Legal Tip 304: Holding Companies and Asset Protection

Discussion in 'Legal Issues' started by Terry_w, 4th Sep, 2020.

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  1. Terry_w

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

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    A holding company is a company that owns the shares of another company.

    It is often used as an asset protection strategy so that the profits of the trading company can be paid out without the tax consequences of the trading company paying a dividend to individual shareholders.


    Example

    Homer operates Mr Plough Pty Ltd with himself as sole shareholder. Mr Plough is conducting risky business – someone is bound to sue the company for something sooner or later. It is making huge profits though so the options are to either leave the money in the company and risk it being lost when the company is sued or pay it out as a dividend to Homer who will pay 47% tax on it.


    Barny also operates a similar business, copying Homer’s idea. But Barney uses a Company called the Ploughmeister Pty Ltd. The shares of the Ploughmeister Pty Ltd are owned by Plough Holdings Pty Ltd which in turn is owned by Barney.


    The Ploughmeister Pty Ltd makes a huge profit. Barney takes a market level wage. The profits are then paid out as a dividend to Plough Holdings Pty Ltd without any further tax payable – or perhaps a little bit because it would probably be taxed at 30% whereas the trading company would be taxed at 26%.

    Barney’s taxable income remains the same.


    Note that there are heaps of other issues and variations on this to consider and legal advice should be sought. One of which is that a holding company can be liable for the debts of the company it holds shares in – in some instances.
     
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  2. JohnPropChat

    JohnPropChat Well-Known Member

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    What's the benefit of holding company rather than a holding family trust that owns share in the trading company.
     
  3. Terry_w

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

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    Holding company can allow earnings to be retained without triggering more taX like a trust. It can allow for portions of ownership to be moved easily by moving the shares.
     
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  4. Bma

    Bma Well-Known Member

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    For your example above, it it was a trustee (company) for a trust instead of a holding company to hold the shares of the subsidiary, can the trustee company also be liable for the debts of the company it holds shares in? Is a trustee company treated the same as a holding company in this instance?
    Thank you!
     
  5. Terry_w

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

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    see
    Legal Tip 218: Are Shareholders Liable for the Debt of a Company?
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A trustee company should not also be a holding company. It can.... but it does not seem smart.
     
  7. Bma

    Bma Well-Known Member

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    I found that some people own the shares of their holding company with another company, instead of owning the shares of the holding company directly.
    For example, Tom owns the shares of Tom Pty Ltd and Tom Pty Ltd owns Thomas Holding Pty Ltd, Thomas Holding Pty Ltd owns its subsidiaries.
    What the benefits might be if they do it this way?
    Thank you!
     
  8. Terry_w

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

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    Tom Pty Ltd could be trustee. There may be other shareholders involved and it could be for estate planning reasons.
     
  9. Bma

    Bma Well-Known Member

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    Thank you Terry.
     
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  10. Terry_w

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

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    It could also be that there are other shareholders involved at some point. Profits might flow to the holding company to get the immediately out of the trading company with this holding company owned by 2 separate companies so that each 'partner' can get their profits out of the holding company but park it and wait until they are ready to receive a dividend independently of each other.
     
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