Buying in a company structure vs. Buying in your own name?

I'm looking for a layman's guide as to when property should be purchased in a company name vs. when the purchase should be made in a personal name.

Can anybody help me on that?

Edit: also trusts and SMSFs


I found this:

A name is just a name… or is it? Your options when buying a property - Property Update

I will also keep looking at what Terry has posted

 

The main problem with company buying is you miss out on the 50% capital gains tax discount compared to in your name and trusts. So flips and short term holding probably wouldn't be the best option under a company structure.

 

A bit of a misnomer - company tax rate is 30% or thereabouts vs maximum personal tax rate of 45% + 2% medicare levy, so effectively 22.5% + 2% after cgt discount is applied.

(Edit: also add the 2% deficit tax effective until 30/6/17 for incomes over $180k).

For short term holdings/flips there's no cgt discount (<12 months) so a company structure could be more effective.

 

I think I have written a couple of threads of the benefits of using a company structure to own property.


Briefly some of the advantages are:

1. A separate land tax threshold. In NSW that could save you around $7,712 every year in land tax.

2. Ability to retain income

3. Franked dividends - retained income can be paid out to shareholders in a future year when they have low income and they can benefit fron franking credits and potentially get back the tax paid by the company.

 

A company can be better for very large investors - they can invest their franked dividends from other sources direct into property without incurring top up tax.

At times losing the 50% CGT discount later on to avoid the immediate top up tax now is a reasonable sacrifice.

 

Ross - what do you mean in the first paragraph?

 

I believe trusts can distribute income to companies (if the trust deed allows it).

Handy for tax planning if you and your trust are having a high income year and your company is having a low income year (eg property renovations).

 

Or even just diverting trust income to the company to offset any negative gearing loss.

 

Basically setting up a company gives one another tax file number and one can distribute/divert income to arrive st the best outcome (from a income tax perspective).

 

but only if there is a discretionary trust involved:
Company can be a beneficiary of the trust
shares of the company can be held by the trustee of a discretionary trust

 

At the same time, find out the procedures to get OUT of the arrangements if you need/want to.
Sometimes dismantling legal structures is a lot harder than setting them up.
Marg

 

A company may suit instances where a sale that results in ordinary income is contemplated. This is more akin to a developer than a investor but doesnt mean investors cant use a company where they seek "profits" from a property venture such as flipping or renovation income etc. . It may also be a strategy for a non-resident property owner (providing compliance with FIRB is maintained). A company can also be used in some instances for land tax.

A company can be an ideal vehicle to conduct a development ie build so that the land is owned by others but all profits sit in the company. It can safeguard claims on the land asset subject of course to guarantees and mortgages etc,

Generally a company may also be a poor choice where CGT related outcomes are sought and when a "owner" wants a fixed entitlement to their interest. A shareholder cannot call for their share of profits in a company which is different to say a unit trust. Changing shareholders in a land rich company may also be a substantial duty trigger.

Beware of franking credits. It sounds good but reality is company profits are not taxed at 30%. The full and final effect of taxation of company profits has to consider the shareholders final marginal rate due to other income , gross-up of franking credits and also the timing issues around deferral strategies. Final tax rates can be higher than the top marginal tax rate. If bucket companies and the like are considered this can also lead to tax concerns. Companies are not like other taxpayers - They can be used to defer tax to a future period too. This can be one of the reasons why NOT to use a company when a JV occurs. The shareholders cant demand their profit share. Corporations Law can be used to hinder parties when a fall out happens.

 

Ummmm. Maybe not. You are confusing personal with entity ownership. Somewhere a loss of asset occurs and a shift in assets and liabilities may hinder this being effective.

 

That is why I posted from "from an income tax perspective".

My post was NOT advice. I am not an accountant/tax specialist and I would trust that no one would take ANY of my post as such. I take every post on PC as that poster's opinion; I pay for advice and am happy to do so. I would hope that every PC member has the same understanding.

I know people who have distributed income from trusts to companies as part of their tax planning. There can be many issues with this approach as others have pointed out including you, @Marg4000, ...

 

Thanks everybody. More for me to learn but it feels like I'm making a sound decision for what I intend to be my next purchase.... I can see more upsides than holding it in a personal name anyway.

Retaining income to pay out in future periods sounds very appealing especially after taking a substantial profit for selling something I had bought in my own name, invoking a large CGT hit in one financial year. More flexibility under the company structure is what I see.
A separate land tax threshold is just icing on the cake.

 

Thank Marg. I'll have to do that.

 

If you have franked dividends coming out of a business and you put them in a trust you ultimately have to pay top up tax - a corporate beneficiary just delays too up tax. So for wealthier investors who do not sell - giving up the discount and avoiding top up can work.

 

I agree, but when you say 'you' it confuses people.

If a company running a business pays a dividend to a trustee shareholder and the trust is a discretionary trust with a company as beneficiary the dividends can be diverted to the bucket company.

Or if there is a company running a business with the shareholder of the company being another company this is possible.

But not if you own the shares personally.

 

@Terry_w - afaik companies in NSW do not benefit from a separate land tax threshold - NSW Land Tax Act 1956 No 27 Schd 13

It differs from state to state.

 

Oh sorry.

Bucket company just defers the problem. And the interest cost then adds up and it becomes expensive with more dividends flowing out to pay the interest and more top up tax.

Only an issue for larger transactions.