complete novice needing advice!

[james565]

I wasn't sure if I should post this in Commercial property so apologies if I am in the wrong section!! I just wanted to get some advice on a path forward.

I currently own the freehold to a motel valued approximately at $1.1 million (its a small budget motel in a rural location). The property and business has no loans or mortgage on it at all. the property is owned by my business (pty ltd) (900 k) and the business (motel name etc) is owned by my own personal family trust ( valued at 200k). I am the only shareholder in both of these entities. I pay myself and my domestic partner a annual wage each of 45k. the motel makes approx. 250k in sales with a net profit of around 150k approx.

I pay the family trust rent of approximately 50k as per my accountants advice.

the motel is a modest place and we make a modest income from it. however given the fact that I am not paying any loans out, I feel that perhaps I can work out a way of buying an investment property (small apartment or townhouse ideally) and use the business to help pay off the loan on the investment as I figured I can put the loans down as a 'business expense'.

should I be looking at buying a property through my own personal account, my business or via my family trust? I assume I would be able to somehow offset some of these loan costs via the business/trust setup?

I have no other investments or income other than the motel and really not very clued up in the world of investments - as you can probably tell from reading this! i'm very good at running a motel but when it comes to business i'm god awful terrible!

if anyone has any advice or can steer my in the right direction it would be appreciated.

(the investment property would be around $300k and I would be able to put down 100k of my own money for it leaving a loan amount of 200k).

 

[mins]

I would seek tailored financial advice preferably from someone well versed in Trust structures and tax.

 

[Scott No Mates]

James, a few things that you might consider:

• Is the motel developed to the maximum under the council's LEP/DCP? That is, can you put on a second storey or a couple of additional rooms?
• Is the motel working to the maximum capacity for the size? ie what is your occupany rate? Can this be improved?
• By the sounds of it, the motel is of a size which is an easy 2 person operation. Are you willing to take it to the next level which will require casual or additional staff?
• Are you willing to take on a second motel in a different area whilst selling or leasing out the current business? (But retaining ownership of the buildings)
• Do you have a business plan for the motel? (How do you intend to grow the business/sustain cashflows)

But back to your original question - Commercial property.

Yes, you could most likely borrow against this property for further investments elsewhere (there are plenty of good commercial properties on the market at any point in time), with a limited budget, you would be looking at either a small regional commercial property (eg shop or small office).

Alternatively, you might consider investing through your super (if you have any) or start contributing towards your/your partner's super having them manage all aspects of this money.

 

[Terry_w]

I wasn't sure if I should post this in Commercial property so apologies if I am in the wrong section!! I just wanted to get some advice on a path forward.

I currently own the freehold to a motel valued approximately at $1.1 million (its a small budget motel in a rural location). The property and business has no loans or mortgage on it at all. the property is owned by my business (pty ltd) (900 k) and the business (motel name etc) is owned by my own personal family trust ( valued at 200k). I am the only shareholder in both of these entities. I pay myself and my domestic partner a annual wage each of 45k. the motel makes approx. 250k in sales with a net profit of around 150k approx.

I pay the family trust rent of approximately 50k as per my accountants advice.

the motel is a modest place and we make a modest income from it. however given the fact that I am not paying any loans out, I feel that perhaps I can work out a way of buying an investment property (small apartment or townhouse ideally) and use the business to help pay off the loan on the investment as I figured I can put the loans down as a 'business expense'.

should I be looking at buying a property through my own personal account, my business or via my family trust? I assume I would be able to somehow offset some of these loan costs via the business/trust setup?

I have no other investments or income other than the motel and really not very clued up in the world of investments - as you can probably tell from reading this! i'm very good at running a motel but when it comes to business i'm god awful terrible!

if anyone has any advice or can steer my in the right direction it would be appreciated.

(the investment property would be around $300k and I would be able to put down 100k of my own money for it leaving a loan amount of 200k).

Hi James,

You have some mistakes in your wording above:

"I currently own the ...."
No you don't. It looks like a company owns the land. I have a client personally sued because he used imprecise comment like this. They sued him instead of the company.

It appears that the land is owned by the Pty Ltd company, not the business. The business is probably owned by your family trust (or the trustee of the trust).

You cannot be a shareholder is a trust, but must be a beneficiary.

You or the trust or the company could buy an investment. But this is not a business expense. However interest on the loan could be deductible to the owner so it will work out the same. But it sounds like you think you may be able to claim the purchase price as an expense - which you cannot because it is a capital asset. you cannot offset the purchase costs, but just costs such as interest, rates, insurance etc.

You should not buy in the same entity that you trade in because if the trading entity is sued it could lose the investment. Probably not a good idea to buy in the pty ltd company either because you own the shares so not good from a tax perspective and may not be good from a land tax perspective either depending on where you are buying.

Would need to know much more details to decide on structure for the investment.

 

[alexlee]

I currently own the freehold to a motel valued approximately at $1.1 million (its a small budget motel in a rural location). The property and business has no loans or mortgage on it at all. the property is owned by my business (pty ltd) (900 k) and the business (motel name etc) is owned by my own personal family trust ( valued at 200k). I am the only shareholder in both of these entities. I pay myself and my domestic partner a annual wage each of 45k. the motel makes approx. 250k in sales with a net profit of around 150k approx.

I pay the family trust rent of approximately 50k as per my accountants advice.

There are a number of confusing comments here. 'My own personal' family trust doesn't mean anything. You can't be a shareholder in the trust, you might be talking about being the shareholder of the trustee company.

If the company is paying 50k rent to the trust, who is the trust distributing this to?

 

[qprjames]

hi scott..... to answer your questions....

Is the motel developed to the maximum under the council's LEP/DCP? That is, can you put on a second storey or a couple of additional rooms?
Is the motel working to the maximum capacity for the size? ie what is your occupany rate? Can this be improved? HAVING A SECOND STOREY MIGHT BE AN ISSUE AS WE ARE TECHNICALLY IN A BUSH FIRE ZONE SO CFA RULES ARE STRICT. OUR OCCUPANCY RATE IS 85% HOWEVER WE CLOSE DOWN FOR 2 MONTHS OF THE YEAR AND GO OVERSEAS ON HOLIDAY MEANING OUR ANNUAL OCCUPANCY IS NEARER 70%
By the sounds of it, the motel is of a size which is an easy 2 person operation. Are you willing to take it to the next level which will require casual or additional staff? YES IDEALLY WE WOULD LIKE FULL TIME MANAGERS SO WE CAN HAVE MORE TIME OFF, BUT WITH ONLY 10 ROOMS I'M NOT SURE IF WE CAN QUITE AFFORD TO HALF 2 FULL TIME STAFF MEMBERS EACH YEAR.
Are you willing to take on a second motel in a different area whilst selling or leasing out the current business? (But retaining ownership of the buildings)
Do you have a business plan for the motel? (How do you intend to grow the business/sustain cashflows) YES I WOULD LOOK AT A MOTEL IN AN ALTERNATIVE AREA. THERE ARE MANY MOTELS OUT THERE COMPLETELY UNDER PERFORMING WITH HUGE POTENTIAL WHICH I WOULD LOVE TO WHIP INTO SHAPE!!

MY SUPER AMOUNT IS VERY SMALL (20k MAX) AS I AM NEW TO OZ, AND SINCE ARRIVING HAVE MAINLY BEEN DOING CHARITY WORK.

 

[qprjames]

Hi Terry,

To answer the below message.....

Hi James,

You have some mistakes in your wording above:

"I currently own the ...."
No you don't. It looks like a company owns the land. I have a client personally sued because he used imprecise comment like this. They sued him instead of the company.

It appears that the land is owned by the Pty Ltd company, not the business. The business is probably owned by your family trust (or the trustee of the trust).

You cannot be a shareholder is a trust, but must be a beneficiary.

You or the trust or the company could buy an investment. But this is not a business expense. However interest on the loan could be deductible to the owner so it will work out the same. But it sounds like you think you may be able to claim the purchase price as an expense - which you cannot because it is a capital asset. you cannot offset the purchase costs, but just costs such as interest, rates, insurance etc.

You should not buy in the same entity that you trade in because if the trading entity is sued it could lose the investment. Probably not a good idea to buy in the pty ltd company either because you own the shares so not good from a tax perspective and may not be good from a land tax perspective either depending on where you are buying.

Would need to know much more details to decide on structure for the investment.

I do own both the land and the business...the freehold and it is owned outright. I bought the land with the family trust and i bought the motel business with my pty ltd. My accountant suggested that i have a family trust and a business to stop anyone suing me and taking everything! so i created the family tust and the business myself. i would normally have otherwise just stated up as a sole trader.

The Motel pays the family trust rent, every quarter....which is then redistributed to me personally which we declare as a 'director loan repayment'.

I hope that makes it clearer.....

 

[alexlee]

I do own both the land and the business...

No, you don't. The company owns the business and the trustee own the land. From what you're saying I'm inferring that the trustee is a company. Is it a different company to the one owning the business?

I bought the land with the family trust and i bought the motel business with my pty ltd.

You have to start distinguishing between 'I', the Family Trust and the Company. It's very important that you understand that they are different legal entities.

My accountant suggested that i have a family trust and a business to stop anyone suing me and taking everything! so i created the family tust and the business myself. i would normally have otherwise just stated up as a sole trader.

Makes sense, so that if someone sues the company, the land should be protected.

The Motel pays the family trust rent, every quarter....which is then redistributed to me personally which we declare as a 'director loan repayment'.

So your taxable income is approx 95k (45k wages + 50k trust distribution), putting you in the next tax bracket. Why would you do this? You would pay less tax if you distribute 25k to yourself and 25k to your partner, assuming your partner has no other income.

 

[Scott No Mates]

Thanks James,
can you find someone who will take the reins for the 2 months that you are closed? This way, you aren't paying for additional staff but are also covering your closed period (obviously only if it is viable to do so).

Building in bushfire zones is permitted though you may have to install additional control measures eg stainless steel flyscreens, drenchers, rainwater tanks doubling as water reservoirs (with pumps of course). So don't dismiss this option.

 

[qprjames]

No, you don't. The company owns the business and the trustee own the land. From what you're saying I'm inferring that the trustee is a company. Is it a different company to the one owning the business?

sorry perhaps i got a bit mixed up. i assumed i am the trustee....i am the only one listed on the family trust and have full control of the trust. the trust owning the land is a compltly different entity to the company which owns the business.

You have to start distinguishing between 'I', the Family Trust and the Company. It's very important that you understand that they are different legal entities.

sorry i am still learning these things

So your taxable income is approx 95k (45k wages + 50k trust distribution), putting you in the next tax bracket. Why would you do this? You would pay less tax if you distribute 25k to yourself and 25k to your partner, assuming your partner has no other income.

i don't wish to distribute any extra amount to my partner.....he is not my 'business partner' and he is already paid a sufficient $45k wages. i have not asked my accountant but i assumed that i woudnt have to pay tax on the $50k trust distribution.....

 

[Terry_w]

i don't wish to distribute any extra amount to my partner.....he is not my 'business partner' and he is already paid a sufficient $45k wages. i have not asked my accountant but i assumed that i woudnt have to pay tax on the $50k trust distribution.....

You would have to pay tax on any distribution received from the trust. It would be income and go on top of your other taxxable income.

 

[alexlee]

You need to sit down with your accountant and review everything. Who the trustee is, what your roles are in relation to the trust (shareholder of trustee company? Director of trustee company? Appointor? Settlor? Sole beneficiary? All of the above?)

Then go through your personal tax return and see what you taxable income is. Should be about 95K less deductions.

All your assumptions are likely wrong.

 

[qprjames]

You need to sit down with your accountant and review everything. Who the trustee is, what your roles are in relation to the trust (shareholder of trustee company? Director of trustee company? Settlor? Sole beneficiary? All of the above?)

Then go through your personal tax return and see what you taxable income is. Should be about 95K less deductions.

All your assumptions are likely wrong.

alexlee you are probably spot on. i have made assumptions on everything....i have never run a business before so i didnt really pay too much attention to the initial set-up....my accountant is a friend of mine so i just assumed he would set it up in the most efficient way......

but no i haven't sat down with him to get a basic understanding of everything. to be honest i haven't really needed until now and he sorts out all my tax affairs, so i can con concentrate my time solely on the running of the business.
i will make it one of my new years resolutions to get a better understanding of how everything is set up.
thanks for telling me how it is! the truth can be brutal sometimes!!!!

 

[Terry_w]

And who owns the shares in the company? If it was you and you went bankrupt then shares would fall into the hands of creditors who would then control the business. Does the trustee of the trust have a lease agreement with the company? Under what terms could the company's lease be terminated, for example. If you did go bankrupt, which may be unlikely but still a possibility, then the trust could lease to a new entity which could run the business.

 

[alexlee]

alexlee you are probably spot on. i have made assumptions on everything....i have never run a business before so i didnt really pay too much attention to the initial set-up....my accountant is a friend of mine so i just assumed he would set it up in the most efficient way......

but no i haven't sat down with him to get a basic understanding of everything. to be honest i haven't really needed until now and he sorts out all my tax affairs, so i can con concentrate my time solely on the running of the business.
i will make it one of my new years resolutions to get a better understanding of how everything is set up.
thanks for telling me how it is! the truth can be brutal sometimes!!!!

There might be nothing wrong with the setup. That doesn't mean you don't need to understand it. In any case, your accountant being your friend just means he has your best interests at heart. That's no proof of competence or knowledge. How do you know it's an efficient setup if you don't understand it?

If you only find out when you "need" to, you're toast, because it's usually something bad. Death, lawsuit, divorce, etc.