Company and Trusts - What structure?

Hi All
I am new to businesses and new to the forum, so please bear with me.

I have also done a lot of reading and I cant quite get the concepts of which structure to choose sorted out in my head. My intention is to consult a professional but I wanted to seek the forums advice first, to get a better understanding.

Effectively myself and 2 other (un-related) partners all want to invest in commercial property and run a business where by we are effectively landlords collecting rent.

After all I have read it appears that a combination of Company, and either a discretionary trust or Unit trust would be the best option. But its not clear if we should be doing a Unit trust, with the company as trustee (who buys the property? Company or Trust?). Or the company owning the property and dispursing income to a discretionary trust.

A list of our objectives in order of priority is below.

1) Limit the ability of creditors to come after personal assets.
2) Be able to re-invest profits into the business with minimal tax implications
3 ) Ability to disperse profit equally between the 3 partners
4)Ability to disperse to nominated family members if we choose to.
5) Negative gearing of property
6) Ability to get finance ( which some trusts have issues with)
7) Minimise CGT on sale of property. (Which companies cant do)
8) Ease of operation eg: the structure isnt so complicated that it makes operating diffcult
9) Minimise setup costs

Any help or advice would be greatly appreciated.
Thanks

 

Can anyone add anything?

 

I would utilise a unit trust with a corporate trustee.

This will give you solid asset protection with the ability to distribute the income and capital gain proportionately.

For even more flexibility the units should be held by your respective family trusts - so when the distributions from the unit trust goes through to the family trusts they can be distributed to the person with the lowest marginal tax rate.

You shouldn't need a corporate trustee for these family trust as they are only passive unit holders.

Finance shouldn't be any more of a problem than normal - remember the LVRs available on commercial property are typically lower than residential. You personally may need to go guarantors on the loans.

I would invest some extra time and money and get a solid unit holders agreement to cover issues if one of you three want to exit the venture.

As you have 3 unrelated parties you can also utilise your super to purchase some of the units. For this option you would need to set up a SMSF (one per party / family) - but you would have the following restrictions:

- Each party (e.g. one family trust and SMSF controlled by the same people) can only own a maximum of 50% (no more than 50%) of the units
- You won't be able to reinvest the earnings and simply issue more units - you have to physically pay the cash out (but you can buy more units)

Can I just point out that renting a commercial property is typically not a 'business' for income tax purposes - you are simply a passive investor collecting rent.

Negative gearing can work - you simply structure some of the borrowings to be in the name of your respective family trusts.

If you do this structure properly it won't be that cheap. Doing it right and setting it up for cheap are normally mutually exclusive - I am happy that it is #9 on your list.

I hope this helps.

As you are in Perth I would recommend that you go and see the guys at Brett Davies Lawyers: Tax Professionals Welcome

Good luck!
SM

 

Thanks for your post Superman

 

Insurance

I concur with Superman. Thats the way to go. I'd add you need to insure each party against death, and TPD at a minimum to protect the other parties if your reliant on each of you contributing to loan repayments. This can be backed up by terms in the unit holders agreement.

If you want to buy these things in "partnerships" it is unfortunately necessary to spend the extra money to protect against the unforeseen.

The unit holder agreement needs to deal with insurance events and the uninsurable e.g such as one of the parties marriage breaking up and a property settlement forcing sale at an inopportune time for the others.