Tax rates on different structures

[Scallywag]

Hi,

I am an Aussie investor and have a portfolio of that is currently in a trust structure. Trusts were useful when I set it up because of the depreciation benefits, enough said!

Currently I am paying 33% tax on the earnings (as the portfolio is cash flow positive) and I realize now that companies only pay 28% tax, which is considerably less.

Does anyone recommend changing from a trust to a company? Has anyone done this and what would it involve?

Thanks!

[Rosco]

Capital gain tax in Aussi is the big thing to be careful of.

Also the 28% in Company Tax is only an interim tax, and long term if you want to get the profits out, to a Trust then still at 33%, so would pay another 5% when declaring dividends. If you have individual as shareholder of Company, then be very careful of CGT in Aussi!

A few things to consider
- What is cost to sell to Trust? if building depreciation involved it could be thousands, plus maybe $2,000 of legal fees to buy in company and sell in Trust.
- What is commercial reason for transfers? IRD has an issue with tax avoidance, and just need to think through why are you doing this and could it be labelled tax avoidance?
- How long are you going to keep the property for? - if very short term, probably not worth playing around with
- Where is the cash profit going? - If to you as individual, then will have issues with Company ownership anyway and be forced to charge yourself interest (and pay tax on this profit) or declare dividends at 33% anyway.

Ross

[Rosco]

Is there beneficiaries that you could distribute to at lower tax rates - Just be very careful on CGT in Aussi!

Ross

[Scallywag]

Thanks Ross. It all sounds too hard and too expensive which is all I needed to know. I wouldn't might pursuing the option of distributing to myself in Aus as a beneficiary (as I'm on a lower personal tax rate than 33%) but wouldn't the IRD would have kittens because tax that would have gone to them would effectively be going to Aus?

CGT in Aus doesn't worry me too much by the way because I realize I have to pay it eventually, when the properties are sold.

Cheers

[Rosco]

Hi Scallywag,

CGT - generally a NZ Trust can be set up to be separate to Australia, so no CGT.

Profit in Trust - if distribute to you, then have to pay NZ tax on this income. Most likely at 10.5% tax as no other NZ income. Then in Australian also have to pay tax on NZ income, but would get tax credit for NZ tax paid, so would have to pay extra up to your personal tax rate.

Ross