Corporate Trustee instead of Personal

[WilliamB]

Hi all,

I know there are some tax and business structuring gurus here so I am sure this will be a simple query:

We have just bought our second development block through our second DFT and I am trustee of both.

We are looking at doing this more regularly (3-5 per annum) and transitioning it into our own "business" allowing us to step back from wage-slavery over time.

I have a fairly simple grasp of the benefits of Company vs Trust ie 30% tax, retained earnings etc, but am wondering if there are other considerations of using a company as the trustee of a number of DFTs, all which hold different development sites/builds etc within.

One of the main reasons we are considering this mainly is so we can run everything through the company, which would allow us after some time, to borrow in the name of the company, meaning (assuming we are successful) we would be able to step back from traditional work, but still be able to service new debt.

This might be ridiculous, and there may be some much more simple avenue, however I am interested to hear your thoughts.

Thanks in advance,

 

[Terry_w]

This is a complex area.

Some points on your post:
If a company acts as trustee this won?t change the tax side of it ? ie no 30% tax as it would be if a company acted in its own right.
No ability to retain earnings (unless you want the trustee to be taxed on the top marginal rate) by havinng a company trustee ? you need a company as beneficiary.
A company could be trustee for multiple trusts but it probably shouldn?t for a few reasons. One is finance.
If the trustee is a company you will need to have the company as borrower. No transitioning over time. Ability to get finance won?t change. This also won?t change your ability to stop work and still qualify for finance.

And, it is not a very good idea to be a trustee of a trust that does a development.

 

[WilliamB]

Thanks Terry,

All points taken.

In respect to your last point, re: not being a good idea to be trustee of trust that does a development, may I ask you to elaborate a little?

Thanks,

 

[Terry_w]

Thanks Terry,

All points taken.

In respect to your last point, re: not being a good idea to be trustee of trust that does a development, may I ask you to elaborate a little?

Thanks,

A development is extremely risky. The owner of the land will be required to contract with various parties during the development and this creates potential risk if there are disputes as litigation could result. Using a company will usually limit this liability to the company (and assets of the trust if the company is a trustee).

Many other reasons as well.

 

[WilliamB]

Thanks Terry,

I need to speak to my accountant. This is the structure they suggested, which does not fill me with confidence.

Thanks,

 

[Terry_w]

Thanks Terry,

I need to speak to my accountant. This is the structure they suggested, which does not fill me with confidence.

Thanks,

Choice of trustee is a pure legal issue so best to speak to a lawyer about that and the accountant about tax.

 

[Aaron_C]

Technically there is no difference (legally speaking) from being a personal trustee or a corporate trustee because you don't own the land in a beneficial sense. However, due to the complexities of legal action and the tendency of lawyers to go after all your personal assets in a collapse, having a property in your name (especially a development site) can make you a target and potentially bring the trust assets at risk even though they are not 'yours'. This is why having property in separate corporate trustees is recommended as there is no doubt who the legal / beneficial owner of the property is, and is quarantined from your own personal assets.

Having said that, there are some instances when being a personal trustee can be better. I personally think if you are conducting a business or a development, you are nuts to have a personal trustee, but then again, I don't know your situation.

 

[Terry_w]

Other benefits include no need to change trustee if:
- You become legally disabled
- bankrupt
- incapacitated
- insane
- die

Also easier to pass control by passing on shares of trustee company and changing directorship. No need to change title holder.

 

[D.T.]

Also easier to pass control by passing on shares of trustee company and changing directorship. No need to change title holder.

Is this a CGT or stamp duty event?

 

[Aaron_C]

Is this a CGT or stamp duty event?

No it isn't since there is no change in beneficial ownership.

 

[WilliamB]

Thanks all, awesome responses.

We won't be changing trustee for the current projects, but will definitely look to adjust it for the following ones. Will be a nightmare to reapply for loans etc now.

I should have clarified, that the developments are simple splitter block two house builds on 809s, not millions of dollars so we are very comfortable with the risks here, however points definitely taken about considering other structure which is I guess why I was asking. We are not in a hurry to take on anything more complex or risky that these at the moment.

Going forward, would I be correct in saying using a company structure would be the best for these undertakings? We could then retain earnings, create an income track record, provide vehicle etc along with the other planning benefits you mentioned above.

Can I set up a DFT as sole shareholder of the company, so when we do issue divvy's, the trust can then disperse income to family members?

I understand this is a generic sort of query, and I will of course further consult my accountant about this.

You guys are legends.

Thanks,

 

[Terry_w]

Going forward, would I be correct in saying using a company structure would be the best for these undertakings? We could then retain earnings, create an income track record, provide vehicle etc along with the other planning benefits you mentioned above.

Depends how you define "best".

Companies don't get the 50% CGT disccount (which may not apply to developments anyway).

Other ways to do it:
- Corporate trustee of a discretionary trust with a company as beneficiary
- Unit trust with units owned by a DT. this has many advantages over using a DT.

 

[Terry_w]

Is this a CGT or stamp duty event?

Wouldn't generally be a CGT event. Transferring shares is a dutiable transaction in NSW and some other states (state laws). However the company would own nothing beneficially so there wouldn't be any duty anyway - usually.

change of trustee oculd result in stamp duty in some states such as NSW depending on the wording of the deed.

 

[coastymike]

Be very careful changing trustees of a trust without a lawyer. In nsw there is specific wording that must be included in the change of trustee forms otherwise stamp duty applies. Just recently had a client come on board whose accountant didnt know this. 30k in stamp duty later. Ouch.