All Topics / Help Needed! / Property Investing using a company

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  • Profile photo of CattleyaCattleya
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    @cattleya
    Join Date: 2008
    Post Count: 121

    Guys,

    Would you please help with the following questions:
    1. Is it advisable to buy properties using a limited company – what are the pros and cons please?
    2. Can a brand new Ltd company get a mortgage? If so, how difficult is it?

    Your counsels are much appreciated.
    Catts

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of tanner892tanner892
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    @tanner892
    Join Date: 2013
    Post Count: 25

    Well it depends on the nature of your operations, but the first point of order is that company’s do not receive the 50% CGT discount, so for a long term property investor it would not be advisable.

    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    The same serviceability requirements are required for companies, as individuals. They will need to see 1/2 years trading income, or if it’s just acting as a holding company the income of the director/s.

    Obvious downside is lack of CGT discount, though there is the upside of max taxes at the company rate.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of Nigel KibelNigel Kibel
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    @nigel-kibel
    Join Date: 2005
    Post Count: 1,425

    The only advantage of buying in a company is if your were trading property in other words turning over 2 or 3 a year.

    However if you buy in a trust its my understand that you still get the 50 percent capital gains tax discount

    Nigel Kibel | Property Know How
    http://propertyknowhow.com.au
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    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    I have written about the benefits of using a company before. The major benefit in NSW is that a company gets a separate land tax threshold where as a trust gets no threshold. This could save nearly $7k per year in land tax which makes up for losing out in CGT when sold. Also a company can retain income and pass on franking dividends down the track so potentially zero tax.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of CattleyaCattleya
    Participant
    @cattleya
    Join Date: 2008
    Post Count: 121

    All, thanks for the input. Much appreciated.

    Terry, would be grateful if I can have your essay on company please. Or is it in this forum? What’s the title please. Hopefully I can search it.

    The company address: I wonder why this is needed when virtually all correspondence with ASIC and ATO are via email.

    Thanks,
    Catts

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Why it may be a good idea to use a company to own property

    Companies are generally not recommended for holding growth assets in. This is mainly because:

    1. No access to the 50% CGT discount
    2. Income does not retain its character – e.g. capital gains incurred by the company come out to the shareholders as dividends and no capital gains.

    But companies can be good structures for the ownership of property in several ways.
    1. Asset protection – liability is generally limited to the company itself and the directors and shareholders are generally not liable for the debts of the company.

    2. Ability to retain income. unlike trusts a company can hold its income, pay tax on it and distribute it at a later date.

    3. Ability to own the shares via a discretionary trust which will aid asset protection if the individual were to go bankrupt.

    4. Land tax threshold is available in most states – this is a biggie in NSW.

    Take for instance a person who has used up their land tax threshold. They will pay land tax in their own name or if the property is owned by the trustee of a discretionary trust.

    I have done some modelling with a hypothetical property valued at $500,000 with the land being 50% of the value of the property, CPI at 4% (land tax threshold increase) and values increasing by 6% pa.

    If the property was owned for 10 years and then sold it the approx capital gain would be $339,606

    An individual at the top tax rate would pay approx $79,807 in tax. Plus approx $60,987 in land tax over the 10 years = $140,794

    A DT distributing to an individual on the top tax rate would be the same.

    A DT distributing to a company would mean approx $101,882 plus land tax of $60,987 = $162,868

    However, a company would pay $101,882 (30%) in tax plus there would be no land tax at all as the property is under the threshold.

    However to be fair the trustee of the trust may be able to distribute to 5 individuals who each have no other income. In practice I have never seen this happen, but it is a possiblity. This could mean there is no tax payable at all, other than the land tax of $60,987

    But if the trustee distributed all the gain to a non working spouse then they would pay $54170.17 in tax plus the land tax of $60,987 = $115,157

    Summary Income tax and land tax payable:
    Individual owner at top marginal rate before the gain = $140,794
    DT flowing thru to a person on the top marginal rate = $162,868
    DT flowing thru to a person with no other income = $115,157
    DT flowing thru to 5 persons (adults) with no other income = $60,987
    Company = $101,882

    But it gets better.

    Say the shares of the company were owned by a discretionary trust. The trustee of the trust could receive franked dividends from the company. There would be a tax credit for taxes the company has paid. This money could then come out potentially totally tax free to the 5 adults who are not working, assuming they are beneficiaries of this trust. That means no land tax at all and no income tax at all.

    But even if there are no non working adults the company can retain the income and once the person or persons behind the company has stopped work they can cause the company to make a dividend payment to them, via the trust, when their income is low enough to maximise the use of the franking credits. It is therefore also possible that they could end up getting the money out of the company totally tax free and land tax free.

    ==

    get your own legal and tax advice before trying this at home

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Tracey BTracey B
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    @tracey-b
    Join Date: 2009
    Post Count: 158

    Thanks for this detailed explanation Terry. There was a similar post a few years ago which I found helpful at that time and again this is really clear. I always second guess myself having some of our properties owned in a company because be are trading. (The other long term holds are in trusts.)

    I like that when I stop working before an age when I can access super that I’ll be able to be paid franked dividends by our company, effectively getting back any tax that the company has paid on the way through :-)

    Terry are you able to provide info on whether a company owned property can be rolled into a SMSF when reaching that age?

    (Sorry Catts for adding another question into your original post)

    • This reply was modified 5 years, 3 months ago by Profile photo of Tracey B Tracey B.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If the company is controlled by the members of the superfund then no the SMSF couldn’t acquire residential property owned by the fund – only business real property.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of CattleyaCattleya
    Participant
    @cattleya
    Join Date: 2008
    Post Count: 121

    Tracey, no worries, the more the merrier.

    Terry, many thanks much appreciated. I will contact you trough your company.
    err.. which one do you prefer, the Loan Experts or the Property Tax Solutions, please?

    Thanks,
    Catts

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Tracey, no worries, the more the merrier.

    Terry, many thanks much appreciated. I will contact you trough your company.
    err.. which one do you prefer, the Loan Experts or the Property Tax Solutions, please?

    Thanks,
    Catts

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    Depends what you are after. Setting up companies is legal advice – my law firm http://www.finlaw.com.au. The Loan Experts Pty Ltd is a mortgage broking firm.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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