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Business Loss offset against personal CG

Discussion in 'Accounting, Tax & Legal' started by icarus70, 8th Dec, 2009.

  1. icarus70

    icarus70 Member

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    Hi All,

    I really hope I'm not repeating a thread here - I have done some searching though can't find anything addressing this exactly...

    So the scenario is:

    -I have a company XYZ Pty Ltd that has over the years made a loss.

    -On the other hand I have an investment property that I want to sell. Though if sold it would make big capital gains and hence incur a significant CGT - is there any way that somehow, I can offset personal capital gain against the business loss?

    Some ideas I've had though finding it hard to get exact info on it are possibly donating the IP to the business? Or is it possible to convert a PTY LTD into a sole trader status and essentially turn that loss into a personal one?
    Or in the sale of a property, can one arrange the sale proceeds to be paid into a business while the title deeds transfer over in the normal fashion?

    Trying to think outside of the box here since I'm aware under normal circumstances this isn't possible to do. So any suggestions are more than welcome!

    Thank you all.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I can't think of anything off the top of my head.

    Most suggestions where you somehow transfer the IP to someone else's name won't work since no matter how it is done, you will still trigger a CGT event for yourself - potentially making things worse if you haven't actually got the money to pay the tax you'll be up for!

    I'll leave it up to our resident accountants to suggest any possible strategies, but don't get your hopes up - I doubt it can be done, sorry.
     
  3. Superman

    Superman Well-Known Member

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    You are in a bit of a difficult situation - assuming your investment property is held in your own name. You can't transfer or move a loss between your company and yourself they are separate legal entities.

    Sim is correct - if you transfer the property into the companies name then you realise the capital gain anyway.

    The best thing to do would be to reduce your personal taxable income as low as possible in the financial year you sell the property and realise the capital gain. This will mean when you realise the capital gain overall you will be taxed at a lower rate (i.e. your overall taxable income after the capital gain is added will be lower = less tax).

    If you are looking to purchase another rental property, maybe look at a loan that enables you to make a prepayment of interest for the following year.

    There are numerous ways in which you can reduce your taxable income - but you need to find one that suits your personal situation.

    Hope this helps or at least gets you asking the right kind of questions.
     
  4. icarus70

    icarus70 Member

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    changing the company type?

    Hi again,

    Thanks for the response Superman. Yes I figured as much re the spearate legal entities and capital gains tax trigger coming at some point or other.... sigh. And yes you're correct, the IP is a personal asset.

    I have read though don't know in detail that you can change a company type - i.e. change it to a Pty Ltd - So can anyone tell me if its possible to change the company from a Pty Ltd to another 'type', that for all intensive purposes makes its assets (and losses) be viewed as personal? Or do something like that as a two step process and maybe turn it into a sole trader arrangement? Does that make sense?

    Or can one possibly donate a property to a company without without a CGT trigger and not raise any red flags?

    By the way this isn't actually my situation, but a close relative that I'm trying to help in any way possible. I don't actually know much about company law, hence the persistent (and possible silly) questions. But none the less, one has to try... Hope no one minds!

    Thanks all.
     
  5. Intellikev

    Intellikev Active Member

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    Brisbane Qld
    Changing the Company Type

    It is easier to go from a sole proprietor to a Company then it is to go from a Company to a sole proprietor. I believe the company structure will need to be dissolved and along with the winding up of the company goes any carried forward losses. This then will allow the new busines to open its books with zero debt.

    The last time somebody tried something similar, to transfer debt to reduce their tax liability, I believe the term was "Bottom of the Harbour Scheme".

    Good luck.
     
  6. Superman

    Superman Well-Known Member

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    OK - I kinda get what you are asking.

    You want to know what would happen if the business stopped operating via the company and was re-started as a sole trader business?

    If the sole trader business generated a loss (i.e. the individual had negative taxable income) and the that same individual made a capital gain, then yes, in that scenario it may be possible to obtain a tax benefit.

    However - some major questions need to be asked:

    1. Can the business (regardless of the structure) afford to continue to make a loss? If it is not making a decent profit - what is the point?

    2. Is the person who owns the company (and assuming they run the business) still taking a wage? If there are losses they should be able to stop taking a wage in the year they personally make the capital gain making their personal taxable income $0 which would reduce the impact of the capital gain.

    3. Is the additional tax resulting from the capital gain all that bad? Maybe it is easier to take a hit, pay the tax and get on with life. We are all obsessed with saving tax - but sometimes you just have to ask yourself if it is worth it.

    4. If the individual decides to stop trading via a company and starts to run the business via being a sole trader, they will need to meet the commercial loss provisions to ensure they can deduct the loss from the (sole trader) business. A quick summary of these provisions is below.

    5. Part IVa - general anti-avoidance provisions. What ever is done, the only reason an changes or restructuring are made is solely to avoid or reduce tax - there doesn't seem to be any other commercial reason for doing so. This is even worse than paying the original tax on the capital gain the first place!

    OK - quick summary of the non-commercial loss provisions:

    To be able to claim a business loss from being a sole trader against your other income* - you must meet at least one of the four to be able to claim the deductions against your other income:

    1. Assessable income test - you must generate at least $20k of income in the business during the tax year.

    2. Profits test - your business must have made a profit in at least 3 of the last 5 years of trading (not applicable if the business is new).

    3. Real property test - a property with a cost base of at least $500k is used in the business (solely - no private use - it can't be your house).

    4. Other assets test - other assets / equipment used in the business are worth at least $100k

    *income = not capital gains i.e. the individual must have some other income such as wages, interest, dividends, trust distributions etc in addition to the business loss to be able to offset it

    The assessable income test is the most likely to apply in this scenario.

    Overall, based on the information put forward (which kinda makes me feel like I am stumbling around in the dark anyway) icarus70 needs to take his relative to a decent tax accountant, lay out all the facts and get some paid advice.

    Hopefully this information will enable them to ask the right kinda of questions.

    Good luck - just don't fly too close the the sun ;)

    SM
     
  7. icarus70

    icarus70 Member

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    changing a company structure/type

    Thanks Superman.

    And yes I know I may not be putting in all the info possible for people here to help, though I'm still quite fresh on researching matters like this. And I have been trying and don't know about anyone else, but reading through the tax office's website is painful at best!!

    But Superman what you've posted gives me a lot to go on.

    Just for clarification from your points:

    1. As it was, the business couldn't continue operating in its market with the losses it was accumulating over the years. I'm not sure of the figure though it was a decent loss that certainly makes it worth while to try to use somehow.

    2. No the person is no longer taking a wage, so they're already on the path of $0 taxable income.

    3. From our estimates, the additional CGT bill would be between $65-80K. Many have asked the same question and yes it would be easier to just pay the bill and be done with it but I would say its worth trying to reduce it...

    4 and 5 - Good info/questions there that I'll pass onto my relative before they head off to a professional.

    Sorry to not give you much to go on but thanks for your post.

    Ha! I'll be keeping my feathers close to the ground with all I've been learning from the sideline on this exercise :)

    Icarus