Structure to purchase commercial

Hi Guys
New to commercial investment.just wonder which structure is the best to purchase commercial property?
Trust,company or individual.....
I am home owner with a equity

 

Best to do what? Protect your assets? Stream the income? Reduce captial gains tax on eventiual sale (companies don’t get the CGT discount).

How financed? Some cash plus borrowings? All cash?

If via a company, need to consider how to own the shares. If a trust then a corporate trustee is useful.

 

Generally avoid individual as the increased risk makes it risky! Either a company or a company as trustee. Get legal advice on the structure of the structure

 

Hi

Thanks for your replay!

Sorry it’s all new for me, I only had residential investment in the past.
I am trying to find some info online what would be the best structure for me and how they different.
I would like to use property as a cash flow positive investment to pay off my current debt at first and then start paying off the investment itself.
I have been in touch with rethink property buyers’ agents and making myself ready for a purchase.
Regards finance I will have some equity from my current home and rest will be a bank loan.
We won’t go above 1 mil ,probably in 700-800k range .
G

 

Have a read of my hundreds of posts in the legal and tax section here on structuring.

 

Any particular reason? I would have thought that direct ownership was lower risk to the lender than a more indirect "structure".

 

My situation is similar. I plan to use house equity. I have some $700k equity from my current home and rest will be a bank loan. Searching for 2 mil commercial property with minimum 8% yield.

Have you decided on pros and cons of company versus individual versus trust structure? Any broker specialising in commercial loan?

I like lower tax rate for company but CGT after eventual sale in 10 years time , may cost more.

 

or it could be less too.

 

A company as owner gets no CGT discount but pays 30% max
A trust may distribute a discounted gain which at the highest marginal tax rate could face a rate of 23.5% or less.
Who is paying land tax ? (Lease may push this on tenant in which case its not a concern)
Who pays outgoings ?
+ve and -ve geared property ? A trust will quarantine the loss.
Unit trust, Disc Trust ?
Company or Corporate trustee may avoid consumer lending limits
Depending on size is the loan a commercial loan ?
Is any personal (eg equity) loan involved ?- In which case a different legal person to that of the trustee may be required. You cant lend to yourself.

I would address the finance limits first then seek advice on structure.

 

I get the company structure Paul@PFI has 30% tax, but don't you then pay tax if you distribute the income to yourself-i.e. the company dividend or employee wage pays you? Would that not be tax on tax?
I do get company structure though relative to land tax issue.

Remind me again the difference between unit trust and discret trust?

Note for others reading here-trusts in commercial can attract land tax surcharges, and if that is the only outgoing you cannot pass onto the tenant (& a slightly uncontrollable one at that), may not be worth it.

 

franking credits

 

This doesn't make sense to me. What state are you referring to?

 

@Greada

<Not an expert, just a punter.>

This is not limited to only commercial, but in your learnings, don't overlook the point that trusts must distribute profits whereas companies can retain profits.

Depending on your strategy (whether you will be trying to pay down the debt so that the asset is fully-owned ie unencumbered, or whether you are intending to carry a loan balance longer-term), you could end up with a large tax bill, without having "received" any income to cover it.

This is just one consideration, but was a significant factor in our decision on structure.

 

That should never happen I think as it creates problems.

 

Of course it shouldn't happen, but it can. And by can, I mean if you were trying to follow a specific strategy ie paying down the debt aggressively within the trust, and weren't thinking of the unintended consequences come tax time.

 

I am not sure what you mean. Who is 'you'?

A trustee must make someone presently entitled to the income. This should be paid out to them ideally. Often it is not and it then becomes an unpaid present entitlement - which is like a loan owed to the beneficiary but worse.

If the trustee wants to pay down the loan with a beneficiary's money they should be very careful and get the consent of the beneficiary. If the beneficiary dies or is bankruptcy or wants the money back it could cause the trust to go belly up.

If the beneficiary controls the trustee they might want to forgive any UPE owed to the trust or to receive a distribution and gift it back to the trust to avoid these issues later. But generally I think this shouldn't be done unless there are asset protection risks of the beneficiary becoming bankrupt at some point.

I had a client whose mum died and she had a UPE to the trust and it caused the trust to get a court judgment against it and lose 'its' assets.

 

Oh lordy. Yes, definitely all of those things as well. Don't forget death (oh you got that one), divorce, disease, destitution etc etc etc.

But also, as I was pointing out - tax implications. Just flagging something else for people to read up on.

Good luck, @Greada

 

How exactly?