Ownership Structure: Asset Protection and Land Tax Threshold

Is it possible to please explain what the benefit is of going through a unit trust first and then having a company own units in the unit trust? What is the difference between this and just having the company own the property.

 

I’m not sure I understand this. Are you saying that having other income in the discretionary trust is an issue for those with PAYG income as it would just add to the tax burden of the PAYG individual? Could you please describe how you would lose the benefit of franking credits?

 

I have a post on here somewhere called something like the '18 benefits of a unit trust' which explains a lot.

Main difference is ability to transfer units to a SMSF later and ability to transfer units without notifying asic

 

A trust must have at least $1 of income to pay on benefits of franking credits. If the income is negative this may not possible.

 

Student, i think you need to consider 3 questions:
How likely youll need asset protection.
Can you mitigate land tax.
What will it cost (not just setup costs but loss of negative gearing etc) to use a complex structure?

 

Yes, agree, the company can keep reinvesting, cap the tax rate at 30% in the immediate term and potentially defer higher tax if it applies. However, there may be a limit to how much the company can invest in property as the land tax threshold would be hit in this vehicle again? Then, that particular vehicle would be limited to say share or other investments?

Still thinking on which option!

• Discretionary trust: pay more immediate costs of land tax and get asset protection
• SMSF: save land tax, get asset protection but lock up funds and potentially limit future use of SMSF because if it continues to buy property the loan amount looks like it would be included in the $1.6 million limit and depending on leverage level may mean much less use of SMSF than the limit
• Company: save land tax, get ability to effectively defer tax but lose CGT discount and potentially pay more overall tax depending on future situation

 

Thanks for the assessment. I guess more limited need for asset protection at the moment as I am a PAYG employee, but don't know if this will change in the future (also, assuming risk events that seminars talk about don't occur).

When you say can you mitigate land tax, are you saying is may be worth it to pay the land tax for some other benefit? Alternatively are you saying you can mitigate land tax in some other way?

Yes, thanks, will need to investigate costs of structure.

 

Company will have a threshold the same as a person. This year it is about $582k. Thereafter new companies might be aggregated and taxed as one.

So it is not a matter of one structure for the rest of your investing career but perhaps multiple.

For example one is a company and then the next in a discretionary trust if your company would be paying land tax anyway.

 

Thanks, does the company get its own separate land tax threshold (the utilisation of the land tax threshold by shareholders is counted separately)?

 

No.

They discuss this when you sit down with one of their staff or someone they pass the work to for some kind of benefit.......potentially

 

Is there anything inherently risky in commercial property that it would be better to have a structure to own it, for asset protection or otherwise?

 

Yes

 

At any one time we will have multiple lessor v lessee disputes on foot. As at today we have 6. Tenants are more commercially oriented and, as the damages involved are larger (we have a $2m+ dispute where rent is over $600k a year), more motivated to pursue an outcome.

 

Thanks, this emphasises the need for a structure if commercial property. Are there any that are better for commercial property, for example, is a discretionary trust better or does a unit trust or company provide similar asset protection or other benefits?

 

In the first instance, You will need a company to limit liability whether as trustee or I it's own right. And then need to consider additional defences

 

Thanks Terry. Perhaps a corporate trustee with discretionary trust is best protection as the beneficiaries are not as defined as for a unit trust or company?

Do you know if a company has a separate land tax threshold (considered separate from its shareholders)? Would such a company be considered a related company under section 29 of the Land Tax Management Act 1956 and therefore grouping would apply so that a separate land tax threshold would not be available (tried to research this)? Although potentially if the company was owned by a discretionary trust this may not be an issue?

 

In Nsw a company not acting as trust has a separate threshold for land tax unless aggregated.

If the landlord is sued, a corporate trustee of a distraction trust woukd not provide better protection than a company as neither beneficiaries or shareholders could be liable for the debts. Unit holders however could be.

What are you saying the company is related to?

 

Thank you.

The section 29 reference refers to related companies with there is common control or where a company holds more than half the issued share capital of another company. Perhaps it is intended only to apply to companies, but there are references to persons in that section as well. I was wondering if the person that has control of the company would be considered to be related to the company owning the property and therefore the person's land tax threshold would be considered jointly? Perhaps you could address this by having the company owned by a discretionary trust rather than the individual but not sure if it would be taken to be under the control of the individual?

A further consideration is if later you had two companies which were considered related you may not be able to continue to get separate land tax thresholds. I don't know if you could structure around this and if you would for example need to have different discretionary trusts hold the different companies or whether this would not be necessary?

 

Youve put land tax minimisation and asset protection as your first priorities. Why? What about tax deductions and borrowing capacity, for example?

 

You will need to seek legal advice on this.
Definitely 2 or more companies are likely to be grouped in NSW.