Trusts vs companies for development

Hi,

I am trying to get my head around the merits of discretionary trusts vs companies for owning land for the purposes of development.

Background:

• Wife earns at highest marginal tax rate, no prospect of splitting income
• Labor will likely be next Federal government anyway and minimum tax on discretionary trusts will be 30%
• I wish to buy land and develop townhouses and sell. I have no interest in holding property long term.
• I may change course in the future and head back overseas half-way through development
  
• I am in QLD, potential development in QLD

Objectives:

• Pay no more tax than necessary
  
• Protect assets (e.g. someone gets injured on site and I get sued or council infrastructure/sewer is damaged by contractors and I get sued)
  
• Keep things as simple as possible

I have been recommended to set up a discretionary trust with a corporate trustee to own land and conduct development and then setup a bucket company as a beneficiary of the DT to hold income and distribute income. The bucket company then has a discretionary trust with my wife and myself as beneficiaries.

My problems with above recommendation :

Complex - we are looking at two companies and two discretionary trusts

• Restrictive: I think I need to be a resident if I keep assets in a discretionary trust basically making life more difficult if I go overseas in the future (vs company where I can appoint someone as resident director and maintain control of asset)
• No tax benefit - I can't 'split' income with my wife due to her income and Labor government is incoming anyway
• The discretionary trust which holds the land could be sued and they take a chunk of equity out of the land

Alternatives that I as a non-lawyer, non-accountant can think of:

1. I set up one company and that company buys the land and conducts the development;
2. I set up two companies, one holds the land and the other does the development (thereby protecting $ in company 1 in the case the development company 2 gets sued.

I pay myself a wage such that my income tax rate is at 30%.

The only benefit that I can see of the discretionary trust are that if I buy land and I don't develop it and sell the land later I get access to capital gains discount. This might be a 10% scenario so a marginal benefit there.

There is no difference in land tax with respect to company owning land or a discretionary trust owning land.

Am I thinking about this correctly? What am I missing? I know I am missing a lot unfortunately as I don't know what I don't know.

 

Labor will likely be next Federal government anyway and minimum tax on discretionary trusts will be 30%

Unlikely I think



Complex - we are looking at two companies and two discretionary trusts

Why is this complex compared to one of each?



Restrictive: I think I need to be a resident if I keep assets in a discretionary trust basically making life more difficult if I go overseas in the future (vs company where I can appoint someone as resident director bu maintain control of asset

Why couldn’t you do this with the corporate trustee?

A company must have at least 1 resident director



No tax benefit - I can't 'split' income with my wife due to her income and Labor government is incoming anyway

Why?



Land tax will differ if in NSW.



There is no real tax benefit with one over the other. A trading trust could hold profits and distribute them to the trustee shareholder of the company.



No CGT on the development. So no 50% CGT discount.

No real asset protection advantage either as the company will give limited liability in either case.



Who advised you?

Why not ask them why?

 

Thanks Terry.

Online bookie odds suggest 60% chance of Labor victory vs 40% for Coalition.

I guess the complexity is that it is more things for me to get my head around, which would not be an issue for you for example due to your expertise, but this is my decision, so being able to understand what I am recommended is a hurdle I have to clear.

Thank you for the insight on having the corporate trustee having a resident Australian director.

Why can't I split income with my wife? Because she is already at highest tax bracket (as mentioned above), therefore no benefit to splitting income with her, therefore no benefit to having a discretionary trust was my thinking.

As to why I am not asking my advisor. I have, I will wait for their response. I like to get a couple of independent viewpoints on the same thing and this is an important step with long-term ramifications.

 

Access to CGT discount ? WRONG. Intent to buy land taints that and its never a CGT asset.

I would never recommend alternative 1 over 2. Only ONE entity will sell the finished project.
Not two. Have you considered personal land ownership ? Joint even ? Different Directors for the BUILDCO ? eg Wife owns land and you Director of BUILDCO

The land tax position of the entity owning the land should be explored. In QLD absentee rates could occur. Also ASIC issues arise if you leave the country. A company must have a resident Director. Trustee cant be a non-resident trust without other tax issues. Change of residency could trigger a CGT issue ?

What is the budgeted profit ?? After GST has been allowed in sales and costs ? Margin scheme ? Is it available or a benefit ?

At end of dev lets assume tax must be paid on that profit. A company tax rate is NOT full and final tax and to use that is plain incorrect in most cases.. Planning to dump profit into a bucket company may lower the tax rate BUT...use of that company other than as an investment vehicle would pose a issue. ie It cant lend or give the profit away !! The shareholders may be full and final tax. A disc trust may give flexibility so that profit can be shared in some way other than that of company ownership.

Good example of the need to get tax and legal advice. The proposed media announced trust changes by the ALP would be a long long way after they win an election. And my understanding its its a minimum tax rate - Not unlike a company. The final tax rate could be higher and no issue.

 

What's the benefit of the bucket company in this scenario? Couldn't the individual + spouse be the beneficiaries of the first DT rather than the bucket company?

 

Company A with shares held by Company B. Shares in Company B held by a discretionary trust. Lots of reasons. Your adviser will tell you why.

 

tax

 

managing div 7a for future developments as well if that is applicable. asset protection of development profits. streaming profits over a number of years instead of one potentially lower overall tax liability. etc etc

 

companies can lend to other entities. If company to company no Division 7a. If to an individual or trust Div 7a needs to be managed. can be an effective tax planning tool. no div 7a repayments required first year of loan.

 

Are u able to elaborate? Isn't the main tax benefit being able to distribute to the lower income earner in the year of sale (assuming profits were made) which could be achieved by having just the one discretionary trust with corporate trustee? What's the point of the second trust and second company being a beneficiary of the first trust?

 

you really need to spend time discussing it with someone. give @Paul@PFI a call if you are based in Sydney or @Terry_w

 

You are spending big dollars on a site and then big dollars on developing it. Good advice from a solicitor and an accountant can save you:
1. Lots of headaches; and
2. In most circumstance, lots of money.

If you setup wrong and change later it will cost you in stamp duty, tax and potential losses from litiagnts

How are you securing your financial contribution?

If things go bad would you prefer to be first in line (after the banks) or at the end of the line after the liquidator?

I see people stuff this is up a lot and cost them large sums that they just need not have paid. People seem happy to pay an agent a decent sum to sell the properties and lots on one off advertising, but cringe at paying a few thousand to get setup properly.

My biggest developer client will move 250 lots this year. My smallest will invariably move none, though they will intend to move 2 but it will take too long or cost too much. My guys setup structures for developers pretty much every single business day of the week, I get involved in the more complex ones.

Setting up properly is the cheapest insurance you will ever buy, let alone your potential savings.

If you have nothing setup at all, then your setup for a small development is likely to be no more than $6k for your first development including ASIC fees(plus GST). After that is likely to cost you half that for each subsequent one. Our setup may well save you that much in the first year of ownership alone, not to mention the SANF.

In QLD, I would see Chris Wheatley at Scope Accounting to sort out the best way to do your books and tax, AFTER you have met with a solicitor that specialises in structuring for developers.

 

yes @RPI doesnt make sense but it happens all the time.

 

It's the ones we see in litigation or liquidation that are the worst. They saved themselves $1500 dollars by setting up online only to lose everything later on.

 

Here is a clue

What is the top rate of tax for a company?
What about a person?

 

Thanks to all of the above contributions. Rest assured that I am more than happy to pay for advice. In fact I don't trust free advice. However, even with paid advice, it still has to demonstrably make sense. There are plenty of surgeons out there that recommend knee arthroscopes when there is little evidence that they actually help.

 

Scour through all @Terry_w tax and legal tips then book into see a lawyer. An accountant cant provide legal advice on structuring. Pick a lawyer well versed in tax and away you go.

 

What tax rate applies to errors fraud mistake and recklessness...What are the legal fees?

 

Sorry @Merlin for hijacking your thread. I was speaking to my accountant today about something very similar to your situation and he didn't say anything about setting up a second company or trust so when I saw your post I thought I'd take the opportunity to ask. I also have no problems seeking and paying for professional advice (which is why I was talking to my accountant in the first place) but I always like to get second opinions and be as informed as possible before having any "formal" conversations. It makes the best use of everybody's time. Also, if anyone can recommend a property lawyer operating in Melbourne inner east, please PM me their details.

 

Just ask the accountant things like

1. If i use a trust and then decide to do another development can i distribute to a bucket company to cap tax at 30% and then lend back to the same trust or a new trust. The answer is you now have a division 7a issue. Using a company with a company as shareholder would have allowed you to flush the profits out (asset protection) and then from company B shareholder it acts as a bank for future developments. No additonal tax as rates are the same. No divison 7a issues as company to company onlending.

2. If you arent doing another development do you need all the cash straight away. Profits in a trust need to be distributed. High profits. High individual tax rates. Could cap it at 30% and stream out dividends over future years. Lower overall tax burden.

3. Land tax. Trust dont get a threshold in many states. Companies do.

Just three things. If they cant answer those adequately then go elsewhere