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Using trading company profits to offset property losses

Discussion in 'Accounting, Tax & Legal' started by Room for improvement, 6th Mar, 2011.

  1. Room for improvement

    Room for improvement Member

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    Hi all,

    Can anyone tell me whether this would be a good idea... to have a trading company owned by a corporate trustee as trustee for ABC family trust.

    That corporate trustee would also own investment properties as trustee for ABC family trust.

    This would be to reduce tax payable by the trading company by offsetting it against the property losses (while the properties are negatively geared).

    Is this a way to reduce tax payable and use pre-tax dollars to invest in real estate, or am I misunderstanding?
     
  2. Rob G.

    Rob G. Well-Known Member

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    And the property assets being up for grabs by the trade creditors if the business goes bad.

    Cheers,

    Rob
     
  3. Terryw

    Terryw Well-Known Member

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    What about two different trusts with 2 separate trustees. One trust with the profit may be able to distribute to the other with the loss.
     
  4. Rob G.

    Rob G. Well-Known Member

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    Nasty trust loss rules to negotiate.

    Having the loss trust make a FTE and the profit trust make an IEE with respect to the same test individual makes for a pretty daunting straight-jacket on who you can distribute to tax effectively.

    What if you want to introduce outside people with equity as beneficiaries of your business ? If they receive distributions of income or capital then we are talking 46.5% tax.

    Needs some serious thought.

    Cheers,

    Rob
     
  5. Terryw

    Terryw Well-Known Member

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    Rob,

    Perhaps these can be avoided by making sure the loss trust doesn't make a loss:confused: by having it perform some work or services for the profit trust and invoicing for the work.
     
  6. Rob G.

    Rob G. Well-Known Member

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    Better make sure that the service is on arm's length terms.

    A "benefit" that is more than merely incidental will be caught by the income injection test , this is a much lower threshold than Part IVA.

    Cheers,

    Rob
     
  7. Terryw

    Terryw Well-Known Member

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    Thanks Rob. You know your stuff.
     
  8. Room for improvement

    Room for improvement Member

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    But wouldn't the company trustee have limited liability with regards to the company if it went bad?
     
  9. Terryw

    Terryw Well-Known Member

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    Generally yes. Limited to its own assets.
     
  10. thereseB

    thereseB New Member

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    Having the loss trust make a FTE and the profit trust make an IEE with respect to the same test individual makes for a pretty daunting straight-jacket on who you can distribute to tax effectively. But wouldn't the company trustee have limited liability with regards to the company if it went bad? If you created a business-related move last year, here's some good news. You may be able to claim it as a tax deduction. Provided you have saved your invoices, it's a good way to recoup the costs of such things as the moving van, packing materials, gasoline, lodging and much more. Meals and off-the-beaten path jaunts are not.
     
  11. Terryw

    Terryw Well-Known Member

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    Generally, yes. The limited liability is to the company and its assets. Shareholders can't be held liable for the debts of the company. Generally directors can't either, but there are exceptions.
     
  12. Room for improvement

    Room for improvement Member

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    But if the trading company is owned by a trustee company, wouldn't the trustee company have limited liability (just the same protection as any director of a company).

    Therefore wouldn't the trust's assets be safe from business dealings? Just like a director's property is safe (assuming all laws are followed and the director does nothing wrong).
     
  13. Terryw

    Terryw Well-Known Member

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    Liability of a company is limited to its assets. Directors aren't usually liable for debts of the company (though they can be in some instances) and shareholders are not liable. If a company is sued, the assets owned by the company are at risk.

    If a trading company is owned by a trustee, ie the trustee owns the shares of the trading company, then it can not be liable any more than you can be liable for debts incurred by telstra if you own telstra shares.
     
  14. Rob G.

    Rob G. Well-Known Member

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    For asset protection, you normally hold them in a separate trust unrelated to the trading company.

    e.g. the trust leases the assets to the company on arm's length terms for use in the company's business.

    Now that you have separated the assets from the trading entity, there is the problem of the income injection test when the trust has losses.

    If the trust merely holds negatively geared passive property investments and wants dividends from your profitable, but risky, company then the trust loss rules must be considered.

    Cheers,

    Rob
     
  15. Room for improvement

    Room for improvement Member

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    If a Corporate trustee owned 100% of Business A shares and also owned property, wouldn't the property be safe as if the Business A went bad, the Corporate trustee would only be liable for original value of the shares, rather than have their other assets (property) seized?
     
  16. Terryw

    Terryw Well-Known Member

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    Yes. Shareholders generally can't b held liable for company debts.