Legal Tip 71: Selling shares in a company that owns property instead of the property

A potential way to save on stamp duty is to sell the shares in the company that owns property rather than the property itself. This can work well where the company owns just one property.


At first thought you may think there is a similar CGT result - transfer of shares is a CGT event just as the transfer of property is, but there will be a difference in tax as a result. Where the company transfers property it will be assessed as getting the gain, but there will be no CGT discount. Where the shares are sold the person selling the shares will have a CGT event it this person would be liable for the tax and not the company. Where the shares have been held for more than 12 months the CGT discount may be available too. So the result could be much different. The difference would be even greater if the person selling the shares had a captial loss which could offset the shares.


On the stamp duty side there are also large differences. In NSW the transfer of land could result in duty of around 4% of the purchase price in some cases, however the transfer of shares in a private company attracts only 0.6% stamp duty.


However, there are special rules for companies which own more than a certain value of land. These companies are considered ‘land rich’ or ‘landholders’ and the duty on the transfer of units will be the same as the n offset duty on the transfer of land.

And don't forget the risks with taking over a company - you don't know if there is impending litigation, unpaid tax, creditors etc

 

@Terry_w

thanks for addressing the question!

i guess purposely created company (XX the Ave pty ltd) to hold assetI(IP) would be less risky ???

 

Can individuals be land rich as well or just companies?

I should have paid more attention when I researched it during my property rotation as a grad...

 

No. Only companies or trusts holding land worth more than $2mil - in NSW anyway.

 

Yes, but a purchaser still would not know what that company had done in the past - unless it was a related party transfer.

 

If one is buying a land with view of getting DA approved and re-sale it to developers.

It could work out better to buy under company name. (With half dozen other things to consider as Terry said)

 

(oftThere are instances (in NSW at least) where the transfer of beneficial equity interests are assessed as a land transfer. Changes to a disc trust can be caught too. $1.1m + This is how some trust interests get dutied. Common with unit trusts etc Its the tax many accountants don't understand. OSR default position is that "conveyance" can occur. Not a transfer of security. Don't rely on the land rich threshold - The threshold for trusts is lower. (anti-avoidance for unit trust scheme). There is a simple way around some matters - A share buy back or a unit trust redemption / reissue can (sometimes) be a strategy BUT the $2m land rich rules may apply.

It is ALWAYS wise to seek a OSR ruling prior to considering any such transfers etc . Otherwise at least one and sometimes two lots of duty can be imposed. Two you ask ?? Yes people realise the error then try to correct it and make the problem worse.

All covered by Revenue Ruling DUT 017 and others.

Trusts can be a smart way in limited cases. A trust merger can leave a transfer (often called a claytons) non-dutiable. (CPT Custodian case)

 

Ive considered this previously. The issue I have with it is that most companies are $1 companies. That is - the shares are vested (right term?) at $1 each. That is the value of each share.

Assuming you have 100shares in a company and sell a property valued at $500k you would reasonably expect to receive $500k for the company sale less any debt held.

Example
You have a $100company (100shares x $1).
You borrow $300k and buy a house for $400k.
Thanks to CG you now sell the house for $500k, repay $300k loan and have net $200k.

If instead you sell the company shares for say $500k, the buyer would still want to have clear title - therefore you can't settle on the property for only $200k and leave the debt to them (I would be surprised if you could and if the banks would allow it).

Therefore you are liable for tax on $499,900 rather than on only $100k.

Unless you vest the shares at a higher price initially - in which case don't you need to physically invest that money initially?

What have I missed?

Blacky

 

The value of the shares will directly be related to the value of the assets of the company.

 

If the company is not a trustee and doesn't run a business then the transfer of shares may be exempt from duty if its total land holdings are less than $2mil.

But check this with a WA lawyer first.

 

I just read a book about how expensive properties in England are often owned by companies set up in tax havens and when the 'property' is sold they hide the change by secretly transferring the shares of the company offshore and avoid duty and taxes this way. These companies are often in jurisdictions with secrecy and the shareholders are no able to be searched. They might also be bearer shares. Whomever holds the certificate is the shareholder.

something similar could happen here too - although not paying tax and/or duty would be a breach of legislation