a Family Trust?

Andrew
 
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Reply: 1.1.1.1.1.1.1
From: Owen .


A Discretionary Trust allows the profit to be distributed to anyone named in the trust deed in any amount.

eg I'm a high earner on the highest marginal tax rate so any income I receive from the trust is taxed at 47%. My partner has no income so up to $6000 can be distributed to her tax free, up to $20,000 @ 17% etc. So if the trust made $12,000 profit, my partner could get the distribution and get taxed $1020 whereas if I took it I would be taxed $5640. Big difference.

Anyone can be named in a discretionary trust including your kids, other trusts and companies too. The distributions have to made once a year (when you decide) but losses can be offset for future years. Not everyone named has to be distributed too. It's easy to add or remove recipients from the trust deed.

If the postponed changes go ahead, discretionary trusts would be taxed like companies (30% as of 01/07/01) and the distribution franked like dividends.

Following on from the example, if I took a distribution I would pay an additional 17% tax only (30% already paid by the trust), whereas if my partner took a payment she would get a 13% tax rebate. Also I think the changes meant that you didn't have to distribute the profits every year. You could wait until the time was right.

I think (don't quote me coz I didn't really ask) a Family Trust you can only name family members as able to receive distributions.

Obviously check it out for yourself but that's what I found out that was important to me.
 
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Company structures /to Owen

Reply: 1.1.1.1.1.1.1.1
From: Con W


Thanks so much for this feedback and the additional info on trusts. That was another area I wanted to ask about. From your experience can you see a way of going directly into a company structure for your first PI? Or do you think it is a matter of getting a property under your own name, gaining some equity and then moving on from there?
 
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Reply: 1.1.1.1.1.1.2
From: D R


Owen,

Excellent answers to the Company/trust dilemma.

You have covered just about everything and probably saved people a few hundred dollars in fees from their accountants who would have offered the same advice.

Cheers

DR
 
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Company structures /to Owen

Reply: 1.1.1.1.1.1.1.1.1
From: Owen .


The answer to that is up to you. Although I am using my house and other IP's as security for the company, this is just to secure a small LOC loan to be used for deposits. The IP's bought through the company will be secured against themselves. If I can trade a few properties then the company accounts will get a positive balance and the LOC will no longer be needed.

If you don't have any security then any loans will be secured against your income just as it will be if you are buying in you own name. A company is up to you and your accountant to discuss.

Again, this is just me - get your own qualified advise for your own situations.
 
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Reply: 1.1.1.1.1.1.2.1
From: Owen .


No I think every one should still spend their own money on specific advise for them. This is just basic overview stuff and my opinion.

Glad it's helping though.
 
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