Hi all,
My query should probably be in the Accounting and Legal section, but it seems that area is boring to you all as the posts in that section doesnt get a lot of replies [blink]
I am new to the game and a lot of queries from new investors in this thread so far are all about where and what to buy etc.
My main query prior to starting out is whether to start buying IP as yourself, as a sole trader (ie register a business name) or create a company.
Steve’s books did not really touch on this area at all which I found disappointing.
I am interested on how you guys are doing it (particularly those currently with multiple IPs), and what the tax implications are doing it using the different methods mentioned above.
The main reason for my query is that if you have a property under your own name and wish to change it to a company or business name down the track, you have to pay stamp duty all over again! So i want to get this right at the start.
Thanks in advance for your help and comments.
Hi
Your right! More of an accounting question. It is a good idea to set up a trust for asset protection but also with a HDT you can personally claim any losses with a negatively geared property.
Using the search function look up trusts as there are and have been many posts on this subject.
Hope this helps.
ShelleyHi there learningtoinvest,
The question you have asked opens many cans of worms and cannot be adequately answered in a forum such as this. You need to speek to an accountant/lawyer to get some advice as to how the different structures will affect your particular situation.
Having said that, I and the others on this forum can provide some general information which may be relevant or at least give you a starting point from which you base your enquiries.
Keep in mind that this is not intended as financial advice and please seek professional advice from a qualified and licensed tax/accounting advisor.
If you invest in your own name you will pay tax on any net income from your investments. You will also pay capital gains tax when you sell, although you get 50% CGT discount if you hold for more than a year. If you make a net loss each year, you get to claim a tax deduction for it. If you default on the loan and it gets repo’d and sold off by the bank, and you owe more than the selling price, the bank (or their mortgage insurer) will sue you to recover the balance. This may put your other personal assets at risk. But you can get mortgage repayment insurance to mitigate this. Also, you are exposed legally if anyone wants to sue you in relation to the property (eg. the house is structurally deficient and a tenant falls through the floor and injures themselves). Again, you can insure against this risk.
A sole trader is basically you personally operating a business. It is not a separate legal entity to yourself. It is just a term meaning you, carrying on a business. The legal liabilities would therefore be the same. The tax liabilities would mostly be the same, although there might be more deductions available if they were business expenses. It also depends if your are carrying on a business doing something else, and also investing in property, or if you are carrying on a business of property trading or property management. If you are carrying on a business of property trading, all your profits on selling would be taxed as business profits, not capital gains, therefore you would not get 50% CGT concession. As a sole proprietor if your turnover (gross revenues) is >$50K you will need to register for GST and lodge BAS’s etc.
The difference with operating ta company is that a company is a separate legal entity to its owners (ie. you) and therefore if it owns the property, it will be legally liable. People would sue the company, not you, for any legal claims. Also, the revenues (rent) and expenses (interest, rates, management fees, maintenance) etc would be earned and incurred by the company. The company tax rate is 30%, which may be higher or lower than YOUR marginal rate. Also, no 50% CGT concession on selling the property. If you wanted to pull money out of the company, it would usually be treated as a dividend (therefore assessed to your PERSONAL taxable income) or a salary (again personally taxable to you). It takes about $1000 to set up a company, and you need to lodge a separate tax return and ASIC return each year. The you also have to consider GST and lodging a BAS (business activity statement) every quarter.
Another structure to consider is a trust. A trust will provide legal protection as well as potential tax considerations. That is another story altogether and a little complicated for me to explain in a few lines.
I have talked over a trust with my accountant. It’s not cheap as you need to involve accountants and lawyers, and at the end of the day what really is the risk of everything going pear shaped and you getting the pants sued off you? If you have the correct insurances in place, he suggested you should be OK to invest as an individual.
Hope this helps. Any other forumites wish to add to this, or correct me if I have said something incorrect?
Regards,
eeshole
You should probably look a getting one property in your name, see how you go and then if you intend to keep going, set up a trust at that stage.
Trusts are cheap to setup. from $137!
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks heaps for your detailed reply Eeshole – much appreciated.
As I am just starting out i think I will start as an individual with my first IP and see where we go from there.
I will also read up on trusts as it seems that’s how most of you more experienced investors are doing it. Although I have a feeling that the BIG ones like Steve would most likely be investing via a company format.
Keep in mind also that there are transfer costs involved if you transfer your properties under your own name into a business or company name.
One step at a time for me then i guess…
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