help with company trust structure please.

Discussion in 'Accounting & Tax' started by mr_alex, 18th Feb, 2017.

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  1. mr_alex

    mr_alex Well-Known Member

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    after ALOT of reading on these forums, iv been trying to get my head around alot of the structuring options. id like to ask for feedback on my ip structuring before i speak with my accountant and take it further

    my wife and i both work fulltime as employees. (70k ea)

    we want to buy n hold ip's in qld

    my idea is to setup company A as trustee with both of us as bennies and company B also a benny -with the idea that we portion enough income into company B so we dont increase our tax brackets and the income of company B would only be used to reinvest in property
    part i am really unsure of -

    can company B who has paid tax on its income, then give money back to company A tax free (frank credits) and this would then be reinvested by comp A for the trust) some have mention div7a but not sure if it relates here.

    1. would comp A need to be a shareholder of comp B?

    2. for comp A, is it better if there is 1 director (me) and my wife as shareholder?


    3. do we even need company B (bucket) couldnt company A play the same role and take any extra income and re invest it itself even though its trustee?

    thanks for any feedback
     
  2. D.T.

    D.T. Specialist Property Manager Business Member

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    Can we be bennies of it too? :)

    1. No
    2. Which of you is in lower risk job?
    3. Depends on your earnings. Company pays tax at 30%. Your work incomes minus negative gearing benefits plus any investment earnings might be higher or lower than 30% depending on the amounts. Could even look at setting it up later on when earnings reach that point.

    Its only tricky to get your head around because lots of people like to overcomplicate it so they can sell advice on it. Its kinda basic.
     
  3. Mike A

    Mike A Well-Known Member

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    if you distribute profits to company B and actually pay the money into the bank account of company B or place it on sub trust and comply with the sub trust provisions then no division 7a issues

    however once you then lend funds from company B back to the trust you will have division 7a issues as the trust is an associate.

    division 7a isnt always a nasty thing. it can actually be used as a tax deferral mechanism as no minimum loan repayments are required in the year in which the loan is taken out so can effectively defer taxes over a 7 year period. it can actually be a good tax planning strategy.

    to comply you need a written complying division 7a loan agreement in place before the earliest of the lodgement date or the due date for lodgement or you end up with an unfranked dividend which isnt a good tax strategy at all.
     
    Last edited: 18th Feb, 2017
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  4. Ross Forrester

    Ross Forrester Well-Known Member

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    You might want to consider having company b owned by a trust as well. This will allow franked dividends to be distributed to the person who is best placed to enjoy them.

    The difficulty with having a company as trustee and as beneficiary is keeping the money flow clear. More often than not I come across new clients who are unable to prove in which capacity a company was was acting.

    It sounds silly but in 45 years time and 6 house moves often the documents are non existent and it can mean the difference between half of your profits being tax free or not. And if you are dealing with this issue at 87 you will be very unhappy and often "give up".

    Also remember that laws for trust distributions are forecast for very large changes in a few years time.

    Talk to your accountant.
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. No it wouldn’t need to and it probably shouldn’t be.

    2. Depends

    3. No you don’t need company B, but you couldn’t do your strategy without it.

    Usually the trustee is not a beneficiary of the trust, so the trustee cannot distribute to itself. If the company.



    I agree with DT the property in the trust will likely be negative geared so there will be no income to distribute. No need to set the bucket company up yet if that is the case. Just make sure a company set up in the future could be a beneficiary.



    Ross is right too, I don’t know of any legal reason why a trustee – company A in this case, could not be the shareholder of the bucket company, but I would prefer a second trust to be the shareholder as otherwise it would be one big circular movement of money (though there may be nothing wrong with this).



    And Mike gives a good overview of div7A issues.



    Company B could also just invest the money itself, or for added asset protection lend it to company C which could invest – with no Div7A issues on loans between companies.
     
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  6. RPI

    RPI SDA Provider, Town Planner, Former Property Lawyer

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    Also need to work out how you are getting funds into the trust for the part the bank won't lend you. If you can utilise another entity to lend the money to the trust then, assuming properly structured, you can protect this capital contribution in the unlikely event that trust goes down.
     
  7. Blacky

    Blacky Well-Known Member

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    My first question would be why a structure in the first place?
    If just for tax, it's not the best structure imo.
    However, there are many other good reasons to have structures.

    In general property investing will be negatively geared. Therefore purely on a tax basis you are better holding at least some property in individual names to reduce tax liability to yourselves. However there are many other considerations besides tax.

    Blacky
     
  8. Wukong

    Wukong Well-Known Member

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    Our accountant keeps telling me to keep it simple. Partner is in high risk job, professional indemnity will cover most if not all issues.

    Tax savings via structures over complicate matters unless you had millions of assets or foresee millions of assets.

    Ownership in personal name highly leveraged, that's a deterrence on its own. We are both on a much higher income too.

    Your circumstances could be different. Best listen to all the posters with professional qualifications :)
     
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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    But as this is legal advice what does your lawyer tell you? :)
     
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  10. Mike A

    Mike A Well-Known Member

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    agree with terry a lawyer can only advise on the asset protection issues.

    simplicity doesnt always save on tax. just had a client where we put a division 7a loan agreement in place before lodgement date. tax savings of 24k as we will pay dividends out to the trust shareholder and those dividends paid out to a low income beneficiary who will then use the dividends to meet the minimum loan repayments over a 7 year period. simplicity would have cost them 24k in tax for the 2016 financial year. that would have been bad tax advice.
     
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  11. Ouga

    Ouga Well-Known Member

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    "Trying is the first step towards failure" Homer
    At the rate this is going you are going to end up with 3 companies and a couple of trusts!

    Ask yourself what you are trying to achieve through this complicated setup which is going to cost year after year in accountants fees. Asset protection? Income streaming?
    There is value in simplicity but it is not often portrayed on the forums and it's easy to fall in the "trap" if thinking you need an elaborate structure to do things "right".

    Unless you are building an empire (which is unlikely given the vast majority of investors don't hold more than a couple IPs) you could start by holding an IP each in your own name and keep things simple and cost effective.
     
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  12. mr_alex

    mr_alex Well-Known Member

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    Thanks for those replies,

    1) given there is only my wife and myself, could a very similar outcome be achieved with
    Company A buying property solely, not through a trust, and Company B as Director with both of us as shareholders, or without comp B and just us as directors of comp A.


    2) but if buying in a company or trust, this negative gearing loss can be claimed in later years when the company eventually turns a profit?

    3) would our best bet be to see a lawyer before anything else to discuss best trust/company structure options, and then talk to a broker to discuss loans for this setup? and would I need to speak with my accountant about anything during this setup?

    THANK YOU.
     
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  13. mr_alex

    mr_alex Well-Known Member

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    sorry blacky, I just realised what you meant about neg gearing, as in, we could lower our 70k incomes if purchasing in own names.
     
  14. RPI

    RPI SDA Provider, Town Planner, Former Property Lawyer

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    Land tax thresholds in QLD can make it worthwhile if buying in inner locations. The ongoing accounting fees are not that much extra - maybe some of the accountants here could chime in and say what the difference in cost is per property.

    You can buy in your own name and use a single entity to lend the money via a secured loan if you need to negative gear and are at risk for some reason.

    If you are buy and hold then own names can often make sense for the first couple. If you sell any of the negative gearing benefits can be wiped out if you have to add a decent capital gain to a high income earners salary in year you sell. That is where you get you work on your strategy and work with your accountant to run numbers.

    If you don't have your own business and therefore don't have to give out personal guarantees for leases etc then individual names can make a lot of sense. I still recommend that you use another entity to protect the capital you inject into a purchase. It is about the cheapest insurance you can ever get.

    Keep in mind that my view is coloured because my firm constantly either:
    1. represents people who are in trouble and we see whether the decisions made when they weren't helps protect their wealth; or
    2. we are suing people and the decisions those people made help us decide whether to pursue them through court or to stop early on because their asset protection strategies mean there is little chance of getting money in a win anyway.
     
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  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A company cannot be a director of a company only a natural person can.

    Any losses would be trapped in. Company or trust.

    Learn as much u you can and then see a lawyer. An account can advise on the tax aspects including division 7A issies
     
  16. mr_alex

    mr_alex Well-Known Member

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    thanks Terry. following from what you said,
    when losses are 'trapped in' they can be still carried forward and use to reduce taxable income in any following year?

    eg. company A makes a 10k loss per year for the first 3 years. year 4 & 5 make 15k profit each- so that 30k profit is tax free because on the books they made $0 for those years - is that correct?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes losses can be carried forward and used to offset future gains.