Best way to invest company profits in property?

Hi all, I'm looking to invest company profits into real estate, hopefully separating the two investments from each other for some security.

I wonder how I should go about it?

Would I set up the trading company as a corporate trustee for a trust and the trust may then distribute the earnings to a separate trust which would buy property?

Also, if so, because of the trading company/trust set up, would I need to trade as "Company X as trustee for Trust Y"? Obviously, this isn't as catchy a business name as I'd like.

I'd ideally want the company to be able to reinvest the money in itself (or possibly a separate company/trust start up) as well as distribute excess income to invest in property.

Any help is greatly appreciated!

 

You should never use the trading company as trustee because of the risk the company takes by doing business. A new company as trustee would be much better.

Getting money into the trust could be done by at least 4 ways:
1. Gifting
2. Loaning
3. Distributing
4 paying for work done.

Gifting from a company is not really possible, but the company could pay an individual who could then gift.

Loaning is possible, but you would need loan agreements. For asset protection purposes this may not be a good idea as the money remains the company's.

Distributing is great, but the company can only distribute to its shareholders. You could transfer the shares of the company to the trustee of the trust. But watch out for stamp duty and capital gains tax.

The trustee could perform some sort of work for the company and receive payment. But this could also pose problems as the trust would be now trading and there is a possibility it could be sued. If a person is performing the work for the trust then that person should also be paid by the trust too and this would dampen the effect.

 

I presume you are talking about the situation in the UK here?

 

Hi Room,

Good advice there from Terryw

Have you thought property investing via super?

Maxing out your contributions from the company into super, then using a SMSF (with or without borrowings) to buy property is typically a good way to get a tax deduction for your investment property deposit.

There are some good strategies to get lots of company money into super quickly to build up cash for a property purchase.

Another strategy is that your company can lend to the SMSF (member financed limited recourse loan) however as mentioned by Terry the monies still belong to the company and are exposed.

Depending on your situation a combination of strategies may be employed.

SM

 

Hi Superman,
Would investing company profits into property via SMSF be more advantageous with CGT and Land taxes etc? What would be the main benefits?

 

Hi Room,

Investing via a SMSF (or superannuation in general) is definitely the most tax effective vehicle - I don't think there is much argument there.

I believe with the changes Government is placing on the good old discretionary / family trust such as removing the ability to distribute $3,333 per annum tax free to minors and also with the Div 7A loan implication in regards to unpaid distributions to company beneficiaries the SMSF will definitely increase in popularity.

From a land tax perspective, in most states and territories a SMSF is treated as a trust. Not much you can do here.

From a capital gains tax perspective, a SMSF is superb - 10% on capital gains where the asset has been held for more than 12 months. If the asset is realised when the member(s) are in pension phase (age 55+) then the applicable rate is 0%. That's right - 0%.

I wrote an article back in September last year comparing a family trust to a SMSF for property investment. You will find a lot more detail there.

To get back to your questions Room, the biggest hurdle most people who operate from companies have is tax effectively extracting the cash to use for wealth building purposes.

Sure - you can keep any excess profit (after maxing out wages / dividends to the owners to 30%) in the company and pay a flat rate of 30% tax and investing the rest - but then you end up with a capital growth asset in an entity where there is no general 50% CGT discount (assets held 12+ months) and those assets in the name of the company are at risk if the company ends up in financial strife. Definitely not a good wealth building strategy.

By comparison amounts held within super are general protected if a member gets into financial strife.

By maximising super contributions from a company, you obtain a tax deduction for extracting the cash which in many cases you would be paying up to 46.5% tax on (I am talking about a GOOD year where there is a large profit which would push the owners into the $180k plus tax bracket!).

Tax deductible contributions are limited to $25k each for persons under age 50 and $50k each for those people over age 50. Contributions made to super are taxed at 15% - which is a lot better than up to 46.5% or even 30% if the amounts are kept in the company.

There is also a strategy which enables 2 years of contributions be paid (and a tax deduction claimed in the business / company) at once. This strategy is useful when there is a surge of income / profit in one year which is not expected to be repeated the following year. I will not go into the details of this strategy in this post, however you need a SMSF and it is to do with the different rules between when a tax deduction can be claimed and when the amounts are allocated to a members account (i.e. contribution caps).

So, if you have a husband and wife under age 50 running a family business with strong profit and cash flow you could easily get $100k (less 15% tax = $85k) into a SMSF very quickly and reduce the company tax bill by $15k staight up. Combine the $85k with monies they have in their existing industry or retail super funds and you have access to a sizable pool of money to invest that you have control - and I know my small business owner clients love control!

If there is money in the company left over (once all wages, dividends and 30% company tax is paid), then the company can also make loan to the SMSF for the purchase of investments via a bare trust - such as an investment property - maybe even the premises the business has been trading out of (or would like to be trading out of!).

There is a stupid amount of information on the net about using a SMSF with limited recourse loans (bare trust / formally known as an instalment warrant) to purchase property. Most of it by very intelligent people who struggle to communicate in English.

But wait - there is more: The related loan from the company (which needs to comply with the Div7A loan provisions) can also be combined with a loan from a bank to give the SMSF even more scope (i.e. more ca$h) to purchase a suitable investment property - as long as the cash flow stacks up and the SMSF can afford the repayments.

Even more - any future excess cash that builds up in the SMSF from super contributions and rent can be returned to the company as tax free loan repayments (principal). Perfectly legitimate - but you need a switched on accountant / SMSF guru to make this work

Still more - in future years (except the financial year after you claim the double deduction as described above) if the company is a little short on cash, but wants to claim a deduction for super contributions that year, then it can forgive part of the loan. This loan forgiveness will be treated as a concessional (deductible) super contribution.
Wow - this strategy is the gift that keeps on giving!

Not only that, for younger business owners / investors it is a perfect way to take advantage of the extremely tax effective structure of superannuation without locking 100% of your capital away until you are too old (and maybe too boring? ) to use it. Once again 100% legit.

Those more astute readers will not doubt be thinking "yeah, sounds OK, but your asset protection is not working becuase you have an asset in the trading entity" (i.e. the loan the company has made to the SMSF). 100% correct - go to the top of the class if you picked that up. I also have a solution for that - however once again it is outside the scope if this response.

Obviously all the above strategies come with a cost, and it would be unlikely for people to use all of the above at once, so it is simply a matter of cherry-picking which ones are most suitable for your personal situation and making it work for you. I am under no illusions - the above strategies will only apply to a very small number of people.

So, Mr Room for Improvement, did I answer your questions? Have I provided enough advantges?

I think it can be summed up basically as pay less tax, have more to invest, and protect your assets and have more funds to spend and enjoy in the future!

Enjoy

SM

 

Enjoyed! Very nice summary Superman.