buying property as a business

cheapanddirty on 26/06/2023 - 14:20
Last edited 26/06/2023 - 14:21

Ok, this is a complex one for me, as a non-financial person. I will try to outline what I think is important here, if there are gaps of important information, let me know. I am sure this will raise more questions than answers, but that's good, it will slowly get me into the right direction.

Situation; parents from overseas have moved to Australia. They will be sitting on a bridging visa, until permanent residency, which could take 7 to 12 years at the moment.
They have moved their lifesavings / retirement savings of 1million+ to Australian bank accounts.

They need to do something with that money and the stock market is not their kind of thing. So their idea was to buy one of 2 properties which they can live in or rent out whenever they need to, based on future travel plans. They also want to move the money over to myself and my brother, both residing in Australia, I guess as a preparation for some kind of inheritance. They asked me for tax advice… Although I do have some finance education, tax and stuff is really not my kind of thing. I will be talking to an accountant at some point, but the specifics of this situation are probably not something you can drop on the desk of the HRBlock agent sitting at the local shopping mall. I want to discuss it here as well, so I get some ideas on issues and what to ask for…

This money transfer could be directly; hand over the money and my brother and I buy the property in our name. I foresee some issues there with tax, for instance is the "gift" taxed as income for my brother and myself? I can also see some issues with potential income from a rental property if it is in my name; I am in the highest tax bracket which means any rental return will be hit pretty hard with no deductions on mortgage costs etc (because it will be 100% paid in cash).

A more creative option could be to setup a company, where my brother, my parents and I will be shareholders, but my parents get 100% of the income (the rental return). My brother and I will own the property, but have 0 income and will therefor pay no tax on anything. They have no income other than from this business and will declare that for income tax) Are there any issues around this? Thing here is, if they god forbid pass away one day, My brother and myself would be 50% owner of the company each, at which point we can work out if and how to sell the properties and split the income.

Sorry, seems like a mess, but I am sure the right people are here to go:"Have you even thought of X, Y or Z?" :)

Financial

Comments

  • singlemalt72 on 26/06/2023 - 14:23
    +2

    Gaps in knowledge can be filled, but the best thing is to speak with a financial planner/Tax specialist once you have a handle on understanding of these issues.

    • cheapanddirty on 26/06/2023 - 14:26
      +1

      yep, will absolutely do that, but I want some rough ideas and understanding before I hit up a financial advisor with all this crap :)

      • jacross on 27/06/2023 - 07:50
        +2

        You are playing with decisions that can cost tens to hundreds of thousands of dollars. That's not investment risk/return. That's just pure tax consequences of your decisions.

        All you should be doing is researching who is the most reputable financial adviser in your city. H&R Block is not the right choice by the way.

        • cheapanddirty on 27/06/2023 - 09:07

          yep, already done. I have a meeting with an advisor today actually. This post did allow me to get some questions and ideas together to discuss though, so that was helpful as expected.

  • Drakesy on 26/06/2023 - 14:36

    Yeah, you'll need a financial advisor for this one.

    I know that it is becoming incredibly difficult to be an international investor and yes, the restrictions to buying houses will make it hard for them to purchase property (that isn't brand new). My personal opinion is that we should go the way of Canada and crack down completely on foreign ownership of property

    The tax implications as well for the transferral to you, followed by buying a house in your name would also be quite complex.

  • cheapanddirty on 26/06/2023 - 14:39

    Ow this is not China, this is a country in Europe. The money is already sitting here in a savings account. Just needs something done with it. They would love to buy a house (or 2), because they need something to live in as well. One complication with that is that they have to pay additional stamp duty as foreigners, but given the property will be their kids one day anyway, they would prefer to make that all happen now.

  • Crow K on 26/06/2023 - 14:48
    +5

    If you want an entity to own the properties (instead of an individual) you'll probably want to do it through a trust rather than through a company so that you're eligible for the 50% CGT discount - but this is the sort of stuff figured out in front of an accountant.

    Get a clear idea in your head what the property's mainly being used for and what the "planned" use of it will be (e.g. will you only be getting it when they're dead vs them gifting it to you sooner etc).

  • Ramennightmare on 26/06/2023 - 14:51
    +7

    Noone will ever own properties in the company name as you will lost access to the Capital Gain Discount.

    The best you can do is set up a discretionary trust with coporate trustee ( you and your brother can be shareholers) and then buy the properties within the trust. From there, any rental income/Capital gain can be distrubuted more efficiently, eg whoever with lower tax bracket can get more income.

    • cheapanddirty on 26/06/2023 - 15:02

      Ok cool, very helpful already.
      So, the income of the rent will need to 100% go to my parents then, but I assume you mean they are also "corporate trustee"? They stick that 1M into the trust which buys the property and my brother and I won't pay tax over that contribution? Seems odd, because if we are shareholders, say 50% each, that means we have just been gifted 500k tax free?

      • Ramennightmare on 26/06/2023 - 15:25
        +1

        1) if the income go to your parents, then you will have to check whether your parents tax residency. Even though they are not permanent residency but they still can be Australian tax resident which I think they will be in this case. However, for a property that worth about $1m in anywhere in Australia, then net rental yield should still put both your parents under tax free threshold.

        2) They will be the beneficiaries of the trust. Corporate trustee is the company behind the trust, then behind the company you have you and your brother as shareholders.

        3) I would imagine your parents will gift the money to you and your brother, then both of you contribute the money into the trust. The money given from your parents to you should be tax free as it would have been taxed previously in their home country and this is merely transfer of fund. Not assessable income. Unless, it came out from a estate or trust, then it might be different story. In your case, it is just transfer of fund between individuals.

        • cheapanddirty on 26/06/2023 - 15:34

          Well, the money is from the sale of a property overseas while they resided there, so I assume that means they already paid tax over that "income" yes.
          As the beneficiaries of the trust, they don't own any of it as shareholders? They just get paid money by the trust? If so, how come my brother and myself don't end up having to pay tax over the income the trust receives from the rent? The income is just piped straight back out as 100% income for my parents (only)?

          • Ramennightmare on 26/06/2023 - 15:47
            +3

            @cheapanddirty: 1) The trust structure can be confusing at times, you have think about it this way. No one own anything in this case other than the trust (you should treat it as a separate legal entity). Then, within the trust, you have 3 main characters: Beneficiaries, Trustee and Appointor. Their roles are as follow:

            • Beneficiaries can receive any sort of income from the trust per the trust deed
            • Trustee: a person/entity who will decide who get what in a financial year
            • Appointor: a person that has the power to remove trustee

            2) You and your brother didn't have to pay tax is because none of you receive the trust distribution. When you have trust distribution, it is tax at individual level, only in very rare situation a trust will be liable to pay tax.

            3) Yes, when you setup the trust, make sure the deed has your parents as the beneficiaries. Then the income can channel straight back to them. Normally all modern Deed will have a function call income streaming which means the trust income can be distributed out based on catgories.

            • for example: 10 years later, you guys decided to sell the properties and made 100k gain and conincidently you and your brother has 50k capital loss each. You can then draft up a trust resolution with the split to utilise the loss. Rental income 50/50 to your parents and capital gain 50/50 to your brother. Then, no one pay tax.
            • Ramennightmare on 26/06/2023 - 16:59
              +2

              @Ramennightmare: I just got negged for posting something that I came across quite frequently.

              If you think I make a mistake, I am very happy to hear from you and keep learning.

              • Mad Max on 26/06/2023 - 17:06
                +1

                @Ramennightmare: You are pretty much spot on mate.
                It is not that you made a mistake. It is ideology…typical of the majority of Ozbargainers.

            • Msfrugal on 27/06/2023 - 13:57
              +1

              @Ramennightmare: @Ramennightmare
              Hi. I just wanted to thank you for your kindness in providing all that information to the OP.
              Yes, it’s complicated but I’d be just like the OP - trying to research options and understanding of possibilities myself before going to Tax Agent for consulting and confirmation of best for my parents.
              @RMBC- that’s a thank you to you Re Tac agent and not Financial planner.

              Taking the time to write replies with your knowledge and experience is kind.
              I learn all the time on different topics - some relevant, others I’m interested in learning about…
              Always SO grateful to everyone who contributes. You will never actually know the number of people who do benefit as many people will read and not comment!
              It is the generosity and kindness of people who willingly share to help our community that MAKES this such a bloody great community!!!

              Btw - I do have to say the Get Turkish Citizenship post gave me the best laugh today ! Go check out the comments- the The humour of this community CLASSIC and BRILLIANT!!
              My best to everyone.

              • Ramennightmare on 27/06/2023 - 14:12

                @Msfrugal: No worries at all. Glad that I helped.

                All the best to you and your family!!

      • Drifta on 26/06/2023 - 23:54

        In what way? Unless you don't hold the asset for more than 12 months?

        • redfox1200 on 27/06/2023 - 05:44

          Ah I'm mistaken, I was under the impression they don't qualify

    • Drifta on 26/06/2023 - 23:53

      This is the advice you're after. Just ensure the director of the corporate trustee is not a foreign resident. It's better if you or your brother are the directors. Could even be your wives, adult kids etc.
      The good thing in your case is you're not looking to borrow money to fund the purchase.

      Happy for you to PM me if needed.

  • ECE on 26/06/2023 - 14:52

    Wow 1M. If i have that money i wont retire here 😂

    • cheapanddirty on 26/06/2023 - 15:00

      1M to last you 20 years until 2043, having to buy a house first and considering inflation and tax… if you think that is a lot, do the math; you would be struggling to make ends meet.

  • Ocker on 26/06/2023 - 15:00
    +1

    Establish a family trust

  • elgrande on 26/06/2023 - 15:08
    +1

    $1 million in cash and still looking for free advice.. nice.

    • cheapanddirty on 26/06/2023 - 15:11

      these are elderly people who just sold their house… god, take a chill pill. You go and live 20 years of 1M… in 20 years time, that would be equivalent to living of 30k a year. And then godforbid you don't stay alive, because you'd be broke.

      • Drakesy on 26/06/2023 - 15:23
        -1

        Pensioners entered the chat.

        Also might want to look at Singaporean pensioners and how hard it is for them for context, no such thing as a cushy retirement with dividends for them.
        $1 million is a huge amount when you think of it.
        If they want to be frugal there's other countries where it would go further.

  • Wq Orz on 26/06/2023 - 15:28

    You really need to obtain proper tax advice, the advisor needs to have all your income & assets compositions to provide a tailored solution. Free advice will cost you more down the line.

    Depending on your situation, you will need to consider at least the following:
    * FIRB/Foreign purchaser additional stamp duty
    * Land tax/absentee owner land tax/vacant residential land tax
    * Capital gains tax
    * Asset protection

  • TheBilly on 26/06/2023 - 16:52

    It's really not that complex.

    What exactly is it that you are trying to achieve here? Get the money from your parents so you do not have to pay tax?

    Basic rule of thumb is that you pay tax on money earned not gifts.

    Your parents can gift this to you and there is no tax.

    If they die, you can inherit their 'money' or 'property' and there is no tax.

    You don't need to setup a company.

    • cheapanddirty on 26/06/2023 - 19:40

      The handover of the money is one part of this yes. But after that, they need an income, which is what flows back to them as rent. That needs to remain tax free as well, which is not the case if I rent it out and give them the cash each month.

      • TheBilly on 18/07/2023 - 17:09

        If you rent out the properties, you will pay tax on the income under somebodies name. It doesn't matter how you structure things. Not paying the tax on income earnt is tax fraud and you'll probably go to jail if caught. The only way you won't pay tax is if their combined yearly income from pensions and rentals are below 18k.

  • RMBC on 27/06/2023 - 09:13
    +3

    I'm a tax agent, and there are so many variables here you are not going to get an answer.

    See a proper tax agent, not H&R Block, for an hour or so and talk to them about what you want to achieve. There are so many interactions here, between ownership, structure, control, foreign interests, land tax, stamp duty, income tax, capital gains, and that's off a 30 second consideration of what you're outlining.

    It will likely cost you $500 initially, but assuming the tax agent knows what they're doing, you'll have your plan.

    Also do not see a financial planner, they will not give you the advice you need, unless your parents are unsure if they want to buy a property vs shares; structuring and tax implications will be beyond their remit. As others have pointed out, getting this wrong can be very expensive.

  • eftpos on 27/06/2023 - 09:25

    Why can't they just buy the properties in their names and receive the income directly, paying their own (probably pretty small) tax? The only issue with inheritance would be if one of them died and the other remarried and the new spouse inherited, but you can make sure the wills are up-to-date to avoid this. By the way. there's no capital gains tax discount if you sell a property through a company.

    • Ramennightmare on 27/06/2023 - 14:01

      Because they are not Australian permanent resident or citizen, and tax residency is different. If they buy it in their own names, there would be a lot more to consider and more costly.

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