Potentially silly question - why not buy all property under company

I have a potentially silly question that I can't get my head around, maybe I'm missing something basic.

Why don't people put all property purchases under companies (e.g. one property per company)? So that when they resell it one day, they can simply transfer the company shares to the new owner, saving the new owner stamp duty. Also gives other advantages:

1) flexibility - e.g. transfer to children or if you set up a trust later into that trust, again no stamp duty because property is technically not changing ownership
2) new land tax threshold

The only downside I can think of is the yearly $200-300 ASIC review fee. What am I missing? Why is this not widespread?

 

? Company tax 30%, no negative gearing across incomes, no CGT reductions? Probably more.

 

There can be reasons to hold in a company but:

1. transfer of shares in companies attracts stamp duty in many states
2. land tax is aggregated across companies linked to one person
3. loss of 50% CGT discount.
4. strangers generally don't want to take over an existing company because of the risk involved. you don't know what liabilities may he hanging around.
5. Corporations law is complex and administered by ASIC so added dangers.

 

As above and ...
Stacks more DD required on a company. The risk of inheriting an issue means often easier to strip a company of its assets (asset sale & wind down) and start anew.

 

Here is a legal tip I wrote on a company owning a property:
Legal Tip 55: A Company Owning Property

 

The decision to use a structure based on an apparent land tax saving alone is a very short term - long term view and serious problems can and do result. The loan issues alone can seriously affect capacity as the Directors will give a charge / guarantee. The tax issues with access to equity release used for any purpose other than the company buying further property can be serious and problematic. Selling the property at a future date will trigger a taxable profit and on top of this will lead to very high additional tax for shareholders.

The tax issues with neg gearing, CGT, stamp duty, transfer duty, premium rates of land tax and even FBT can be encountered. I once had a client who was advised to use a company...For her PPOR. In a major city tower for a whole floor penthouse worth $15m for the shell 15 years ago. One of the dumbest things I have ever seen. Fortunately after spending $20K in legals OSR accepted she was the legal owner and the company was an apparent acquisition. No transfer duty and as it was detected early no CGT impact. The adviser explained his advice as asset protection which the conciliation person argued was a foolish notion since she owned all the shares in the company. They settled it.

There can be sound reasons to use a company. eg Look at Meriton. But without good advice its not a great strategy.

 

Thank you everyone for the very informative replies, it gave me heaps to consider.

Thank you Terry, very informative post as always. I also read your other threads discussing this topic before replying.

1) the duty rate for share transfer is something nominal or at least much lower than property purchases right? I don't remember paying a 4 or 5 figure bill when I purchased 200k in vanguard ETF earlier this year. Is it different for small PTY LTDs holding a single resi property?

2) after reading your past threads I think the best structure for me is a Pty Ltd held within a discretionary trust - do you have a suggestion on how one would structure things to prevent aggregation?

3) I'm ok with that - your previous threads highlighted the ability to frank dividends, so even if 100% of the CGT is incurred, I'll just pay myself, my wife, my relos etc franked dividends over time, as beneficiaries of the DT. I'm ok with the admin effort needed.

4) that's fine, come time to sell, the company will sell the resi property, or I can sell the shares, an extra crappy option is better than nothing

5) I'm ok with that - does anyone have anything specific to be mindful of or is this just a general risk of uncertainty

Some of my other considerations of potential downsides:

6) trapped losses - that's fine because I plan to keep things neutral to positively geared. I find what works for me is buying a relatively large parcel of land in Sydney and whacking a granny flat and studio on it gives me a 5+% net yield even in today's market.

7) financing options - yes this is a valid concern - I hope banks don't restrict me to commercial lending at commercial rates. I don't mind giving personal guarantees as it is the only way to make the loans service but I don't want to pay 2% higher than resi SVR. Need to investigate this further.

I think on the balance of things, and after numerical modelling on my own situation, the future value of land tax value savings far outweighs the future value of extra taxation due to 100% CGT - frankability of dividends makes corporation tax rate irrelevant. Terry thank you very much for pointing out your previous posts, the information was very helpful to me.

 

Duty applies to a transfer of shares in a land rich entity. This taxes the shares in the same manner as transfer duty on land. Normal transfer duty applies to the land acquired by a company. If later some or all shares are transferred to another shareholder then transfer duty (pro-rata) will apply based on the value of the land. If shares are held and remain unchanged then no duty issues occur.

There is no duty for on-market transfer of EFT shares even if they are land rich. The assumption is that a widely held trust etc is not a dutiable transfer or scheme of land transfer. However in NSW if you off-market transfer to your ETFs to spouse transfer duty may be payable !!

 

Duty will depend on the state the shares are held in. If it is a private company in NSW for example then the transfer duty is 0.6% unless it is a land rich company and then the rate is the same as transfer of land.

 

I just found a possible solid reason to buy IPs in a company if neg gearing tax changes push through after the May budget.

The UK has made changes to neg gearing (they call it buy to let) which kick off in April. Some suggest that Treasury are watching the changes for a possible duplication here. In the UK the rate of tax deduction for interest on neg geared properties will be capped at 50% of the interest AND at a tax rate of 20% not the taxpayer marginal rate. The idea it destroys heavily geared properties and makes many of them positive geared. More tax $ and it doesnt affect CGT which has a mirror provision to our third element of the cost base issue. To remove all doubt the UK also upped stamp duty by 3% on second properties.

One strategy being discussed in UK to beat this is use of a company. Companies dont have a marginal tax rate. And the discounted deduction doesnt apply to a company in UK.

And then I query what may happen if a trust owns the property and the beneficial owner is a company ...Could trust income be grossed - down into the company ?? Something to keep in the back of my mind.

 

If the company is a trustee of a discretionary trust, the company will not pay any dividends as it does not own the property beneficially, but holds the legal title on trust for your discretionary trust and you will pay land tax in NSW without the benefit of a threshold.