Legal Tip 155: When to use a Company Structure to “invest”

When to use a Company Structure to “invest”



The biggest advantage of a company is that liability is generally limited to it and its assets. So whenever there is a liability risk from trading, entering into contracts etc then the company is worth considering. Whether the company is acting as trustee or in its own right doesn’t really change things.

e.g operating a business



When investing in growth assets generally a company may not be the ideal structure because companies do not receive the 50% CGT on the sale of assets. A trust may be better in these instances as the income can be distributed in a more tax effective manner – including to a company.

e.g. investing in shares – CGT would be 30% in a company or a maximum of 24.5% when owned by an individual or a trustee (in most cases, sometimes even less).



Another reason to consider a company is that its tax rate is a flat 30% (or 28% for small businesses). An individual may have to pay up to 48% so that is a huge difference.



The next major advantage of a company is that it can retain income, pay tax and later distribute that income to shareholders as franked dividends. This can have the benefit of diverting income from one year to the next (or many years later) when the shareholder has a lower income. When the shareholder is a discretionary trust this makes it even more flexible.



Land tax is another reason where companies could be worth considering for property investment. In NSW a trustee owning land would be assessed at 1.6% pa of all land held (generally). But a company could get the tax free threshold of $549,000. A trust or a person owning $549,000 worth of land (where the person has already used up their threshold) would cost $8,784 per year, whereas the company would be nil.

Similar in QLD, but companies get the same threshold in QLD as trusts do.



Estate Planning is another advantage companies have over trusts. Companies can live forever whereas trusts must vest within 80% and the transfer of their assets can result in stamp duty and CGT being triggered. It is also impossible to leave a ‘share’ of a trust in an individuals will because no individual has any interest in the trust property. The positions of appointor and/or trustee could be passed on, but difficulties arise where you want control to be given to multiple people. With a company if you owns the shares personally the shares can be gifted in your will. However if a trustee owns the shares then the same problems as described above can occurred.



Easy of changing control is great with companies. If a company owns a business and you want to pass this business to your children you could just transfer the shares of the company rather than the business itself. This can be done without stamp duty in most states (so could transferring the business itself in some states). A better example may be property. Where a person owns property and wants to transfer control to the children stamp duty would apply and title would need to be changed. If a company owns the property then just transferring the shares may be another option and this could be done without stamp duty in most states (where the company is not land rich) and title of the property can stay in the name of the company.



In Summary

Shares – generally a company may not be a good idea. Personal names or a discretionary trust may be worth considering. The discretionary trust could distribute the income to a company (bucket company) for further advantages.

Property – generally may not be a good idea as the 50% discount is not available, but it could be worth considering in NSW where the land tax thresholds have already been hit – but consider a trustee of a discretionary trust owning the shares.

Business – usually a company is the best way to operate a business. This could be a company in its own right or a company acting as trustee.

Development of Property – a company may be worth considering as there would be no 50% CGT discount any way. But there are many other structures to consider as well.

Trustee – a company should be considered trustee in most cases rather than an individual acting as trustee. Always use a company for the trustee of a SMSF

 

Our accountant has suggested that we set up a company for our (future) investment in LICs. I note that you've said "Shares – generally a company may not be a good idea..."

Is this predominantly because of the capital gains concession? Our intention is to 'hold' for life, so the concession is a minor issue for us.

 

Kat,

Has the accountant suggested the company as a corporate trustee of a discretionary trust (which IMHO makes sense), or just the company to hold the LIC/Shares (which IMHO makes no sense)?

Regards,

Jason

 

Yes mainly the 50% CGT discount.

Flexibility is an issue. With a discretionary trust you can always divert income to a company. With a company the income would need to go to the shareholders - who would they be? Could be a discretionary trust.

Even if you don't sell CGT can be an issue when the shares are eventually sold by your successors.
Tax Tip 152: CGT won’t apply to me as I will never sell: 6 Reasons why it might https://www.propertychat.com.au/community/threads/tax-tip-152-cgt-wont-apply-to-me-as-i-will-never-sell-6-reasons-why-it-might.18004/

 

Hi @JasonC he suggested a company that held the shares/LICs directly, i.e. outside of a Trust.

Hi @Terry_w I always enjoy reading your tax/strategy tips, I greatly appreciate the effort you've put into making these.

The suggestion of a 'standalone' company was to reduce complexity/administrative cost. I'm of the belief that a (relatively) small ongoing cost are not worth the trade-off for the flexibility of a discretionary trust.

Thank you both for helping me confirm my understanding.

 

Kat,

I would have thought having a company would be approximately the same amount of complexity/administrative cost as having a discretionary trust with corporate beneficiary. Both ways there is 1 ASIC lodgement per year, and 1 tax return. The trust/corp trustee would have greater setup costs but the ongoing admin fees and effort would be identical.

The flexibility that the trust could save you huge amounts of money in the long term.

Just my opinion, but if planning on building up any significant volume of shares I see a discretionary trust as a no brainer.

Regards,

Jason

 

Two or more Parties Investing Together - A company can be good when two or more parties are investing together as each party can own a fixed percentage of the profits.
Examples are operating a business through a company with 2 separate discretionary trusts owning shares. Each party can receive 50% (or other %) of the profits into a separate family trust and from their have options on how to distribute the income.

(but there are other ways for 2 or more people to joint together - partnership of discretionary trusts, a unit trust etc)

 

Say the company invested in LICs and ETFs and built up a nice income stream from dividends. Could the OP leave the company to their children as shareholders? Then if the children did not sell, are there any stamp duty or CGT implications if the children don't sell any assets of the company?

The other issue is directorship. If the parents were both company Directors and both passed, who would replace them as directors of the company?

 

If a person is the shareholder of the company that means they own shares which could be passed via their will. No duty or CGT trigger with shares passing via a will. If the beneficiary doesn't sell there would be no CGT either.

Directors are usually appointed by the shareholders voting them in. But there could be new directors built in via other methods such as having replacement directors nominated in the constitution.

If the shares of the company is owned by a trustee these cannot be passed via a will. The trust will keep going as is after death, but under new control so the person that controls the trust now needs to consider succession of trustee and appointor roles on their death.

 

Is the Co structure better when youre doing retirement planning for a couple? Is my thinking right here?

You take out the loan and use it to buy shares in the Co. You get to negative gear 100% of the interest as the earnings from the IP go into the Co. The Co retains any earnings over time. When you retire you and your wife can take dividends totaling $36400 pa tax free (the Co having paid 28.5%) which is nice if you’re drawing other money untaxed from super. Or more and you get taxed at your marginal rate and get the franking credit.

If the Co sells the asset, you don’t get the CGT discount and that may be an issue depending on how much CG we’re talking, but if its not then the Co pays tax and you draw down the dividend over time, theoretically within the $36k/couple threshold (which is $58k/couple at pension age I think?).

So is my thinking right here that this could work for retirement with certain conditions: you’re ok to wait until retirement before realising any benefits; its better as a couple; the CG isn’t massive; you have sufficient supplementary tax free income from super that’s not taxed. I’m just playing with the idea so criticisms more than welcome.

 

The interest on the loan wouldn't be deductible in this situation as there is no expectation of income.

But generally a company would be good as it can delay the payment of dividends and then pay them out later when the shareholders income is lower.

This can be achieved with a trust though by the trust distributing to a bucket company. Also gives access to the 50% CGT discount.

 

Thanks. If youre drawing nominal dividends as income annually from the company would the loan be deductible?

 

Hi Terry

I've been thinking about this lately. Thanks for this post and other informative posts.

My wife (a Chinese but is in the process of getting the citizenship). I'm working in Hong Kong and am not a tax resident for Australian tax purpose yet. Our plan is to come back to Australia in 5 years time. But when both my wife and I move back to Australia, we may be subject to a capital gain tax. So I guess it's a smart thing to sell all our assets outside of Australia before we move back And have a trust or a company to acquire new australian assets. We have lots of shares (listed in HK AND THE US). I can sell the shares but need to time the market.

My goal is to get rid of my foreign assets and start investing back in Australia before we coming back.

Can you pls let us know sin e I'm not coming back in a few years but want to invest, would having a company or trust to acquire Australian property be a smart thing to do? I'm trying to avoid our australian assets not be subject to the capital gain at the time we are becoming a Australian tax resident. We also don't want to come back to Australia "naked" I.e. With no assets.

TC

 

For interest to be deductible you would have to have a reasonable expectation of income. So 'it depends'. Have to consider Part IVA too.

 

Worth considering but many issues to consider such as whether such a company or a trust would be considered a 'foreign person' for land tax and stamp duty purposes.

Also a company needs a resident director.

 

Yes, fair one.

That aside, the thinking is ok but may as well use a Trust due to CGT issues because the same benefits accrue? Of course, other issues to consider like estate planning etc.

 

the other main one is land tax

 

I'm super grateful for your help Terry.

 

And FIRB rules can apply to an interposed entity. Breach of these rules have fairly harsh penalties. You cant use a trust or company to avoid the rules applicable to human purchasers. Even using a legit Australian buyer to circumvent the rules fails (eg if they hold it on trust until you arrive)

Residential real estate – Australian corporations, trusts, and use of other persons [GN5] – Foreign Investment Review Board

 

Its very easy to get around the FIRB rules, but not very practical. Do you have someone willing to give a guarantee to 'your' trust's loan?