Surely you can't pay yourself for pamanaging porerties you own yourself in your own name though (?)
Reducing tax on rental income
- Thread starter Ace in the Hole
- Start date
Surely you can't pay yourself for pamanaging porerties you own yourself in your own name though (?)
Sure you can, but you'd also have to declare the income that you receive from yourself.
Going on from this situation.
Say if you have two individuals earning 60k a year each. Then they have 100k cashflow from rents in rental properties.
In this situation, it would be more beneficial to have the properties under a company, than any form of trust, right?
E.G
Would it go:
Person 1: 60k PAYG
Person 2: 60k PAYG
Company: 100k - 30k taxed
Then the 70k post tax company profits would be distributed to the two Persons who own the company, or would the distributed profits then have to be taxed again as income tax?
Say if you have two individuals earning 60k a year each. Then they have 100k cashflow from rents in rental properties.
In this situation, it would be more beneficial to have the properties under a company, than any form of trust, right?
E.G
Would it go:
Person 1: 60k PAYG
Person 2: 60k PAYG
Company: 100k - 30k taxed
Then the 70k post tax company profits would be distributed to the two Persons who own the company, or would the distributed profits then have to be taxed again as income tax?
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A discretionary trust would still be better because the trustee could still distribute to a company and cap the tax at 30% if need be, but also have the flexibility to distribute some to children and other low income earners - and this can be changed each year. With a company you would be lose this flexibility.
Companies also don't get the CGT discount.
If the company did own the properties then the income would go to the company and it could then pay tax and distribute any profits to shareholders (which could even be a trust). If individuals receive dividends then they will get a credit for any tax the company has paid and then pay some more, or receive some back depending on their incomes.
Thanks for the info TerryW,
I thought bucket companies were frowned upon by the ATO by the previous comment by Hillview: "Just be wary that if you are operating from disc trust then distributing to a bucket company and not actually paying the money can be an issue from the ATO's point of view. They are right on this at the moment."
So your suggestion is to have a discretionary trust distributing to a bucket company, with the two individuals being the 'shareholders'.
I don't want to stray into useless newbie questions, but in the case of shareholders, how does one associate the two individuals as the shareholders of the bucket company? It surely doesn't have to be a publicly listed company?
I thought bucket companies were frowned upon by the ATO by the previous comment by Hillview: "Just be wary that if you are operating from disc trust then distributing to a bucket company and not actually paying the money can be an issue from the ATO's point of view. They are right on this at the moment."
So your suggestion is to have a discretionary trust distributing to a bucket company, with the two individuals being the 'shareholders'.
I don't want to stray into useless newbie questions, but in the case of shareholders, how does one associate the two individuals as the shareholders of the bucket company? It surely doesn't have to be a publicly listed company?
Bucket companies are a bit up in the air at the moment since the release of TR 2010/3 a few months ago stating that loans to bucket companies trigger Div 7A except in limited circumstances.
I believe some accounting bodies are looking to do test cases and challenge the ruling's view, but until then we have this to deal with.
I believe some accounting bodies are looking to do test cases and challenge the ruling's view, but until then we have this to deal with.
Hi CJ
Every company must have at least 1 shareholder and 1 share. The shareholder could be another company, a person and a trust (actually it would be the trustee's name that is recorded).
There is nothing wrong with having a bucket company. The problem, or potential problem is getting money out of it tax effectively. In the past people with high income just 'borrowed' money from their companies. ie they just took it and used it as their own and no extra tax was paid. Then the ATO got tough and started saying if you did not have proper commercial agreements with the company then they would treat this borrowing as income (which is what it really was in most cases). In the past year the ATO has gotten even tougher. But at the moment it is still possible to borrow money from your company for up to 7 years without security or 30 years with. By the time the money is due to be paid back you may be on a lower taxable income and then will be able to work out how to keep the money and pay tax on it or give it back and then reborrow it again.
Thanks for the clarification TerryW.
In that case I believe it would be in my best interests to get a disretionary Trust set up, so atleast I can dump some of my tax burden onto my partner who earns less.
I understand that it is difficult to transfer property to a property post purchase, having to pay stamp duty again etc. But is there much difficulty transferring a share portfolio to a Dis. Trust?
In that case I believe it would be in my best interests to get a disretionary Trust set up, so atleast I can dump some of my tax burden onto my partner who earns less.
I understand that it is difficult to transfer property to a property post purchase, having to pay stamp duty again etc. But is there much difficulty transferring a share portfolio to a Dis. Trust?
We have done this, and it is not "difficult" but the stamp duty is a bit of a PITA. You have to weigh up the costs and the possible savings as the years go by.
The other thing we found was the land tax becomes a PITA, but in our situation the stamp duty and land tax expenses were a "necessary evil" to protect the assets.
How did the Trust affect land tax Wylie? Did you previously have the houses spread across your partner and yourselves names to limit tax liability?
Or is there something I don't know?
Or is there something I don't know?
The houses were in my parents' names (individually and jointly) and had thresholds regarding land tax. Once they went into a trust, those thresholds apparently disappear so the land tax becomes a big number, very quickly.
Ah, as I suspected.
Out of interest, there is no penalisation for creating multiple Trusts to spread properties over to reduce land tax bills, is there?
Out of interest, there is no penalisation for creating multiple Trusts to spread properties over to reduce land tax bills, is there?
Hope not, as this is what we have just done.
Bought a site in Bris last month with a newly established trust.
Just registered another trust now for the next purchase in Bris this month.
This was specifically to reduce land tax.
Edging closer and closer to the point of needing professional advice, however this has been quite informative. 
Ace: If it is all legit I think I may head down this path, as Land Tax is a rather large burden on potential cash flow in large scale investment.
Ace: If it is all legit I think I may head down this path, as Land Tax is a rather large burden on potential cash flow in large scale investment.
Not as far as I know, and this was one avenue we looked at (to create more than one trust), but for lots of reasons, it was not the path we chose.
Shares are much easier to transfer. You can do them in stages reduce CGT by spreading it out over 2 financial years or doing it when the values drop etc. But you should get tax advise as there are issues with franking credits (family tax elections may need to be done).
At least no stamp duty on shares anymore.
