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

[Terry_w]

I will be moving a house from a trust that my brother and I control into my own control.

With a trustees or companies (in Qld) having a $349,999 threshold and an individual having a $599,999 threshold, and the UCV of the block in question being $560K I could hold it in my name, but as soon as the UCV hits $600K I'll pay $500 plus 1 cent for each $1 over $600K.

Once UCV hits $650K I will be paying $1K in land tax per year (using 2013-14 calculations).

If I put this same block into a new trust, controlled by me, then immediately I move it the land tax on the current value will be $5,020 per year. ($1,450 plus 1.7 cents per $1 more than $350K).

One of the reasons for moving this house is to pay less land tax, so it seems nonsensical to put it into another trust.

Question 1. Can I set up a trust, controlled by me and hold it half/half (half owned by me as an individual and half owned by a new trust controlled by me)? Would this mean the land tax is divided between the two entities? Or would this be seen as a way of avoiding land tax?

Question 2. Can I set up two trusts, both controlled by me to get to the same end result as question 1?

Question 3. If I can minimise land tax via the above scenarios, would the cost of administering, auditing(?), tax returns etc on the trust/s be worthwhile to make the saving? I don't want to spend $3K in accounting fees to save $5K in land tax?

yes
yes
yes. No auditing need, just a tax return, and annual ASIC fees of about $242

 

[wylie]

Thanks Terry

 

[Mry]

Yes I think it is 360K, it is nice. In fact by owning my dev site in a company name I do not get any land tax benefit. The land value was 350K on the latest notice.

CG is just one consideration. The main attraction is the fact you can defer income and in my situation there is nothing a trust can do to help with reducing tax down to 30%.

My general rule of thumb is to use a company with a DT as the shareholder for developments because (a) asset protection, and you can shut them down after the development is finished at some point and (b) the profit is ordinary income, not capital gains so you don't have to worry about losing out on the discount. Terryw already mentioned this.

The only difference between having a company with a trust shareholder vs a trust with a corporate trustee is that the company can retain the profits. Which leads to the main problem with using a company -

The company owns those profits. Generally speaking, if it makes $100k in profits, pays tax of $30,000 and is left with $70k, that money belongs to the company. If you want to use those funds to help fund a new development, you can either develop in the same company (asset protection risk) or get it out via dividend, loan or some sort of cost before the tax bill is assessed to beneficiaries of that trust.

There are some circumstances where paying the tax to access the cash to fund further developments can be better than leaving it in the company if you exhaust your list of possible beneficiaries. I do like saving tax, but I also like building wealth.

If I wanted to hedge my bets, I would use a discretionary trust with a corporate trustee for the development and a bucket company that I could distribute the profits and money to. That way you only tie up in the bucket company the profits and money you don't need straightaway, no asset protection risks since those funds are no longer in the original development entity and moving to the next entity is as simple as establishing a new trust with the original corporate trustee, saving costs in setting up a new company (see your lawyer first though). It can also give you the benefit of using those funds earmarked for the bucket company for about a year since you don't have to make the compulsory repayment straightaway. The bucket company can make franked dividend payments as your income allows.

I set up four trusts for someone who was buying a $900k piece of land (I could have prepared just three but he wanted to hold onto it for many many years so I wanted to future proof it in case Queensland decides to keep the thresholds). No land tax. If you do want to use trusts in QLD for the land tax threshold benefits, you need to read OSR's public ruling (LTA020.1.1) since trusts can be grouped in some circumstances.

 

[evan1875]

My general rule of thumb is to use a company with a DT as the shareholder for developments because (a) asset protection, and you can shut them down after the development is finished at some point and (b) the profit is ordinary income, not capital gains so you don't have to worry about losing out on the discount. Terryw already mentioned this.

The only difference between having a company with a trust shareholder vs a trust with a corporate trustee is that the company can retain the profits. Which leads to the main problem with using a company -

The company owns those profits. Generally speaking, if it makes $100k in profits, pays tax of $30,000 and is left with $70k, that money belongs to the company. If you want to use those funds to help fund a new development, you can either develop in the same company (asset protection risk) or get it out via dividend, loan or some sort of cost before the tax bill is assessed to beneficiaries of that trust.

There are some circumstances where paying the tax to access the cash to fund further developments can be better than leaving it in the company if you exhaust your list of possible beneficiaries. I do like saving tax, but I also like building wealth.

.

Mry,

Actually my accountant suggested a structure which I mentioned in this thread: http://somersoft.com/forums/showthread.php?t=105968

Essentially this is the gist of it:

"Company 1 holding development site and do development, pay 30% tax, profit goes to Company 2 as dividend, Company 1 does not retain profit

Company 2 being shareholder of company 1, is there simply holding the profit

Discretionary Trust with Corporate Trustee (Company 3) being shareholder of company 2, can receive any dividend and then distribute, if Company 2 declares a payout.

My accountant is comfortable with Company 1 paying 30% on profit because both my wife and I are in a higher tax bracket for now and the foreseeable future. So there is no short term disadvantage.

If Company 1 is under threat from external, wind down and there is no assets in Company 1. If not continue to use Company 1 to do the next development.
This I guess applies to any trading entity holding assets, risk.

Company 2 retains the profit.

Discretionary Trust with Corporate Trustee kicks in at a later stage when the beneficiaries move to a lower tax bracket or more beneficiaries emerge. For example, wife and I retire, kids >18, kids have kids, etc."

Do you see the value of the addition of a second company?

 

[Mry]

I would see that scenario as somewhat similar benefit wise as to what I proposed, only that Company 3 is a trustee of the discretionary trust. You can ask your accountant if there is a problem having you as a trustee of the discretionary trust that owns the shares in Company 2 and see what he has to say.

 

[Terry_w]

I would see that scenario as somewhat similar benefit wise as to what I proposed, only that Company 3 is a trustee of the discretionary trust. You can ask your accountant if there is a problem having you as a trustee of the discretionary trust that owns the shares in Company 2 and see what he has to say.

Mry - can you elaborate on any potential problems that could arise here? I can see any legal issues.