Question from Simon updated on 29th March 2013:
I intend to buy a property off my parents. The rental yield is a healthy 7.5% and against all expenses it means that we should clear around $2,000 per anuum. First question, my wife and I already own our own house with loads of equity. We both pay tax at 33%. We were going to purchase this property in an LTC (look through company). Can you see any negatives in this? Second question, we own a couple of unlisted and listed share PIEs in our own name. Would it be advantageous to sell them to the LTC too and use debt to borrow against them? If so would this be tax avoidance?
Our expert Mark Withers responded:
The look through company is proving to be a "quirky" entity to say the least. It is a company that behaves for tax purposes like a partnership. The Government expected many more LAQC's to transition to LTC than has actually occured. This I believe is because profitable LTC's stream income back to shareholders with no ability to retain profits in the company and enjoy the benefits of the lower corporate tax rate. Because you are both paying the top marginal tax rate the tax outcome would be identitical should you simply choose to hold the property personally. The LTC is far more administrative and complex, what with its loss limitation rules, deemed disposal rules on share transfer and other technical requirements. I also doubt the limited liability status is particulaly relevant to a simple rental property investment. If I were you I would look at keeping life simple with a conventional joint partnership or perhaps a trust that protects the asset and allows flexibility in future to distribute surplus income to beneficiaries as the trustees see fit. I'm struggling to see a reason to restructure your PIE investments with debt. There is absolutely no future in borrowing money you don't need to fund the holding of cash investments. Why not cash up the PIE investments instead and reduce some of your property debt? I bet the mortgage interest rate is higher than what your PIE investments are earning. You will probably pay more tax but thats just a by product of earning more from your investments.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.