All Topics / Help Needed! / Advantages of using a company name.

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  • Profile photo of TerrywTerryw
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    Originally posted by ownahome:

    From a purely investment point of view a company is a seperate entity. This means it has its own borrowing power seperate to the directors and shareholders. When low doc loans.. LMI are invloved you can effectively double your borrowing capacity before you need to source private finance or higher rate non-LMi low doc loans.

    Hi Ownahome

    I agree that companies are separate legal entities. But cannot see how a campany can increase borrowing capacity. Virtually all lenders will require personal guarrantees from directors. This limits things. I am not 100% certain, but presume that on low docs the maximum exposure levels will include existing loans that the directors have as well as the companies. ie you do not each get a maximium exposure level.

    Originally posted by ownahome:

    Your maximum tax rate is 30%. If you are doing sub-div, flips or reno with purchase to sale under 12 months you are paying only 30% as opposed to most likely 48.5% tax in individual name. So you use the company for short term projects and personal or trusts for longer term to enable the 50% CGT saving.

    True, but if you were using a trust in this instance, you would have the additional flexibility of distributing income to other benefificaries on lower tax rates – who would get the 50% CGT reduction. As a last resort you could distribute to a company to cap the tax rate.

    Terryw
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    Profile photo of TerrywTerryw
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    Originally posted by Mortgage Hunter:

    Originally posted by ptn:

    Thanks guys,

    I don’t want to approach an accountant or a lawyer at it will cost me $$$ just to say hello.

    Thanks TerryW, you’ve given me a bit more confident in buying the family trust.

    Regards
    ptn

    I bet you that a mistake will cost you more.

    I think you are focussing on small amounts of money and losing sight of the big picture. If you proceed without getting an accountant to sign off on what you do then you are setting yourself up for a fall. Just from reading your posts I doubt very much that you are your own best advisor.

    My Doctor friends have a saying. “Any Doctor who treats himself has a fool for a patient.” and at least they are qualified to give the treatment.

    Lastly can you explain the benefits of using a standard family trust over using a hybrid discretionary trust? If you cannot then please seek professional advice [blush2]

    True. I like to think I know what I am doing. The trust deeds from Lawcentral are excellent, but what if you don’t know who to put as appointor – or how many, or trustee. Or worse, getting the wrong trust. Changning things later can be expensive as Simon says.

    Terryw
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    Profile photo of ptnptn
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    @ptn
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    Thats not necessarily true. If you add or remove beneificiaries to a trust, this could cause a resettlement to occur. This is when the ATO deems a new trust to be formed and all the existing trust assets transfered (ie sold) from the old to the new. This means stamp duty and possibly CGT on everything the trust owns.

    Ouch. This is going to be hard. What if I have 2 trusts; a property trust that has our family trust as trustee? My wife and I and the family trusts will be the trustee of property trust and everyone can be in the family trust. That way, if we move trustee in and out, it’s not tie to anything.

    Just thinking outside the square.
    ptn.

    Profile photo of TerrywTerryw
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    PTN, why is it going to be hard? You can just have one trust. The trustee will just chose who to distribute to each you.

    Only a individual or company (or combinations) can be trustees. Another trust cannot. But one trust can be a beneficiary of another.

    Terryw
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    Profile photo of ptnptn
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    Thanks Terryw, you’re right, it’s not like I am going to add or remove a trustee anytime soon anyway.

    Regards
    ptn

    Profile photo of ctaingctaing
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    Thanks for the opportunity to join in this thread. I’d be grateful if anyone can explain the added issue of negative gearing in situation where a Hybrid DT is set up to invest in property for the purposes of distributing income and asset protection.

    I gather it can only be done if the loan is under the name of the individual (beneficiary to the trust) with the highest tax bracket. If the Hybrid DT (company as trustee) owns the first IP, how then can individual access the equity through finance from the first IP to fund a subsequent purchase? Is it where personal guarantee (put up personal collateral) comes in?

    Or am I looking at it all wrong in terms of in whose name the mortgage should be in. I heard some property experts use the K.I.S.S. principle and just buy and finance in personal name – saving setup and ongoing compliance costs, as well as precious time finding the ‘right’ legal and accounting experts to help.

    [glum]Sorry for the long post, but would love any answers from people who walk the talk.

    CT

    Profile photo of TerrywTerryw
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    Hi CT

    My understanding is that the loan needs to be in the unit holder’s name – which is not necessarily trustee. However, I have seen a few client come to me with it all setup incorrectly, they have the hybrid setup, but have the loan in the trustee’s name, so won’t have any tax advantages.

    From what I have seen, if the property in creases in value, the trust has equity. The trust can then borrow more money for further investments. If the individual unit holder wanted to borrow more money, they would probably have to buy more units.

    I am not sure of all the finer details of HDT as I am not an accountant and do not use one.

    Terryw
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    Profile photo of ctaingctaing
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    Thanks heaps Terry for the privilege. I understand it all boils down to the wording of the deed and the unit holder eventually buying up units to enable further borrowings.

    You’re right in pointing out the detrimental effect of having finance in the trustee’s (in this case a company) name – any initial negative income is then quarantined in the trust. Even though tax issue shouldn’t be the forefront of our investment priority, it is a cost that can be minimised if the setup is done correctly.

    If only veteran forumites are more willing to share their knowledge and experiences in this area. Then again, I completely understand why some are cagey …

    CT

    Profile photo of JohnSmithJohnSmith
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    Hope this helps

    It is a misconception that a Trust can pass back losses.

    A trust can not pass through losses EVER, therefore a trust with a negative geared property can not pass through the loss where interest is higher than rent.

    To get around the problem, you use a unit trust/hybrid trust.

    The lender, lends the money to the person who will PURCHASE the units in the trust.

    The Trust receives the Money for the ISSUE of the Unit, and buys the property OUTRIGHT.

    The rent less any costs is sent back to the unit holder as income.

    The person holding the unit who has borrowed money for investment purposes can claim the interest, against the income received (leaving a loss) claimable against normal tax.

    The Lender takes both the unit and property as collateral.

    Now after saying all that – the above is what is normal for the majority of trusts setup. But Chan and Naylor do say they have a Property Trust, that possibly could avoid that. I have never used it, or exactly know how it works, as it is something they will not tell you. Of course they will do what they need to if you use them as accoutants. (I have no affiliation with them)

    I will add there are many aspects to using trusts (Even the above can have capital gains issues if you don’t know what you are doing) – you should always have a good accountant, that really understands trusts.

    Regards
    John

    Inspired Finance
    (02) 9944 7776

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    Profile photo of ctaingctaing
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    Thanks John, your calrification helps indeed.

    I agree we need good advice from appropriate sources. This issue of negative gearing from a hybrid DT setup had me puzzled for a while; I’m glad to hear pointers from valued forum contributors – their generosities are much appreciated.

    From here, there is another issue with structuring finance to minimise the cut the bank takes as collateral to perpetuate the process of wealth creation. Can anyone give valuable suggestions?

    CT

    Profile photo of TerrywTerryw
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    CT

    With a trust the banks only need to take the security as collateral. Same as without a trust. Some banks also want to take a charge over a company if a corporate trustee is involved too – pain the the butt, but I don’t think it affects things much.

    Terryw
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    Profile photo of ctaingctaing
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    Much obliged Terry.

    I’m cautious and don’t have great appetite for debt at the moment. But the experts are touting it the best way forward. My current bank is not one to let up in taking more security than it needs, and I hate paying hefty LMI.

    Back to reading more of your posts on LMI; and the legalities of avoiding one by finance through different sources.

    Enjoy reading your newsletters, Terry, and wouldn’t mind confirmation on the LMI issue.[blush2]

    CT

    Profile photo of ctaingctaing
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    Hi all

    I’ve done a search on the forum, one post maybe of interest along this line;

    Urgent Help Needed – Title and Loan in Different Names.

    Sorry as I tend to jump in and get off the topic at times.[wink]

    CT

    Profile photo of TerrywTerryw
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    Originally posted by ctaing:

    Much obliged Terry.

    I’m cautious and don’t have great appetite for debt at the moment. But the experts are touting it the best way forward. My current bank is not one to let up in taking more security than it needs, and I hate paying hefty LMI.

    Back to reading more of your posts on LMI; and the legalities of avoiding one by finance through different sources.

    Enjoy reading your newsletters, Terry, and wouldn’t mind confirmation on the LMI issue.[blush2]

    CT

    Hi CT

    Not sure what you mean about the LMI issue?

    LMI is generally only paid if the LVR exceeds 80%. However, you may have to pay it on some low docs at lower LVRs.

    So if you can borrow the 20% deposit from equity in another property (eg a LOC), then you can avoid LMI. Having a trust doesn’t change this.

    Terryw
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    Profile photo of ptnptn
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    Hi All,

    Following your advice to research more, I bought a book called ‘Family Trusts’ by Nick Renton (as recommended in previous forum). I have to admit the first 8 chapter are boring or going around in circle (a drag). I hope the next few chapters will pick up.

    From what I understand so far, trust isn’t giving me any advantange at all apart from asset inheritant and some degree of protection if I die … which a will will solve this problem. But if I am making a loss (negative gear) then a trust will cost cost me more for administration. Options are HDT (next chapter)

    It seems that only when I make a Positive cash flow can I distribute the money acordingly. Further more, I am restricted in what I can gift and what must be declared.

    Can someone please let me know if I can do any of the following if I have an +CF; I can buy a car in the trusts, take a holiday and claim it as a trust expense, rent a house and claim it in a trusts? Can I pay my kids education from the trusts? Can I pay the nanny for taking care of my kids from the trusts?. …. I got a feeling I can’t.

    As Nick said, if you’re not confused, then you’re paying any attention.

    Confused
    ptn

    Profile photo of TerrywTerryw
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    PTN,

    You trust is a business, so you can only claim a deduction for business related activity. If you travel relates to the business, then it could be claimable.

    Dale Gatherum Goss says you can claim small items and one off gifts that you could not otherwise claim.

    You can rent a house form your trust and the trust claim the interest etc, but if you are running at a loss you will need a HDT or other income in the trust to make it worthwhile. ATO will also be looking closely as this, but there are ways around it.

    A trust can only distribute profits, not losses.

    A trust could buy a car, but you may be betetr off buying it in your own name??

    Terryw
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    Profile photo of ptnptn
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    Thanks TerryW; for your positive respond.

    I am curious, can you claim capital depreciation from HDT?

    Thanks
    regards
    ptn

    Profile photo of TerrywTerryw
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    Depreciation is a cost of holding the asset. The asset is owned by the trust, so it would be the trust that claims any depreciation.

    The individual can only claim the interest – because they have purchased income producing units in the trust.

    Terryw
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    Profile photo of ptnptn
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    Hi TerryW,

    Just wondering,

    The trusts purchase a new house for $300k. There is an $8k depreciation schedule p.a
    Assuming there are 1 x Trustee (Husband) + 3 x Beneficiaries (Wife + 2 kids).
    Let’s say I create 300k units in this HDT to buy this house.
    Let’s say the rent is $300pw ($15600pa less agent)
    Let’s say the interest at 7.5% = ($22,500pa)

    Scenario #1:
    Trustee gets a loss + depreciation of $14,900pa.

    Scenario #2.
    The income gets distributed to all beneficiaries and nothing to the trustee. Trustee claims $30,500 loss (Ints + Depr). Sounds too good to be true.

    Scenario #3.
    The income gets distributed to all trustee + beneficiaries. Trustee claims a $22,500 in Interests. The depreciation is ignored.

    Or Scenario #4.
    Trustee gets a loss of $6,900 only.

    Thanks
    ptn

    Profile photo of TerrywTerryw
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    Hi PTN

    I am not an accountant and do not have a HDT, but I think it would work similar to this:

    Trust has made a $15,600 income from rent. But there is a $8,000 claim for depreciation. This makes a net profit of $7,600 (assuming no other costs).

    This profit would need to be distributed to the unit holder to justify them making money to be able to claim the interest. In the above ex you don’t mention who the unit holder is, it may or may not be the trustee. Anyway, the unit holder gets a trust distribution of $7,600, but has an interest bill of $22,500. This results in a loss of $14,900. They can offset this loss against other income.

    In future years rents should increase and this loss will gradually become a profit. At this stage I think the trust can redeem the units, then it can act as a normal discretionary trust and start distributing the income to beneficiaries other than the unit holder.

    Terryw
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