Mixing activities in a Ltd Co

Hi

I don't think the Tax Battles Manual mentioned this but if I set up a limited liability company to act as a property trader to buy, renovate, onsell properties the gains would be classed as profits and taxed at company rates. The question: If I decide to hold any of these properties and rent them out for 12-18 months then sell them do I get capital gains tax relief of 50% or is that only available to individuals holding property? If the 50% rule also applies to companies would the ATO prefer me to setup separate companies for the two activities ie one company for trading and one company for investing? Would there be a problem as far as the ATO is concerned if both business activities were carried out by the same company?

Thanks in advance.

Mike
 
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The 50% concession is available to individuals and trusts, but not to a company. From a tax viewoint only, long term holding of an appreciating asset is least effective in a company structure (at least until you take into account the expenses you can claim).

Perhaps I should say from a CGT viewpoint, companies are less effective than trusts or sole trading.

Bob
 
Thanks Bob,

Okay, let's say, that you hold the property long term in a trust. The trustee is a company owned by the investor. Who should be the beneficiary - the company or the investor? Can the same company purchase buy to holds on behalf of the trust and operate a trading business as well? Or is this too messy from an accounting viewpoint? Is it simpler to keep the activities in separate entities? Is it cost effective?

Regards, Mike
 
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Originally posted by Mike
Okay, let's say, that you hold the property long term in a trust. The trustee is a company owned by the investor. Who should be the beneficiary - the company or the investor? Can the same company purchase buy and holds on behalf of the trust and operate a trading business as well? Or is this too messy from an accounting viewpoint? Is it simpler to keep the activities in separate entities? Is it cost effective?

Regards, Mike

HI Mike

The beneficiary will be the person to specifically benefit from the trust when it is created, and, any relative of that person. There is also another class of beneficiary that allows any company owned by that person to also be a benificiary of the trust.

The trustee can have two property portfolio's. One to trade and one to keep. It just means that records should be maintained to show each property.

It i simpler to have separate entities, by a long shot, and for lots of reasons.

Have fun

Dale
 
Thanks Dale,

Awhile ago at a seminar I attended an accountant was talking about the tax implications for Options. As a passing comment he warned against mixing different property objectives like trading and investing. He advised to keep the activities separate, not so much for simplifying accounting but because the Internal Revenue (UK equivalent of ATO) may deem you to be one or the other and lump all your properties in the same category. For example, if your major activity was trading then your buy to holds would lose the 50% CGT discount because the properties would be treated as stock. Have you heard anything like that? Is that why you say if you mix activities you need to nominate and document the purpose of each property?

Regards, Mike
 
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Originally posted by Mike
For example, if your major activity was trading then your buy and holds would lose the 50% CGT discount because the properties would be treated as stock. Have you heard anything like that? Is that why you say if you mix activities you need to nominate and document the purpose of each property?

Regards, Mike

Hi Mike

No, I have not found that at all. It is just simpler for all concerned if you keep records that identify that certain properties were bought for certain reasons.

Mind you, it is easy to see that the tax office could argue that they are all lumped together if it suited them to do so.

Keep things simple is a rule that works for me.

Have fun

Dale
 
Thanks, Dale. Have a fun day yourself. I've got another post coming about the accruals method but will have to wait till tomorrow. Too tired right now. What I need is a yawning smilie.:eek: This one could pass for a yawn but is actually a gaping surprise.

Regards, Mike
 
To further confuse the issue, what would happen if property investing is your main source of income. A mixture of rental properties, investment land and reno's.
My accountant feels that a buy and hold rental, held longer than 12 mths, would qualify as capital gain when sold.
All others would be a deemed to be income.
Any thoughts?

Macca
 
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