IT Contractor/Business tax incentives?

[dynamite]

Are there any tax incentives for buying an investment property as a business entity when contracting?

If someone could give me a basic guide to what are the best stratgegies I would appreciate that.

My current boss was saying most people he knows on high rates put all their money into an IP and at end of year their tax is minimal to pay. How does this work?

i would say a fair chunk is in the high tax rate. Currently paye so looking to go business enity for IP benefits.

 

[geoffw]

I think it could be a very definite disadvantage having an IP in the same structure as the company you are working in- and I believe there's better structures for holding an IP than a company (eg, trusts).

What your boss is talking about is having a property, and having expenses of the property reduce your taxable income. These will be incurred expenses (interest, rates etc) and non-incurred expenses (depreciation).

 

[coastymike]

Agree with Geoff. From an asset protection perspective it would be unwise to have passive, low risk assets combined with your business, high risk activities. Say you were sued in your business capacity then if the investment property is held by the same entity it will be an asset available to those who are suing.

If you are also operating through a company, pty ltd then that entity will not be eligible for the 50% capital gains tax discount on sale (provided you sell after 12 months) which could have a significant tax impact.

Better to use your earnings to gear into property through other structures.

 

[dynamite]

so i guess i should seek advice from accountant now on trusts etc. how do i get the profits from the trust to myself in the long term though?

anymore advice would be appreciated.

 

[geoffw]

so i guess i should seek advice from accountant now on trusts etc.

Yes, absolutely. Or spend some time going through the forum- there's been lots of stuff posted. Or get Dale's "Trust Magic" manual.

how do i get the profits from the trust to myself in the long term though?

Profit is merely distributed to you- and to any other beneficiaries. If you are married, this can be distributed in a way which can cut down your tax.

Though it will probably be a number of years before youi start making any profit.

 

[coastymike]

You will also need to discuss the Personal Services Income rules with an accountant to see how they apply to your situation.

 

[dynamite]

its so easy just to go paye, but i really do wonder if i can get more value out of my money as a business entity.

there just isnt any information on the net which discusses this as a guide line.

i was thinking, u dont get the 50% CGT discount when buying as a company do u?

 

[coastymike]

Dynamite,

No companies do not get the 50% CGT discount. There is a wealth of information online but like anything sifting through the data and trying to apply them to your own circumstances can be time consuming and in some cases you can still get it wrong.

That is why I always believe it is best to go see a professional. Yes you will pay dollars for the advice but if you go to someone experienced in these matters then you can rely on the years of training, reading and studying that they must do as part of their profession.

It's a bit like fixing your own car. Sure you can spend the time reading the technical manuals, tinkering and possibly doing a great job. However that same time could be spent doing other things that you are good at and enjoy (unless you enjoy fixing cars). Forums like these always provide general advice but can never be specific to your own circumstances as there are always too many variables involved.

For some people it is easier to stay as an employee but many, myself included, can't stand working for someone else when we get the same enjoyment and rewards working for ourselves. I have a few clients who are SAP consultants and gave up their $150K salaries to start their own consulting practice 5 years ago. They were very afraid to take this risk, particularly with families involved, but decided they had enough of "working for the boss". They now have a company that employs 10 people and turns over a little over $10M per annum. Well worth the risk in their case. In my experience very few people become wealthy working for someone else. It is usually the other investments they have which generate the wealth. I have seen business owners on the other hand make great successes. I will qualify this by saying that you do need to choose something that you are passionate about. The money will follow.

 

[dynamite]

yeah its a hard slog working for other people.

i been in the IT and telecommunications now for about 11 years. done everything from IP switching to software development. Mainly working in business analysis (technical) at the moment. Should probably be project managing with my diverse skill set and experience, but long hours, prob worth it if contracting.

have thought about consulting in chanage management (system impact).

hmmmm, i might target a specific skill from now on and look into selling that skill in a consulting business sense.

 

[dynamite]

a quick question about professional advice. who do i turn too?

i mean financial advisors to me are really only in the game for money, and most seem to be product pushers or have very little real world experience.

is an accountant a better person to speak to about building wealth and tax strategies?

 

[trajik]

Dynamite,

If you're wanting business/tax advice then you'll defintely need to speak to an accountant, whereas if you want financial advice, you'll need to speak with a licensed financial adviser, which may also be an accountant if they have the licence. An accountant without a financial adviser licence can advise you with regard to things like structures, tax strategies, but they can't legally advise you about which "financial product" suits you.

With your contracting, you'll usually be better off using a structure like a trust as you can then employ yourself and take advantge of the many benefits, whereas a PAYE employee doesn't have much luck with tax concessions.

 

[geoffw]

With your contracting, you'll usually be better off using a structure like a trust as you can then employ yourself and take advantge of the many benefits, whereas a PAYE employee doesn't have much luck with tax concessions.

This is where Dynamite would need specialist advice. It's not that simple.

CoastyMike has mentioned the "Personal Services Income rules". Basically, according to by rusty understanding, this means that if somebody derives all of their company income from personal exertion (say as an IT contractor) then the ATO may choose to treat company income as personal income.

(I'd appreciate any clarification from the experts on this).

It's all a minefield.

But where to turn?

In terms of what sort of structure to set up, I'd be looking at an accountant. A financial advisor's role is more of how to invest money (or equity) you already have. An accountant's role is more how to set yourself up in the most effective way.

An accountant who knew about trusts and property would be ideal. the accountant would not have to be in Brissy. There are several accountants in this forum- Dale in Melbourne, CoastyMike or NickM in Sydney for instance.

Or go to an accountant in Brisbane, just find out about their knowledge of trusts and investment properties first. My former accountant recommended I did not buy property through a trust at all- that cost me a lot.

 

[coastymike]

Exactly Geoff. The personal services income rules are complex and basically you need to go through a flowchart of questions to determine whether

a) the income is from personal services; and
b) the income that is personal services income is from a business structure.

More complex rules apply for professionals such as medical practitioners, etc and there are a number of ATO rulings and cases covering these situations. Mry is an accountant from Queensland who could assist with these issues.

Basically if you are not conducting a personal services business then you can operate through whatever structure you like but profits cannot be retained in that structure (company) or distributed to beneficiaries other than yourself (trusts). A number of deductions are also denied for those deemed to have personal services income. There are some specific exemptions regarding superannuation (Ryan's case). The ATO has realised a lot regarding PSI at http://www.ato.gov.au/businesses/content.asp?doc=/content/43885.htm&page=2&H2

 

[Mry]

i mean financial advisors to me are really only in the game for money, and most seem to be product pushers or have very little real world experience.

I haven't met many people who feel otherwise, so your sentiments are hardly uncommon. I have two Financial Planners in Brisbane who I trust and I'll post their names and phone numbers tomorrow for you. They pass the test for me as advisors because they (a) refund commissions to you and (b) recommend property purchases.

EDIT
Mark Laszczuk
Navra Financial Services 3003 1350

Steven Travis
Travis Financial Services 3263 3350