All Topics / Legal & Accounting / Why you should never buy an appreciating asset in

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  • Profile photo of RobJaniceRobJanice
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    Hi All

    Just wondering what peoples views are on this. tink about this.

    “”Why you should never buy an appreciating asset in a company!””

    Cheers Rob

    Anyone who has never made a mistake has never tried anything new.”

    Albert Einstein
    1879-1955, Physicist and Nobel Laureate

    Profile photo of Robbie BRobbie B
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    Your post does not seem to ask anything but I have to say that I can think of many reasons in favour of buying appreciating assets in a company structure. What is the point you are making?

    TMA


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    Profile photo of coastymikecoastymike
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    The real question should be why should you never hold appreciating tangible assets in a company. The main reason is that companies are not eligible for the 50% CGT discount. This is an enormous loss of tax savings by purchasing appreciating assets through a company.

    There are various strategies if one does want to operate the business itself through a company and have a trust holding the appreciating assets and licensing these back to the company.

    However companies are required for some concessions such as the R&D concession. This 125% tax concessions is only available for company structures and no other structure.

    Profile photo of Robbie BRobbie B
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    Most companies holding appreciating assets also utilise a trustee company (of which the trading company directors are also directors of) and a trust. Impact of taxation is minimised.

    TMA


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    Profile photo of TerrywTerryw
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    Even if the shares of the company are held by a trust, I beleive the CG is still unable to be discounted.

    One reason to hold a proeprty in a company would be to avoid stamp duty on the transfer (in Vic at least). When selling you could just sell the shares in the company, and avoid stamp duty.

    Terryw
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    Profile photo of RobJaniceRobJanice
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    Sorry TMA
    I don’t have a specific point to make.
    Just wanting to start a disscusion based on that sentence.
    What are the reasons that you would favour buying appreciating assets in a company structure? Maybe against as well.
    As coasty Mike mentioned CG is paid on the total gain. Hi Mike , Terry. Mike apart from holding assets personally do you think that the only other entity should be trusts?
    TMA please explain a bit more about lessening the tax implications that you mentioned.

    Cheers guys
    Rob

    “Goodness is the only investment that never fails.” — Henry David Thoreau, 19th-century American essayist and nature writer

    Profile photo of Robbie BRobbie B
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    I didn’t say I “favoured” it… just that I could think of many reasons for it.

    I think an Accountant would be the best one to outline minimising tax implications. I don’t like giving incorrect information and this is not my field.

    TMA


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    Profile photo of RobJaniceRobJanice
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    OK TMA

    “Every family is born with a father as the banker.

    Profile photo of munjymunjy
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    This may be way off base, but is it possible for a company to use pretax dollars to purchase property as opposed to individual investors who must use posttax dollars? Even if this was the case, the company would have to have large amounts of cashflow to make this worthwhile.

    Profile photo of Robbie BRobbie B
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    I would say yes seeing a company pays their own tax whereas and employee is paid in after tax dollars.

    TMA


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    Profile photo of GreatPigGreatPig
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    Originally posted by munjy:

    is it possible for a company to use pretax dollars to purchase property

    By this I gather you’re asking is it possible for a company to claim a tax deduction for the cost of property purchases.

    While there may possibly be some special situations for certain types of businesses (although I can’t think what), I would say in general no.

    Property is an asset and by my understanding, companies normally have to depreciate assets. For property, I would assume normal depreciation rules would apply (ie. on structure and fittings, but not on the land).

    However, I’m really just guessing here based on my limited experience with companies. Coastymike or one of the other accountants would be able to give you a much more authorative answer.

    GP

    Profile photo of GreatPigGreatPig
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    Originally posted by coastymike:

    The main reason is that companies are not eligible for the 50% CGT discount.

    I have personal experience with this restriction, and have had numerous headaches trying to live with it. To be a little fair to myself, I got into the situation before the 50% CGT discount was introduced, and a company structure otherwise seemed like the best idea at the time.

    One thing I think that is often overlooked is the real tax rate when using a company structure if the shares are owned by a high income earner. It’s all well and good to say there’s only a few percent difference between the 30% company rate and the 24.25% top marginal rate with 50% discount (although those few percent can be a lot of money if the amount is high enough), but one also has to consider what they’re going to do with the money once it’s in the company tax-paid. The way I see it, there are only two real choices: take a dividend and use it, or use it within the company.

    Taking a dividend when the shareholder is on the top marginal rate means the funds will ultimately have been taxed at 48.5% (including Medicare levy). That’s suddenly looking a lot worse than 24.25%. Having the company owned by a trust may be better (if you think of that in advance), but then why not just buy the asset in the trust in the first place?

    Using the funds within the company, on the other-hand, can be quite a nightmare (assuming we’re talking investment rather than active business). To continue investing in the company structure leaves you stuck with the problem of no 50% CGT discount, and trying to invest through another structure using company funds can be something of a minefield. One foot wrong and it could all become a deemed dividend – and forget the franking credits. The rules are pretty tight.

    As an illustrative example, consider some figures:

    Say you have a $100,000 capital gain over a period of more than 12 months. In the hands of a high income earner, tax would come to $24,250 (ignoring any deductions). In a company, initial tax would be $30,000, but if a high income earner took it as a dividend, the final tax bill would be $48,500 (ie. the shareholder would pay an extra $18,500). If they tried to use it in the company but managed to get it deemed a dividend, I believe the tax would be the initial $30,000 then another 48.5% of the $70,000 dividend – or $63,950 in total. However, if it was in a trust and distributed equally to three beneficiaries with no other income, then each would get $33,333 and pay tax on $16,667 – by my calculation about $1,800 each or $5,400 odd in total (excluding Medicare levy). Even a single beneficiary with no other income would only pay about $11,000 in tax, plus Medicare levy.

    I know which amount I’d prefer…

    Cheers,
    GP

    Note: these are only general comments based on my personal experience and should not be construed as any sort of advice.

    Profile photo of Robbie BRobbie B
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    What is the value of asset protection to an investor? This would be a very strong driving force behind using company and trust structures. Also, some investors will never sell. These arguments may not even be considered but they are certainly strong arguments against using a company structure.

    TMA


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    Profile photo of Badgers_R_UsBadgers_R_Us
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    Originally posted by Rob&Janice:

    Hi All

    Anyone who has never made a mistake has never tried anything new.”

    Albert Einstein
    1879-1955, Physicist and Nobel Laureate

    I bet Neil Armstong hoped Albert was wrong!

    Profile photo of catacata
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    What is the value of asset protection to an investor?

    The value is not to loose everything you own if you are sued. NSW is the 2nd most litigated state in the world followed by Qld in 5th, on a per capita basis. Also, if you use these company/trust structures the major reason for them must be for Asset Protection or the ATO might see it as tax avoidance. Tax benefits are a secondary consideration(of course!).

    CATA
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    Profile photo of coastymikecoastymike
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    Ive been advised by tax lawyers that the word asset protection should be used in conjunction with the word ESTATE PLANNING. Why ?

    Because if the reason you transfer your assets into a trust is to protect them then the question might be to protect them from whom. Creditors ? Well then the bankruptcy laws of 24 months do not apply where the sole purpose was to defeat the creditors. So be careful otherwise even those assets you thought were protected might be clawed back.

    Remember there are three major reasons for structuring 1. estate and retirement planning 2. asset protection 3. taxation planning.

    Profile photo of munjymunjy
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    By this I gather you’re asking is it possible for a company to claim a tax deduction for the cost of property purchases.

    While there may possibly be some special situations for certain types of businesses (although I can’t think what), I would say in general no.

    As I understand it, the purchase of anything used by any business to be income producing is tax deductible. In my own business, any business expenses I have, are paid from any income generated. The difference is profit, which is taxed. Hence, pretax dollars. If your business is setup up as a property investing business?

    In any case, I’m no tax expert, so this is the blind leading the blind I’m afraid. No more tax talk from me!

    Funnily enough, my personal thoughts are against buying in a company structure. I just wanted to point out a possible advantage.

    munjy

    Profile photo of GreatPigGreatPig
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    Munjy,

    I’m only going from limited knowledge here, but…

    Originally posted by munjy:

    the purchase of anything used by any business to be income producing is tax deductible

    Not so. Only expenses can be claimed, where an expense is a non-recoverable outgoing. When an asset is purchased, all that’s happening is an amount of cash is being replaced with an equivalent valued asset. There is no expense (except possible transaction costs).

    Most assets fall in value after purchase, which amounts to an unrecoverable expense, thus they can be depreciated to allow that loss of value to be claimed. However, land generally appreciates over time, and thus there is no loss that can be claimed.

    If your business is setup up as a property investing business?

    Then I think the property held by the business might become trading stock. By my understanding, trading stock has to be valued at the end of each financial year and any loss or gain in value taken into account for tax purposes.

    Not sure how that ties in with depreciation though. Perhaps in a property trading business depreciation doesn’t apply – but this is just a blind guess.

    Cheers,
    GP

    Profile photo of RobJaniceRobJanice
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    TMA
    Veteran Forum Contributor [3794 posts]
    Posted 03/07/2005, 18:58:16

    I didn’t say I “favoured” it… just that I could think of many reasons for it.

    TMA
    Veteran Forum Contributor [3794 posts]
    Posted 29/07/2005, 11:42:13

    Yep. That is why I buy property in a company name. If I want to live in it, I just ‘rent’ it from the company. I have never owned a PPOR.

    Hi TMA
    Well thats a good reason then

    Do you find it more advantageous to rent as apposed to having your own PPOR?

    Badgers r Us
    Here is a new quote for you.

    Cheers Rob

    “The secret of getting ahead is getting started. The secret of getting
    started is breaking your complex overwhelming tasks into small manageable
    tasks, and then starting on the first one.”

    Mark Twain
    1835-1910, Writer

    “Every family is born with a father as the banker.

    Profile photo of hellmanhellman
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    Hi TMA
    Well thats a good reason then

    “Do you find it more advantageous to rent as apposed to having your own PPOR?”

    There are three general entites in which you can buy a house (this is for your PPOR):

    ~Own Name: No Capital Gains Tax if you sell (big reason for most people); Cannot deduct rent from company/personal income; Little asset protection (you lose the court case, you can lose the house); Zero accounting/tax costs (V. easy).

    ~Company: Pay full CGT tax (so 30%); Comapny can use the loss from the property to reduce their profits (so good if you work for your company – pay little to no income tax); Quite easy accounting; Must pay current market rent and be seen as arms length (extra admin for ATO req.); Property falls under the companys liability (so if you get sued you probably won’t lose it, but if the company does, you may have problems):

    ~Trust: Pay 50% discount on CGT (so 15%); Trust can use losses from the property to offset future earnings; Hybrid trusts can “transfer” (via ‘units’) the loss to personal income; Downside is accounting can get quite comlicated esp. if “transfering” the loss; Must pay current market rent and be seen as arms length (extra admin for ATO req.); Best asset protection (IMO) if you get sued you can protect your assets (with a company as trustee it is very difficult for anyone to get your assets).

    I think this sums up the

    Hellman

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