What tax am I liable for on properties bought through my company?

Question from Ross Sheppard updated on 20th May 2008:

A friend and myself have opened a company and purchased two sections with $10,000 deposits on each. We have sold both of them making a profit of around $150,000 before titles are through.
What tax will we be liable to pay? I have heard of putting shareholders in to lower the tax rate?
Your advice would be great

Our expert responded:

This is a typical situation where it would have been advisable to get advice from an accountant before you purchased the sections. Firstly, to answer your question, tax will be payable on the entire profit. While you have made a profit of $150,000, there may be some costs that need to come off that, thereby reducing your overall profit. If the profit is left in the company, then tax will be payable at the rate of 30% (33% if the profit was made prior to 31 March 2008). If the profit is allocated to the shareholders, then the profit will be taxed at the individual shareholder's tax rate based on what the shareholder's total income is. The income tax issue is fairly straightforward. What is not as clear cut is the issue of tainting. Tainting arises when a property is bought with the intention of on-selling it. If you are tainted, then any property you sell after you become tainted (and you bought it after you became tainted), you will have to pay tax on any capital gain made. And anyone associated with you, such as your partner, children, parents and siblings will also become tainted and they too will have the same tax consequences. Being tainted has far reaching consequences and is to be avoided. In this case, you did not personally do the buying and selling. However, you own shares in a company that did, and under the associated party rules, that will be enough to bring you, your friend and both your partners, children, siblings parents and so forth within the gambit of being tainted. Being tainted under the current legislation, is not a foregone conclusion and can be avoided by getting the right advice before doing anything.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.


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