Home – New Forums Starting your journey Property Company – Share Distribution

  • This topic is empty.
Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
    Posts
  • #968569
    mexham
    Member
    • Total posts: 302
    Up
    0
    ::

    Hi there,

    I’m just in the very early stages of talks to start a small family property development company.

    We are initially looking to buy a land package to start with.

    As it will be a company we will just each hold shares in the company. What I’m wondering is how do you evenly work out share parcel distributions when some of the family will be providing equity, whilst others will be covering the servicing of the loan? Does anyone know a method of fairly working this out?

    Thanks,
    Mike

    #1033925
    Dardee
    Member
    • Total posts: 430
    Up
    0
    ::

    Consider using a trust(s) for the structure. It will make the distribution of income etc much easier. You can still have a company as the trustee.

    Speak to your accountant about it.

    #1033926
    CruzAccountant
    Member
    • Total posts: 195
    Up
    0
    ::

    Before I read Darren’s post, I was thinking Trusts. Spot on Darren!

    A family trust or unit trust would be good options. Have a look into those, or speak to someone about the pros and cons of each. They may be more expensive to set up and maintain, but they are far more flexible than a single company structure.

    To simply answer your questions, you’ll all need to agree on the amount that each person is putting in. For contributions that aren’t cash, it might be a good idea to get a market valuation and agree on the value before proceeding. You can have unequal shareholding in the company, but it’s best to agree to this before commencing.

    Richard

    #1033927
    Richard A
    Member
    • Total posts: 92
    Up
    0
    ::

    Hi Mike,

    It would probably help to know what the strategy for your “property play” is, as this can have a bearing on the most appropriate structure. Are you developing and selling out, or holding something for the long term? I’m surprised the accountants responding here didn’t ask this before suggesting structures.

    Do you even need a structure? Maybe a partnership agreement would suffice as then each party can arrange their own structure according to their own requirements.

    Richard

    #1033928
    mexham
    Member
    • Total posts: 302
    Up
    0
    ::

    Hi thanks for all the responses.

    Richard, we are looking at buying a block of land with the intention to subdivide and sell off the sections.

    Amongst those involved funding is provided in different ways (equity, deposit, loan servicing) and we are just trying to determine a fair method of valuing everyones contributions.

    #1033929
    Richard A
    Member
    • Total posts: 92
    Up
    0
    ::

    OK, well your goal will be to get the profit out in the most efficient way for the participants.

    If it was me, I would do a trust set up to do equal distributions to all beneficiaries of the profit proceeds. Key point to note here is that with a trust you must distribute the proceeds, whereas with a company you can keep the cash in there and roll it on to the next project.

    Also with a trust, distributions are taxed in the hands of the recipients at their marginal rate – fine if you earn under $130k as you will be under the company tax rate of 30%. It is probably worth speaking with an accountant on your personal circumstances and you can structure your personal interests “into” the trust.

    Re the funding – keep it separate to the ownership structure. Funds should be loaned into the structure for the project on separate loan agreements with the funders. I would structure the loans around a commercial rate of interest depending on the project risk, gearing, etc, with capitalised interest and payment at the end. Debt ranks before equity so the loan funders would get their money back before any equity/investor return (and so they should). Therefore those putting money in get an interest rate return, as well as a profit return at project end. Interest expense reduces the net profit obviously, but under this arrangement the loan providers at least get a return more in line with their risk.

    I reckon this is a clean way of doing it.

    #1033930
    Alan Maddick
    Member
    • Total posts: 410
    Up
    0
    ::

    I agree with Richard except that the 30% tax bracket ends at $80,000 not $130,000.

    The rest of his post is spot on, ie generally investors should get their money back +/- interest and then you distribute what is left as profit.

    I woud be using a trust (probably a unit trust) if you want to do this once only and a company if you plan to do repeated projects (ie more of a business than an investment)

    If you want to take advantage of the 30% company tax rate and still use a trust you can with the trust units held by companies.

    You should have a discussion with all parties with your acountant and lawyer and get everything in writing and make sure everyone is happy before you proceed, it may seem like a substantial cost but may save you tens of thousands, broken relationships etc down the track.

    #1033931
    Richard A
    Member
    • Total posts: 92
    Up
    0
    ::

    My point on the 30% was not where the rate threshold ends, but how much you would have to earn as an individual to equal an overall tax rate of 30%, equal to the company rate.

    I worked it out some time ago and haven’t checked it since, but that was the general gist of the argument.

    #1033932
    MattR
    Member
    • Total posts: 196
    Up
    0
    ::

    I’d consider a Unit Trust, but consider the Land Tax implications as well. There are some Trust Deeds out there that are apparently “Fixed Trust” friendly for NSW and Victoria – these are worth considering as the can save you ~ $6000 in Land Tax per annum.

    I’d also consider a Unit Trust as it allows for flexibilty of investment and borrowings to be by individual unit holders. There is also potentially no stamp duty of Transfer of units if you are below the threshold for the Land Rich provisions so this can be benefical.

    A Unit holder could be a company, which to take a point from above would mean tax is capped at 30%. Alternatively a Unit holder could be another Trust with a coporate beneficiary but beware of the implications of Taxation Ruling TR 2010/3.

Viewing 9 posts - 1 through 9 (of 9 total)
  • You must be logged in to reply to this topic.