Run it as company

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From: Sergey Golovin


Hello everyone.

Someone (here on forum and also Jan Somers in her book) mentioned earlier that if you are buying your 4 or 5th IP property you need to register a business and run it as business, otherwise it is very hard to get finance from bank. Which if fine.

Question is - would it be advisable to set up such investment company right from the beginning, from day one.

Or would it be more tax effective to start as private person and than move on to setting a company.

And associated question - would it be more tax effective run it as trust or family trust from day one or change it over from private to trust later on (on purchasing 4-5th property).

Would anyone have any comments, please.
Thank you.

Regards
Serge G.

 

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Reply: 1
From: Sergey Golovin


Congrats, have found half of the answer on my own question.
“Rental property rental and taxation” by Tony Compton.
Chapter 16.
Structures and Ownership.
Sole Ownership…-..blah, blah……
Joint Ownership…-..b….b…..
Companies –
“Since September 1985 and the introduction of capital gain tax companies have not been an appropriate vehicle to hold investment properties”.
Hang on, more to come……I am only quoting…..
“This even more so since the 1997 Budget which include measures to restrict dividend streaming, thus removing the only flexibility provided by the companies. Capital Gains tax taxes only the non-inflationary component of the gain. That is, the real gain. When the gain is distributed to the shareholders this benefit is lost, as the distribution would be taxed as an un-franked dividend. Whilst on the surface offering asset protection, in reality the property is at risk because of exposure to the ownership of the shares held in the company. Any losses earned are retained in the company for offset against other income earned by the company.”
Family Discretionary Trusts –
There is no doubt that the most flexible and often appropriate vehicle by which to own an investment property is a family discretionary trust……..
Asset protection is provided because litigation against a beneficiary cannot affect any of the trust’s assets.
The loses can not be distributed to the beneficiaries…….
This structure is therefore not appropriate, asset-protection consideration aside, for negatively-geared investments when there is no other income to offset the loss.
At the time of writing, the Taxation Office and the social welfare lobby groups are attempting to convince the government that trusts should be taxed in the same manner as companies. Whether they are successful remains to be seen. With the enormous voting power of small business, and the popularity of trusts as a trading vehicle for small business, I doubt such a change will be made.”

The question is - why is company structure is more appropriate than trust. Is it because everything is negatively geared? But it still has to be offset by other income. And company structure does attract more tax any way. Unless there is way around it.
Hmm…Still searching…

Regards
Serge G.

 

[paulzag]

Company or Trust or Private

Reply: 2
From: Paul Zagoridis


Get advice for you exact circumstances from your accountant and/or solicitor.

Start with the end in mind. Do you want to retire from your IP's? Do you want to run a REI business? Do you just want a few IP's?

If you wanted IP's to retire invest through your Super fund. If you want a few IP's now and then see what happens, buy them in your own name.

I will eventually control millions of dollars worth of real estate. Therefore I structure it in companies and trusts with NO personal holdings (not even my residence). This costs money to setup and maintain. But I feel it gives me flexibility and protection.

HOWEVER, changing strategies mid stream is very expensive. Moving 4-5 IP's from personal holdings into an entity triggers CGT and Stamp Duty. So many people should start with personal holdings and as they trade out of them acquire new holdings in an entity if it suits them.

I bought privately the first time, but because I didn't sell all the IP's at once it was very hard to buy new property in the entity. Had I owned everything in the entity from the first I wouldn't have gone broke in 1992.

Gary Smith wrote two good articles in the archives. I don't agree with them, but they offer the other view.

You can find them under

"Re: Company or not ??"
http://www.somersoft.com.au/_disc/00000661.htm

"Company or not (Also a question for those full time investor..."
http://www.somersoft.com.au/_disc/000006df.htm

Reply if you want to go into further detail.

 

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Company or Trust or Private

Reply: 2.1
From: Rasputin .


What if you dont have an accountant ?? Or an advisor ?? I have never used them before, do I need them to do IP investing..???

 

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Company or Trust or Private

Reply: 2.1.1
From: Robert Forward


I'd say it is always best to have some of these people around. They know what the laws are for you area and can advise on the best structure to further your investments.

Cheers
Robert

 

[paulzag]

Company or Trust or Private

Reply: 2.1.2
From: Paul Zagoridis


Do you want to be a finance, tax and legal expert as well as an astute property investor?

A complimemtary accountant is essential. A good lawyer can help. And a finance broker is these days more useful than a banker but some people don't think so.

 

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Company or Trust or Private

Reply: 2.1.2.1
From: Sergey Golovin


Thank you Paul.

I have seen it few times people say that first property (owner occupied) has to be separate from investment properties. I guess it purely for tax purpose ( to max. you return?).

Would it be possible to buy that first property as investment property and lease back to you self with in the entity?

See also “Calculating Return” 18.04.01

Regards
Serge G.