My accountant recommended this. Any developers on here using a similar set-up?

E

evan1875

Of course Somersofter accountants and whoever else in the know are welcome to comment as well please!

My current development No. 1 is held under a discretionary trust. At the time I was thinking bucket company. Now my understanding is that a bucket company is a short term fix.

http://somersoft.com/forums/showthread.php?t=71950
http://somersoft.com/forums/showthread.php?t=102358&highlight=bucket+company

My accountant also dislike it. So I now know I will end up paying a fair chunk of tax if I sell. (Currently all beneficiaries are maxed out at taxable income >180K.) Development No. 2 is a recently acquired Brisbane site (unconditional but yet to settle) under a company, shares held by the same discretionary trust.

I am a beginner developer. So with my new path, I am walking a bit like my 1 year old, keep falling over and still learning from mistakes. But I would like to get this done right for the No. 3 before that happens.

After chatting to my accountant he suggested the following structure for future developments, basically is the addition of a second, middle, company:

Company 1 holding development site and do development, pay 30% tax, profit goes to Company 2 as dividend, Company 1 does not retain profit

Company 2 being shareholder of company 1, is there simply holding the profit

Discretionary Trust with Corporate Trustee (Company 3) being shareholder of company 2, can receive any dividend and then distribute, if Company 2 declares a payout.

My accountant is comfortable with Company 1 paying 30% on profit because both my wife and I are in a higher tax bracket for now and the foreseeable future. So there is no short term disadvantage.

If Company 1 is under threat from external, wind down and there is no assets in Company 1. If not continue to use Company 1 to do the next development.
This I guess applies to any trading entity holding assets, risk.

Company 2 retains the profit.

Discretionary Trust with Corporate Trustee kicks in at a later stage when the beneficiaries move to a lower tax bracket or more beneficiaries emerge. For example, wife and I retire, kids >18, kids have kids, etc.

Forgot to ask him what happens if I hold a few in the development. Anyway anyone else developing using this set up? If not, what do you use?
 
The 30% initial tax is likely to reduce under proposed Lib plans...If they can get it past senate and if they don't implode. Just remember that the 30% is NOT a final tax and never is for a company.

The reality is a company MUST pay the profit out (after it pays tax at 30%) to a shareholder at some point. So a company is merely a deferral structure. Companies are rarely ever a tax saving structure and don't believe anyone who says it only pays 30% tax. It does. You wont.

The final rate of tax needs to be considered. Lets think a $100,000 profit. Tax of 30% is paid. So the company has $70K cash. Two years later you want to draw that out.
- Super ?? May be sensible based on age ?
- Salary - Taxed at your marginal rate again
- Dividend....OK the $70K is franked. So its got $30K of tax credits attached. You are assessed on the 100K. Lets assume a marginal tax rate of 39% as you already earn $120K +. You add the $100K to income and the EXTRA tax is $42,200. You then get a tax credit for the $30 tax already paid. So final extra tax is $12,200. This extra tax means a extra tax on FF div would be 17.4%. Given a 39% marginal rate prior that means the rate of tax on the $70K is far higher than 55%.

So deferral comes at a cost. And the deferral may come at a time when you don't have the cash. It also may mean you consider bucket companies (don't work) or other strategies that enhance risk.

Sometimes the strategy should just be to pay the tax and walk on. Consider tax saving strategies like salary sacrifice etc. But it may be cheaper and far simpler to just distribute profit as it arises and pay the tax at a marginal rate of 47%. Perhaps this opens up a personal tax deduction for super you, wife etc and you can save tax that way. Just watch for issues like HLP debts, private insurance and if your income is likely to touch $300K watch for the extra 15% tax on super.
 
Thanks Paul,

The explanation you offered on company simply defer tax, but at a cost makes sense. But the hope is that the day of the payout is when there is a tax benefit. Stay with your example, in several years when a child becomes an adult but have 0 income until finishes university. 70K goes to the child.

The idea of retaining profits in the company until such time the shareholding discretionary trust beneficiaries are on lower tax bracket, in your opinion, rarely eventuates in reality?

I am currently 39. I do struggle to keep income under 300K on paper. I have changed from sole trader to a personal service business which helped. I have started a SMSF this year. Oldest kid: 4 :eek: Here I am wishing they grow quicker for my little scheme:D Must be out of my mind.
 
Yes that would be a relatively good broad structure, but what does your lawyer say?

Throw in a unit trust and you have the ability to transfer units to a SMSF too.

Have you considered the structure of the companies and the structure of the trust. land tax, death, incapacity unwanted pregnancy and limiting personal guarantees. Private loan agreements?
 
Terry_w said:
Throw in a unit trust and you have the ability to transfer units to a SMSF too.
Click to expand...

Transfer to a third party, spouse another entity etc. And avoid stamp duty in many states in some cases. eg Victoria. Refinance principle shouldn't be overlooked as debt can be refreshed in future etc
 
Terry_w said:
Yes that would be a relatively good broad structure, but what does your lawyer say?

Throw in a unit trust and you have the ability to transfer units to a SMSF too.

Have you considered the structure of the companies and the structure of the trust. land tax, death, incapacity unwanted pregnancy and limiting personal guarantees. Private loan agreements?
Click to expand...

Hi Terry,

Thank you for the comment.

My accountant did mention why don't I have a unit trust during our last meeting. I was thinking... I already have 3 DTs and a bunch of companies, just added a SMSF and another trustee company, soon if I buy a property under SMSF another bare trust, do I need more?:eek: But instead of investigating a bit more I got lazy and put it on the backburner. There are lots that I don't know but unit trust is very high on my list to get to know soon. I remember your thread on unit trust from a while ago and I plan to re-evaluate things probably starting from reading that thread again!

But no I have no lawyer... Do I need a personal lawyer? I have done nothing wrong.:D

Death - I do have a testamentary trust and that is the last time I had a chat to a lawyer. You know apart from conveyancing, lending matters that sort of thing.
Incapacity - income, life and PD insurance in place.
Unwanted pregnancy - 0.2% chance.
Land tax - investing in different states and under both personal and trust names help.
The other two I am not sure what they are at this stage...
 
Paul@PFI said:
Transfer to a third party, spouse another entity etc. And avoid stamp duty in many states in some cases. eg Victoria. Refinance principle shouldn't be overlooked as debt can be refreshed in future etc
Click to expand...

I have already done a spousal transfer in Victoria, no stamp duty but CGT apply. UT is great the more I think about it.

What is the refinance principle you are referring to?
 
evan1875 said:
Hi Terry,

Thank you for the comment.

My accountant did mention why don't I have a unit trust during our last meeting. I was thinking... I already have 3 DTs and a bunch of companies, just added a SMSF and another trustee company, soon if I buy a property under SMSF another bare trust, do I need more?:eek: But instead of investigating a bit more I got lazy and put it on the backburner. There are lots that I don't know but unit trust is very high on my list to get to know soon. I remember your thread on unit trust from a while ago and I plan to re-evaluate things probably starting from reading that thread again!

But no I have no lawyer... Do I need a personal lawyer? I have done nothing wrong.:D

Death - I do have a testamentary trust and that is the last time I had a chat to a lawyer. You know apart from conveyancing, lending matters that sort of thing.
Incapacity - income, life and PD insurance in place.
Unwanted pregnancy - 0.2% chance.
Land tax - investing in different states and under both personal and trust names help.
The other two I am not sure what they are at this stage...
Click to expand...

Of course you need a lawyer. You are dealing with trust law, company law and various other laws.

A testamentary trust is good, but none of this structure will end up in a testamentary trust so have you planned the succession of control upon the death of yourself and/or spouse.

incapacity - insurance is good, not relevant to this discussion. What if you had a brick drop on your head mid way through and ended up in a coma. Who could then take control of the trust and/or company. You would probably automatically be outed as trustee and/or appointor. You could wake up from your coma to find one of a few things had happened:
1. collapse
2. loss of control, uncle harry completed project and winded up trust to benefit his family.
3. smooth transition.
 
Hi Terry,

The testamentary trust deals with assets in personal name. Unfortunately there are a few before start using trusts/companies.

So I will need a session sitting down with a lawyer to look through everything and plan ahead?

Back to the structure used for developing any other regular developers on here mind sharing their experience?
 
evan1875 said:
Hi Terry,

The testamentary trust deals with assets in personal name. Unfortunately there are a few before start using trusts/companies.

So I will need a session sitting down with a lawyer to look through everything and plan ahead?

Back to the structure used for developing any other regular developers on here mind sharing their experience?
Click to expand...

Yes it would be a good idea to use a lawyer to set up any structure, provide legal advice, draft documents and review existing estate plan. Also good idea to use a tax advisor to check the taxation aspects as well. Andd don't forget the ability to borrow - this should be checked first. see the recent thread where a group set up a unit trust only to find they were having problems getting finance.

Just keep in mind that trust assets and super do not form part of your estate on death and cannot be dealt with via your will (except perhaps passing on powers of appointment in some deeds - not a good idea though).
 
evan1875 said:
Hi Terry,

The testamentary trust deals with assets in personal name. Unfortunately there are a few before start using trusts/companies.

So I will need a session sitting down with a lawyer to look through everything and plan ahead?

Back to the structure used for developing any other regular developers on here mind sharing their experience?
Click to expand...

evan

just spent over 2 hours with my accountant also a developer.

Currently strategising tax and the plan moving forward, I am relatively new to developing, only 3rd development but it is my full time job.

What we have in place -

Trust - for land acquisitions only

Company 1 - Project Management/consulting company (I am paid as an employee), this helps service loans.
This company charges my trust for project management/consulting services

Bucket Company - Distribution of profits annually (lending company).
My Trust can access money from this company, interest will be charged.
This company is set up to also reduce exposure as I do not want to hold money in my Trust or Company 1.

I will in due course be also moving development properties that I hold in my SMSF. This is all still a work in progress, but pleased with outcome to date, there are other strategies he is currently looking at.

I am still trying to get my head around everything so unfortunately I do not want to get into too much detail other than what I have posted as your scenario may be different and this may not be the best option for you

MTR:)
 
A trust accessing funds from a bucket company is a division 7a issue. As long as you have a complying loan agreement with repayments generally over a 7 year period and interest charged at the division 7a rate then not an issue.
 
coastymike said:
A trust accessing funds from a bucket company is a division 7a issue. As long as you have a complying loan agreement with repayments generally over a 7 year period and interest charged at the division 7a rate then not an issue.
Click to expand...

Thanks
Yes, we touched on this.
 
One thing you can also consider is having a seperate company (rather than a trust) do the next development.

Developments on revenue account so CGT not an issue. Companies don't get the CGT discount but not an issue as you wouldn't get it anyway. So trust not really necessary. Company to Company loans not subject to Division 7a.

Then Company Two does the second development. Retain the profits at 30%. Decide what to do then. Maybe lend to Company 3. Or have a trust as shareholder and stream out franked dividends.

The issue with Division 7a is generally a cashflow one. You have to make minimum loan repayments every Year. if the second development goes for 2 years then making the minimum loan repayments can sometimes be difficult. This is where company to company loans for developers generally works better.
 
evan1875 said:
Of course Somersofter accountants and whoever else in the know are welcome to comment as well please!

My current development No. 1 is held under a discretionary trust. At the time I was thinking bucket company. Now my understanding is that a bucket company is a short term fix.

http://somersoft.com/forums/showthread.php?t=71950
http://somersoft.com/forums/showthread.php?t=102358&highlight=bucket+company

My accountant also dislike it. So I now know I will end up paying a fair chunk of tax if I sell. (Currently all beneficiaries are maxed out at taxable income >180K.) Development No. 2 is a recently acquired Brisbane site (unconditional but yet to settle) under a company, shares held by the same discretionary trust.

I am a beginner developer. So with my new path, I am walking a bit like my 1 year old, keep falling over and still learning from mistakes. But I would like to get this done right for the No. 3 before that happens.

After chatting to my accountant he suggested the following structure for future developments, basically is the addition of a second, middle, company:

Company 1 holding development site and do development, pay 30% tax, profit goes to Company 2 as dividend, Company 1 does not retain profit

Company 2 being shareholder of company 1, is there simply holding the profit

Discretionary Trust with Corporate Trustee (Company 3) being shareholder of company 2, can receive any dividend and then distribute, if Company 2 declares a payout.

My accountant is comfortable with Company 1 paying 30% on profit because both my wife and I are in a higher tax bracket for now and the foreseeable future. So there is no short term disadvantage.

If Company 1 is under threat from external, wind down and there is no assets in Company 1. If not continue to use Company 1 to do the next development.
This I guess applies to any trading entity holding assets, risk.

Company 2 retains the profit.

Discretionary Trust with Corporate Trustee kicks in at a later stage when the beneficiaries move to a lower tax bracket or more beneficiaries emerge. For example, wife and I retire, kids >18, kids have kids, etc.

Forgot to ask him what happens if I hold a few in the development. Anyway anyone else developing using this set up? If not, what do you use?
Click to expand...

If you decided to keep say 1 of the 4 units developed what then? Does you accountant advise you to keep this unit in a company structure? I would doubt this.
 
OC1

It might be worth it believe it or not. We did some modelling for a client where a unit would be retained in a company structure for 5 years and then sold. Recognising the 50% CGT Discount would be lost. HOWEVER. After that period they planned to retire anyway and dividends would be paid out from the company to a trust and then to the beneficiaries. With husband and wife receiving fully franked dividends the profits could be streamed out over the next 10 to 15 years effectively tax free as they would receive a full refund of the franking credits. They also had a daughter not working who could also receive distributions. This was a better result than distributing all the profits in the year of sale and paying tax and never having a chance to get refunds company taxes previously paid. So the answer isn't always that a company is a bad structure for long term holds or where trading stock changes into a fixed asset.
 
coastymike said:
OC1

It might be worth it believe it or not. We did some modelling for a client where a unit would be retained in a company structure for 5 years and then sold. Recognising the 50% CGT Discount would be lost. HOWEVER. After that period they planned to retire anyway and dividends would be paid out from the company to a trust and then to the beneficiaries. With husband and wife receiving fully franked dividends the profits could be streamed out over the next 10 to 15 years effectively tax free as they would receive a full refund of the franking credits. They also had a daughter not working who could also receive distributions. This was a better result than distributing all the profits in the year of sale and paying tax and never having a chance to get refunds company taxes previously paid. So the answer isn't always that a company is a bad structure for long term holds or where trading stock changes into a fixed asset.
Click to expand...

Nice one Coastmike. Goes to show one strategy doesn't apply to all. :)
 
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