Investors Ask: What structure should I buy in?
Q. I am a small business owner and I have some friends who have purchased properties in their company name. I am wondering if I should do the same thing. What are the advantages?
A. You can run a business as a sole trader, in a company or in a trust. As a sole trader you are liable and therefore expose all your assets, including the business.
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In a company, it is false to assume you have adequate asset protection as most business owners have shares in their family business in their names and so this is an asset that is available to creditors.
A company has limited liability, which means normally your individual assets are not at risk unless as a director you act fraudulently or trade while insolvent.
A trust requires a trustee to sign documents and open bank accounts etc. The trust, as the operating entity, completes deals with customers and suppliers and files the tax return; the trustee merely acts as the signatory.
Pre-tax profits are distributed to beneficiaries who then include these sums in their individual tax returns and pay the appropriate tax.
Overall, a trust with a corporate trustee brings together the best of the sole trader and the company.
Having your business in a trust is a very convenient and effective way to buy properties as you can buy investment properties (not the home) in a trust and distribute funds from the business trust to the property trust to absorb negative gearing etc.
The benefits of having property in a trust are the ability to stream any rents or capital gains to any family member as well as asset protection and improved estate planning.
This strategy is not accessible to wages employees as they receive after tax monies and any negative gearing would be trapped in the trust. For wages employees a different trust would need to be set up to effectively shift the negative gearing.
You would not normally buy property in a company as a company does not receive the 50 per cent CGT general discount and again wages employees could not use a company as they would not get tax deductions for any negative gearing and distributions are normally limited to the shareholders, restricting flexibility.
You will also need to consider land tax as different rates apply to people, companies and trusts and each state has different rules.
Ken Raiss, director, Chan & Naylor
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