Why it may be a good idea to use a company to own property

[evan1875]

how could this inflexible set up beat using a bucket company?

I can't see anything here to suggest moving away from the tried and trusted way.... corp trustee, disc trust, bucket company and an array of individuals.

Ausprop,

I know people who develop in the way you outlined. Works for them. I am not an accountant and only have a vague idea on this subject.

My understanding is that a bucket company has its problems. Access to funds for example and the cost of deferring tax. PaulG from memory has some good posts on it.

At the end of the day I am following what my accountant said..

 

[MIW]

This may be irrelevant, but are there any consequence if the director is sued prior to finishing the development or while still holding those company assets?

 

[Ausprop]

Land tax???

I can't see it assisting. a company and a bucket are what they are, regardless of whether there is an interposed trust?

 

[Ausprop]

This may be irrelevant, but are there any consequence if the director is sued prior to finishing the development or while still holding those company assets?

at law no, but usually guarantees will be in place which could make it practically difficult. However litigation takes many years, most developments will be over and done with by then

 

[D.T.]

I can't see it assisting. a company and a bucket are what they are, regardless of whether there is an interposed trust?

Not at all. Different entity types have different rules. Look it up mate.

 

[handyandy]

We do have most of our property assets owned by companies which are in turn owned by Trusts.

Via this method we get 3 separate thresholds for land tax in NSW. This saves us about $20k PA.

We are looking at a CIP currently and it will be held by a new company with different directors to get another threshold.

Our income is structured in such a way that we never exceed the 30% income bracket for tax. (We could very easily)

If we were to sell than we would pay 5% more in capital gains tax as we would pay the company tax but this would translate to imputation credits. I arrive at only a 5% difference as even with the 50% CGT on the top bracket this translates to a tax level of 25% (1/2 of the top margin) on the capital gain.

Cheers

PS Forgot to mention that we pay virtually no personal income tax due to the imputation credits we receive. This has been the case for many years. I did pay tax last year due the the USA income where we have personally loaned money to the USA entities and these loan payments plus our personal property income has generated uncontrolled income.

 

[Terry_w]

Keep in mind that I am not saying it is a good idea to have a company own property but that it could be a good idea in some situations only. Careful consideration is need by prospective company owners.

RobG raises some good points too.

 

[Terry_w]

I can't see it assisting. a company and a bucket are what they are, regardless of whether there is an interposed trust?

You missed the whole point of this thread!

See my first post so see why it could assist.

 

[Terry_w]

This may be irrelevant, but are there any consequence if the director is sued prior to finishing the development or while still holding those company assets?

Yes.

Directors don't hold company assets - the company itself owns the assets and is a legal person separate to the directors and the shareholders.

It is the shareholders than own the company - which could be the trustee of a discretionary trust.

Director could be sued in relation to the project in many instances, e.g. false and misleading advertising when selling the property, insolvent trading, OHS breaches etc But this could happen whether the company is a trustee or acting in its own right.

If a director is sued for something not related there would generally be no direct effect on the structure. But a person that is bankrupt cannot be director so a new one may need to be found. These may also be a breach of the mortgage agreement so a new loan would need to be negotiated.

 

[Paul@PFI]

We do have most of our property assets owned by companies which are in turn owned by Trusts.

Our income is structured in such a way that we never exceed the 30% income bracket for tax. (We could very easily)

Most of the above is factually incorrect which may be a good thing for asset protection.
1. The property assets are not yours. They are company owned. Your trusts own an interest. On your death none of that will change.
2. Your income doesn't include rental income unless 1. Company pays tax ; and 2. Trust receives a div and 3. The trust makes a distribution.

The full and final rate of company tax earned by shareholders on the apparent property benefits hasn't truly been factored into anything. Your strategy is a deferral strategy. The final tax hasn't been factored in. Tax is paid to 30% BUT full and final tax would impact shareholders. No CGT discounts but potentially franked income - That doesn't limit the tax rate to 30%. It just part pays it in the shareholder hands. The full and final tax rate can exceed 57%. ie 30% company + 27% personal. So you pay more tax to defer tax.

Someone, one day must pay a load more tax to access any asset, income or other benefit of this company wealth and even then insufficient franking credits wont cover any profit on sale.

 

[handyandy]

Most of the above is factually incorrect which may be a good thing for asset protection.
1. The property assets are not yours. They are company owned. Your trusts own an interest. On your death none of that will change.
Where have I said that they were mine? I don't want them to be mine. I just want to control the them.
2. Your income doesn't include rental income unless 1. Company pays tax ; and 2. Trust receives a div and 3. The trust makes a distribution.

And the problem is? All our income is rental income (via dividends via a trust or 2) and listed company dividend income. We have no other income.

The full and final rate of company tax earned by shareholders on the apparent property benefits hasn't truly been factored into anything. Your strategy is a deferral strategy. The final tax hasn't been factored in. Tax is paid to 30% BUT full and final tax would impact shareholders. No CGT discounts but potentially franked income - That doesn't limit the tax rate to 30%. It just part pays it in the shareholder hands. The full and final tax rate can exceed 57%. ie 30% company + 27% personal. So you pay more tax to defer tax.

Someone, one day must pay a load more tax to access any asset, income or other benefit of this company wealth and even then insufficient franking credits wont cover any profit on sale.

Hi Paul

I am solely outlining my personal situation. We limit the tax rate to 30% because we control how much income we draw.

How is it that there won't be enough imputation credits as the profit on any sale will have a 30% company tax payable. If I was to sell then, again, I would limit the income we draw and certainly avoid getting into the top tax brackets.

In our situation, we should never have to sell anything as we obtain more than enough income from our investments and still leave all the assets untouched. Even the properties that we hold personally will be taken care of via a testamentary trust and then hopefully those assets will also become part of the income distribution game my son will play.

I must sit down with you one of these days to just examine my situation and see if there are things that we are missing.

Cheers

 

[Ausprop]

Not at all. Different entity types have different rules. Look it up mate.

look up what, the difference between a company and a company

 

[Ausprop]

You missed the whole point of this thread!

See my first post so see why it could assist.

well I thought I had so I did originally re-read it. Having re-read I am no wiser. Presumably there is something in the grouping provisions of DTs in NSW that is less favourable than for companies (difficult to see but who knows), otherwise I can't see why you wouldn't just interpose the DT as per usual

 

[Ausprop]

We do have most of our property assets owned by companies which are in turn owned by Trusts.

Via this method we get 3 separate thresholds for land tax in NSW. This saves us about $20k PA.

We are looking at a CIP currently and it will be held by a new company with different directors to get another threshold.

Our income is structured in such a way that we never exceed the 30% income bracket for tax. (We could very easily)

If we were to sell than we would pay 5% more in capital gains tax as we would pay the company tax but this would translate to imputation credits. I arrive at only a 5% difference as even with the 50% CGT on the top bracket this translates to a tax level of 25% (1/2 of the top margin) on the capital gain.

Cheers

PS Forgot to mention that we pay virtually no personal income tax due to the imputation credits we receive. This has been the case for many years. I did pay tax last year due the the USA income where we have personally loaned money to the USA entities and these loan payments plus our personal property income has generated uncontrolled income.

just to clarify, I presume you mean a vanilla flavoured structure whereby you have a corporate trustee, DT beneath where the assets are held, then individual and corporate beneficiaries?

 

[Terry_w]

well I thought I had so I did originally re-read it. Having re-read I am no wiser. Presumably there is something in the grouping provisions of DTs in NSW that is less favourable than for companies (difficult to see but who knows), otherwise I can't see why you wouldn't just interpose the DT as per usual

No land tax threshold at all for a company owning land as trustee for a discretionary trust in NSW.

But a company owning land in its own right would have a land tax threshold.

On land worth $400,000 that could amount to a difference of $6,400 per year in land tax:
i.e. Land on on company owned land $nil
Land tax on trust owned land $6,400 every year

 

[Ausprop]

amongst all this, protection in bankruptcy is one of the most difficult to achieve. Think very carefully about who you want to have as shareholders and appointers for the trust.

 

[Ausprop]

No land tax threshold at all for a company owning land as trustee for a discretionary trust in NSW.

But a company owning land in its own right would have a land tax threshold.

pfff well I'll be. That's truly dreadful. How do they even know what capacity the land is held in is the next question?

 

[handyandy]

just to clarify, I presume you mean a vanilla flavoured structure whereby you have a corporate trustee, DT beneath where the assets are held, then individual and corporate beneficiaries?

Not sure what you are asking but I think you mean that company is beneficiary of trust.

We have that but we also have structures where company owns assets. 100% of shares of company are owned by a trust. Company declares dividend and pays to the trust. Trust distributes to me. Most times money just ends up in my loan account in company as we don't need the cash.

Accountant organises it all so pretty well hands off for me. In fact until recently I didn't even have a personal bank account or certainly not ones that were used on any sort of regular basis.

Cheers

 

[Paul@PFI]

Hi Paul

I am solely outlining my personal situation. We limit the tax rate to 30% because we control how much income we draw.

A FF Div caps out at the 30% tax rate at $25,910 of dividend. Therefter the shareholder / trust beneficiary needs to fund a tax shortfall. This feature is limiting. It imposes a cap on income strategies.

How is it that there won't be enough imputation credits as the profit on any sale will have a 30% company tax payable. If I was to sell then, again, I would limit the income we draw and certainly avoid getting into the top tax brackets.

There might if you paid tax and wait.. Typically when a property is sold the rush to get the cash means a debit loan. Again a failure of using a loan account akin to a bucket co.

In our situation, we should never have to sell anything as we obtain more than enough income from our investments and still leave all the assets untouched. Even the properties that we hold personally will be taken care of via a testamentary trust and then hopefully those assets will also become part of the income distribution game my son will play.

I must sit down with you one of these days to just examine my situation and see if there are things that we are missing.

Cheers

Super may change the effective tax rate. Zero is a lot less than 30. And a cost base can be refreshed unlike a company. Super often a better estate planning tool than a company. If it runs to an estate then it can go to a TT also. Just have to watch beneficiary taxes. Rev pensions can assist. Death benefit strategies such as anti-detriment often come into play with such taxpayers and can pass on huge tax savings to kids.

There can be strategies to have the property ownership changed when its owned by a company too. Without paying duty. Company ownership is a bit "traditional" and there can be flaws but it can work when ownership isn't desired. And then a trust makes a great shareholder provided trust control issues are planned. More than once I have seen control of the company lost v's estate planning.

Company strategies also need to weight up aged care etc. No access to capital or cash but the ACAT assessment will. Very intrusive too.

 

[dan c]

A FF Div caps out at the 30% tax rate at $25,910 of dividend. Therefter the shareholder / trust beneficiary needs to fund a tax shortfall. This feature is limiting. It imposes a cap on income strategies.

There's no shortfall of tax. The slightly higher individual income tax rates up to $80,000 will eat into the refund, but the franking credit would cover tax up to $100,000 cash dividend (assuming no other income).