Ownership Structure: Asset Protection and Land Tax Threshold

Discussion in 'Accounting & Tax' started by Student, 18th Nov, 2017.

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  1. Trainee

    Trainee Well-Known Member

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    what happens to your negative gearing?
     
  2. Terry_w

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

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    Don't forget the CGT would be a max of 24% or so whereas company tax is 30%. If the company was a small business the tax would 28%. Not much difference.

    Also with a company there would be franking credits for tax already paid by the company so the eventual tax rate could be much lower - nil potentially.
     
  3. Student

    Student Well-Known Member

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    I think that any losses would be trapped in a discretionary trust.

    For a company or unit trust, could the individual borrow to pay for the shares or units outside the relevant company or trust and then get the benefit of any negative gearing?

    So if looking to have the ability to negatively gear, the discretionary trust may not be the preferred vehicle. Although losses could be recouped over time.
     
  4. Student

    Student Well-Known Member

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    Ok, so taking into consideration company tax of say 30% and access to the franking credit, assuming an individual holds the shares in the company, effectively the source income in the individual’s hands would still in total be taxed at the individual’s marginal rate. On that basis I think the numbers will be as described?

    If the shares of the company are held by a discretionary trust, then different effective tax rates may apply for different beneficiaries but would still be dependent on the tax rate of the beneficiary. Lower tax rate individuals or entities would be able to have a higher capital growth rate assumption to make it work, similar to if that individual held the shares directly?
     
  5. Terry_w

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

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    If the unit holder borrows to acquire the units in a fixed trust they could claim the interest in their personal tax return. Probably not in full for a company as there is no guarantee of a dividend.

    Keep in mind lending will be restricted if borrowing to acquire units as you won't legally own the property
     
  6. Terry_w

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

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    The company might be able to retain the income in one year and pay it out in another.
     
  7. Terry_w

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

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    If the trustee owns the property they company would be giving a mortgage to the bank, not you as you are not an owner.
     
  8. Mike A

    Mike A Well-Known Member

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    @Terry_w is right.

    If its a long term hold then yes the company wont get the 50% discount. However if the plan was to sell during retirement it might actually be better. Or if you have a non working spouse.

    if you sold the property and paid out dividends to the trust and that went to an individual they may get a full refund of the franking credits.

    Its a numbers game and requires planning but as terry says sometimes you arent worse off. In fact you may be better off if you can stream it over 10 years to 15 years and also do a deductible contribution to super.

    I should do an example.
     
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  9. Terry_w

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

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    Simple example
    Jonny buys $500,000 property, holds it for a few years and sells it for $1mil
    $500,000 capital gain is taxed as $250,0000 after the discount and he pays $125,000 tax

    ABC Pty buys identicle property next door for the same amount and sells for the same.
    $500,000 capital gain is taxed at 30% and the tax is $150,000

    That is $25,000 more in tax by holding the property in a company

    But let's say Jonny had already used up his land tax threshold - he might have paid $8,000 land tax per year, whereas the company may not have had any land tax (depending on the land content of the property)

    Also with the company the $350,000 in retained earnings can be paid out to the shareholders with $150,000 tax credit attached. Jonny may have a discretionary trust as shareholder and cause the company to pay out $50,000 per year for 10 years after retirement. Jonny and wife may get $25,000 each per year and get some of that tax back.
     
  10. Student

    Student Well-Known Member

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    So this would actually involve the discretionary trust loaning an amount to the individual, the individual then using the amount from the discretionary trust to fund the unit trust for the equity amount and then the bank loaning the unit trust the debt for the property purchase?
     
  11. Student

    Student Well-Known Member

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    Thank you Terry and Michael.

    It looks like there are therefore benefits for company ownership by deferring the dividends from the company until a point in time where there may be beneficiaries with a lower tax bracket. Just thinking that if you start building up cash in this company then the ability to invest cash may also have similar considerations, because for example if you wanted to invest the cash in shares the CGT discount would also not apply to those shares.

    If you are trying to hopefully build up enough passive income so that by retirement it would put you in the top tax bracket, then perhaps the company may not be the preferred investment vehicle?
     
  12. Mike A

    Mike A Well-Known Member

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    A vehicle that provides

    1. Asset protection
    2. Land tax thresholds
    3. Ability to move to super
    4. Ability to use refinancing principle
    5. Ability to transfer to parties without stamp duty
    6. negative gearing benefits
    7. Gets the 50% cgt discount
    8. Provides optimal tax flexibilty

    If you find one let me know. The holy grail.
     
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  13. Terry_w

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

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    The fixed unit trust!
     
  14. Mike A

    Mike A Well-Known Member

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    Doesnt provide asset protection if units held by an individual

    Doesnt provide land tax threshold if units held by a discretionary trust

    Doesnt provide gearing benefits if units held by a discretionary trust

    Doesnt provide tax flexibility if units held by an individual

    Sorry fail. Next
     
  15. Terry_w

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

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    The bank would lend the individual the money with the corporate trustee guaranteeing the loan with a mortgage over the property. The individual could also borrow from a related DT to fund the remaining with the units of the unit trust being charged for security (probably breaching the banks terms in doing so)
     
  16. Terry_w

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

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    It does provide some asset protection with the corporate trustee - but not against the bankruptcy of the unit holder.

    If a DT owns the units there can be negative gearing benefits if the DT has other income - same with a company.

    If the units held by a company or DT provides the tax flexibility.

    I think the UT with units owned by a company with the shares of the company owned by a DT is about as close to ideal as you can get - for NSW.
     
  17. Terry_w

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

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    Not necessarily. A company is good in that it can retain income or pay it out. Might be better to cap the income tax at 30% and have the company, or a bucket company keep investing so that there is more compounding.
     
  18. Mike A

    Mike A Well-Known Member

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    Units held by a company wont provide tax flexibility. You would lose the 50% cgt discount when it is distributed to the company.

    Having other income in the DT is an issue for those with PAYG income. May help with shares but you then lose the benefits of the franking credits if all the income is used up as you wont have at least a dollar of income to distribute.

    The reality there is no ideal.
     
  19. Terry_w

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

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    No you can't have your cake and eat it too - but you can get some crumbs.

    The company can provide good tax flexibility, especially with the shares owned by a DT - but the downside is no 50% CGT discount.

    These structures can work well with those that are self employed. Hard for the PAYG person initially, but over time they can slowly build up wealth inside trusts and different structures can distribute to each other and taxes can be saved.
     
  20. Mike A

    Mike A Well-Known Member

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    I agree a big issue for the PAYG person is the deferral of tax benefits from gearing. For a property producing losses of say 20k per annum @ 30% tax rate that is 6k a year deferred. 60k over 10 years. For many thats an additional property.

    For some it may even mean they cant service the debt in the early years.

    The PAYG generally loses out with complex structures. Business owners can take huge advantages.

    If you truly want to save on tax get out of the PAYG system as quickly as possible.
     
    Last edited: 20th Nov, 2017
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