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family trust to purchase a property and run business

Discussion in 'Accounting, Tax & Legal' started by chris_qld, 16th Feb, 2010.

  1. chris_qld

    chris_qld Active Member

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    I'm thinking of setting up a new business. The problem is I don't have enough space. So I need to buy another property and run the new business there. I wonder if it's a good idea to set up a family trust first then purchase a property under the trust in order to protect the property (of course there might be other benefits as well). I don't want to pay dead money for renting an office or shop.

    I have already had a company for existing business.

    Any opinions would be appreciated.

    Chris
     
    Last edited by a moderator: 17th Feb, 2010
  2. Rob G.

    Rob G. Well-Known Member

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    Good asset protection if there is a separate trust for passively holding assets.

    Problem is that the trust cannot negative gear.

    Often with smaller startup businesses there is the need to access the equity for security in borrowing, or else the proprietors end up having to personally guarantee business loans.

    Cheers,

    Rob
     
  3. jrc77

    jrc77 Well-Known Member

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    (No expert disclaimer - but thinking out loud for comments)

    To offset the lack of negative gearing, couldn't the trust hold shares in the company so that profits are distributed to it offset the investment losses?

    Or alternatively run the company in a trust (seperate one) and then distribute the profits to the investment trust while the investments are negatively geared?

    Regards,

    Jason
     
  4. chris_qld

    chris_qld Active Member

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    Thanks Rob.

    I have another question: Can my family trust lends the property to my company which runs the business?

    Thanks again.

    Chris
     
  5. MattR

    MattR Well-Known Member

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    Not a bad idea. The property however it's held should be formally leased to the business.

    But you can't manufacture a tax position to get an advantage - so if the property is held by a Trust, you can't get the business (assuming run by another entity) to pay an inflated rate of rent so that the trust in affect operates as Nil, and the business (entity) gets the affect of the negative gearing.
     
  6. chris_qld

    chris_qld Active Member

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    Thanks Matt.

    Well, we know that the trust which holds assets shouldn't run business. This creates a problem, i.e., how the trust pay off its loan if it doesn't have any kind of earning. So if my company (also a trustee) pays the rental to my trust for the use of the property, the problem can be solved. (Just like adult children pay rentals to their parents who borrowed money to purchase the investment property).

    Cheers,
    Chris
     
  7. MattR

    MattR Well-Known Member

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    Understood.
    What I was getting at was if the property was negatively geared, and those losses were quarrantined in the trust. In that instance you could up the rent to cover the losses and effectively move the deduction to the business entity. However as a dominant purpose would be to reduce the tax bill, this would not be an effective measure.
     
  8. chris_qld

    chris_qld Active Member

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    Thanks Matt, I agree with you.

    What about if the property is in my wife's name? She is not related to my company.

    Cheers,

    Chris
     
    Last edited by a moderator: 24th Feb, 2010
  9. Superman

    Superman Well-Known Member

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    How much (as a %) are you looking to invest in the property that would be used by the business?

    Having your wife own the property is a good idea so she can take advantage of the tax benefits while also provide asset protection as she is seperate from the trading entity.

    Another alternative is a 'family' self managed super fund which could provide awesome tax advantages and the most superb asset protection available in Australia. The trading entity could still access the 'negative gearing' benefits via making additional tax deductible super contributions on your behalf.

    Major downsides however are:
    - Banks typically only lend up to 65% on commercial properties
    - Higher interest rate (premium) charged + set up and ongoing costs
    - If the only members are young, then profits will be trapped (so maybe get mum and dad involved in the action)

    You have a fair bit of flexibility as a business owner.

    Any questions let me know.

    SM