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Can rental loss be offset against capital gain if property held inside company?

Discussion in 'Legal Issues' started by scientist, 31st May, 2016.

  1. scientist

    scientist Well-Known Member

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    E.g. say company A Pty Ltd owns a property for 5 years and incurs an operating loss of $10k per year throughout - so that's a net loss of $50k over the period. Then A Pty Ltd sells said property at the end of the 5th year for a capital gain of $50k. Would the company's loss credits for years 1-4 offset against the net profit at end of year 5?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    yes
     
  3. Brenden

    Brenden Member

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    I'm almost certain that operating losses can't be offset by the sale of an asset inside a PTY LTD. I had losses in a PTY LTD business I sold (sold active business not PTY LTD) and had to pay tax on the contract value and didn't receive any credits for the pervious tax year losses.

    If it was a trust I believe it could be.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are various rule about carrying forward losses. These are to try to prevent uncommercial trading in losses from occurring.
     
  5. scientist

    scientist Well-Known Member

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    Excellent thank you

    This helps in the situation where if I plan to use a company to hold a property that isn't exactly positively geared - losses can't be transferred out of the company but nice to know that eventually when I do sell I get some value back from the losses.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should get some tax and legal advice before considering this.

    Why use a company?
     
  7. scientist

    scientist Well-Known Member

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    Avoid land tax - mainly

    I'm aware of the downside which is no CGT 50% discount on sale, and 30% tax rate on every cent. Losses trapped inside. Character of income (income vs capital gain) lost once given out as dividend (could be a good thing). Any other significant ones come to mind?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I've written a few threads on companies owing properties in my legal tips.

    One other thing on the tax side is the effect of depreciation on franking credits.

    Plenty of legal issues to consider too - ownership structure for shares, control, estate planning etc.
     
  9. Brenden

    Brenden Member

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    Wouldn't a discretionary trust be better to hold property?

    You could also use a unit trust to own property and use your own SMSF funds.

    It would also get around labors proposed changes to negative gearing.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It depends

    $400,000 worth of land in NSW would result $6,400 per year, every year, in land tax if owned by a trust. Where as a company would not have any land tax to pay if it owned the same land.
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Losses may be affected by:
    - Change of residency
    - Change of shareholders
    - Type of trust eg fixed v's non-fixed (and fixed doesnt mean same as a NSW land tax issue)
    - Trust elections
    - Non-commercial losses
    - Capital losses are quarantined from ordinary income
    - Same business / ownership tests
    - Interest deductions if thin capitalisation applies
    - Consolidation

    Operating losses that are deferred must be continually appraised to determine if they can offset taxable income or carried to the next year. Capital losses in a company may often only be deferred to offset a future capital gain however and arent offset against income BUT a company may offset a revenue loss against capital gains in some cases.

    Trust losses are subject to special tests to determine if they can be claimed in the future - an area of complexity. For a fixed trust its a bit easier than a disc trust. Its one of the key issues a trustee must consider if buying a IP.