Buying shares via a company or personal names? Pros & Cons?

G'day all....

Other than losing the CGT discount and gaining asset protection, are there any other pros & cons of buying shares through a company rather than in personal names?

Cheers.

 

A company won't protect the shares owned by the company from your personal creditors unless you use a discretionary trust to hold your shares in the company. The company shares are an asset a creditor can attack

 

No real benefit in buying via a company at all then?

 

There could be many.

Do you already have a company you use as a bucket company as beneficiary for your trusts?
Could you buy in a trust and allow flexibility as to distribution of dividends and capital gains in each year (assuming investing rather than trading).

 

Yes, already have a bucket company. Shares would be bought for high yield, very long term with dividends re-invested and used as an income stream in retirement so not too concerned about losing CGT discount.

I was thinking of ways to use the bucket companies funds rather than them sit languishing in the company's bank account doing nothing. The obvious choice I guess is a Div7 loan back to me and park them in the mortgage offset but I figured investing the companies funds from within the company would be a good way of forced retirement savings if you like.

 

The shares in your bucket company are owned by a disc trust I would assume. Bucket company often used to buy shares in that instance. Accountants would need to comment on the other aspects but that's good from asset protection angle

 

As yet there's no shares anywhere (other than ones we already bought the last couple of years in personal names).

If we bought them via the trust though, that doesn't help me "spend" the bucket companies money? Or I guess the Trust can buy the shares so there's less money left over to send to the bucket in the first place.

 

I am saying that if the shareholder of the bucket company is a disc trust then the bucket company can buy the listed shares. If the bucket company shareholders are individual then you need to seek advice from accountant on taxation issues with that but also from asset protection that is bad.

 

Thanks. Shareholders of the bucket are individuals. I'll run a few more things past the accountant. Cheers.

 

1. If the individual shareholders get into trouble then their creditor/bankruptcy trustee can get at these shares as they are an asset - that is obviously vary bad as a bucket company is where you are accumulating your excess wealth
2. the bucket company can only distribute profits / gains to the individual shareholders, a disc trust would provide much more flexibility.

 

The bucket company will potentially have a large amount of assets in the future so the shareholders of this company need to be carefully considered. And the shareholder should not be the same trust it receives distributions from, otherwise the top marginal tax rate could apply.

Companies are good for retaining income but not good for CGT so what could be better would be for the company to make a Division 7A loan to the trustee of a discretionary trust which then buys shares. The trust would need to pay interest to the company, but this could be deductible where income producing shares are purchase. The interest to the company is income, but this goes into the bucket and becomes part of the lending pool or money.

When the shares pay dividends this can be paid out to the trust which owns the shares and the trust distributes it to the company with franking credits. The trust would need to make a family trust election and to make sure the company is a member of the family group.

When shares are sold the gain can be passed to individuals who would pay a tax rate of less than 24% instead of the company rate of 30% or the new 27.5% (which a bucket company could get with some planning).

Legal Tip 151: Structuring the Ownership of Shares Legal Tip 151: Structuring the Ownership of Shares

 

Thanks @Terry_w I'm thinking just to keep it simpler to make a Div 7A loan to myself and just park the bucket company cash in the PPOR mortgage offset account. Pay it back once the mortgage is knocked over then drawn an income from it in future years when my regular income reduces, (semi retirement).

 

You should do the sums.

Benchmark rate for unsecured loans is 5.3% whereas you might be paying a bank 3.8% or so.
The interest you pay is not tax deductible, but it is income to the company.

But you are paying a related entity, which means income is retained in the group, whereas when paying a bank that money is lost.

 

But even if you don't buy shares your bucket company at present has no asset protections from personal creditors nor does it have flexibility of distribution to people related to the current shareholders.

 

It might be worthwhile just paying the profits out of the bucket company, wearing tax, but avoiding non-deductible interest going forward.

Then when the bucket company is empty you could transfer the shares to a trustee and have improved asset protection and tax streaming in the future.

 

I did float the idea of another trust for the bucket to disburse to underneath the bucket but the accountant didn't see too much need for the extra cost in set up and administration of another trust.

I guess if we were talking mega bucks it would warrant further protection but essentially holding surplus cash in the bucket isn't much different to not having the bucket and just having the extra cash straight into the regular bank account, the bucket will just help smooth income over the next few years, sit it there when business is good and draw it down when we're slack, smoothing out the tax a bit.

 

The advantage with holding shares in the bucket company is that you could pass these to a testamentary discretionary trust in your will when you die and this would give your surviving family extra benefits in asset protection and saving tax.

 

Not an expert but I read and learnt a lot from the forums here.

I will search Debt Recycling Strategy here.

 

@Terry_w would you mind elaborating on why holding shares in a company helps with asset protection and tax saving in a testamentary trust vs the shares being held directly in the testamentary trust?

 

You can only get assets into a TT if they derive from a deceased estate. To get them into the estate you need to own them at death.
So if you have a discretionary trust holding shares these shares cannot get into the TT as you don't own them. But you can divert the income of a trust to a company. If you personally owned shares in this company you can get these into a TT when you die. So the built up wealth of the company can pass to the TT and then out to kids at adult tax rates. BUT at the same time you can have the flexibility during life of having the shares in the DT and distributing income elsewhere, other than the company, if you thought that was better - assuming you control the trustee.