Hi everyone,
Probably a simple question that I'm not quite sure about; say if you have a company, as far as I understand you pay tax on the profit that is left over after all your expenses are paid.
Does that mean that if you have rent, capital gains, etc during the year with your property portfolio under a company, you can "respend" that money into other property, renos, etc, without paying tax on it as you haven't actually "profited"?
I'm not sure if I explained it very well, but I guess what I'm trying to ask is do you only pay tax on money that is actually left in your hand at the end of the financial year, and hasn't been spent on other things to improve your property or as deposits on new ones, etc.
Thanks heaps,
Matthew
No. You are looking at cashflow which is different to income and expenses from a taxation perspective. Deposits are not deductible but are capital expenditure or if you are turning over houses will be part of the cost of trading stock.
Just think of the company as a person. Add up all your income and minus all of your expenses (the tax deductible ones anyway) and then minus other costs such as depreciation and that is your profit. This is then taxed at 30%.
Capital gains are not income until they are realised. So you don't pay until you sell. Also companies do not get the 50% discount on assets help over 12 months so it is not a good idea to hold property in a company as you would have less tax as an individual. Look at using discretionary trusts instead of a company.
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
Hi Terry,
Can you elaborate on Discretionary Trusts ??
In the new year I'll be setting up a Company and a Trust to work side by side – my advice so far has been to set it up as a Family Trust. What is the difference between the 2 ??
Cheers,
Darren
A discretionary trust is one where the trustee can choose which beneficiaries to distribute the profit too, ie they have discretion. This is good for a number of reasons the main 2 being tax and asset protection. Tax can be minimised by distributing to the beneficiaries with the lowest income so the least tax is paid. Asset protection is gained because the assets of the trust don't belong to the beneficiaries unless a distribution is declared. So if one of the family were to go bankrupt you would just not distribute to them at all.
Compare this to a unit trust where each unit holder holds a fixed percentage of the trust in the form of units. each year profit must be distributed in accordance with percentage ownership. Units are also at risk if you go bankrupt.
Family trusts are usually discretionary trusts. It doesn't matter what a trust is called, what matters is how the deed is worded.
What you are talking about with the company is the company will probably be acting as trustee for the trust. that means the company will be the legal owner of the property of the trust for the benefit of the beneficiaries.
This adds to the asset protection side – trustees can be used. eg. your trust owns a property and a tenant is electrocuted, They will sue the owner of the house which is the trustee. a $2 company and the assets of the trust are at risk, but not usually the people behind the trust..The company won't, or shouldn't, do anything else. no business, just act as trustee and file a nil tax return. All the income goes to the trust and this is distributed and the trust pays no tax, but the individuals receiving the distribution do.
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 Terry,
Paragraph 4 where you’re talking about the $2 Company has thrown a small spanner in the works, I think this is where I’ve hit my current limitation of understanding regarding Companies, Trusts & Trustees.
Here’s why…My original Proposed Company/Trust Structure was going to be like this:(I’ve attached a Picture to help explain – http://www.4shared.com/file/179391320/5f8b53f8/Co__Trust_Structure.html)
Company A
Trading Company that buys and sells property (stock) to renovate, sub-divided, build and sell. This is where the majority of business is conducted and it will accumulate the most amount of income and expenses. (Plan is for most deals to be done under 12 months).
Discretionary Trust
Trust used to receive the profits made from Company A, which eventually get paid down to the beneficiaries as deemed necessary (one of the beneficiaries is Company
.
Company B
An Investing Company that receives frequent beneficiary payments from the Trust, which then provides finance to Company A for future purchases.
Now you’ve thrown Company C into the Mix, and I’m wondering if my whole proposed structure is flawed (which is highly possible)… Presuming the structure above is suitable, would I then look at attaching Company C into the Trust (as the $2 Company), which acts as the Trustee ??
This is where I’m getting a little confused…who actually owns the property, Company A or Company C…if I’m sued, who do they go after ??
PS – I haven’t sought Legal advice yet as I want to know what questions to ask when I look to engage someone. This way I’ll know I’m paying for someone who knows there stuff !!
Cheers,
Darren
HI Darren
No need for a company C at this stage. I didn't know you had 2 companies in the mix already.
Your company A must be acting as trustee for the discretionary trust or the shares of company A must be owned by the trust.
You might as well distribute profits from the trust to individuals if their marginal tax rates are less than 30% and then they can gift or lend the money back to the trust.If successful you will probably want to set up a few of these strucutres to limit potential losses even further.
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 Terry – I've been told that having a few of these structures once the portfolio builds size is a good option…
There's so many more questions that I have relating to Trusts, Companies, Trustees, etc…I think I'll do a little more reading first as this might answer some of the common questions I have…
Thanks for your input – appreciated…
Cheers,
Darren
Hi Darren,
Just to elaborate, in your structure, Company A is the legal owner of the property. Companies are taxed on their profits, unlike trusts, which distribute their profits and the beneficiaries pay the tax on their distributions.
So Company A would pay tax on any profits it makes. It would then be able to pay dividends to the shareholders. For your structure to work, the Trust would have to be the shareholder of Company A.
Its best to seek advice from your lawyer or accountant, as they will be able to provide more details, relevant to your circumstances.
Thanks Dan,
I know there's still alot of the finer details to work out, I'll be lining up an Accountant in the new year (based on some of the recommendations from this site).
I'm based in Brisbane, and a few have been mentioned in previous posts…if anyone's reading this and know's of another Accountant that specialises in Trusts and Property Investing, I love to acquire their details – happy to accept PM's for personal details like this.
Cheers in advance…
Darren
I think Dan is based in Brisbane. Why not ask him,
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
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