It's not Newton's First Law but may contain something a little ASTONISHING ... or at least informative. If not, how can I do better? - Gareth
Property Investment - START AT THE BEGINNING!
most important aspect of making money out of property is preserving and
protecting both the property and the wealth that is created.
Far too many
property investors rush into buying properties without first getting a suitable
property investment structure in place. Without a suitable property investment
structure you are exposed and vulnerable to creditors who can ruthlessly take
away everything you have gained." - Jason Lee
The importance of choosing the correct business entity for the right
type of investment (before making the investment) cannot be over-emphasised.
This decision determines the protection, method of succession (passing the
investment onto future generations at death), style
of ownership (management / administration / flexibility) and tax
treatment that the investor will enjoy or be obligated to by that investment.
You could probably buy property in
your name if you only want to own one property. People are often
advised to buy their primary residence in their name due to the capital gains
exemption. But if you want to build a property portfolio (aka the best way
to build wealth), you need to have a proper structure in place.
I will therefore only consider Companies and Trusts as viable options in
this Blog Post.
[Close Corporations are being phased out but since there are still a
few floating about, my comments on Companies would apply in the same way to
I will discuss each entity by referring to each of the aspects that I
have already mentioned.
When you buy property in a Trust, it is possible to
build a much bigger portfolio than you would be able to in your name. Trusts are mostly more suited for more passive/holding investments (e.g. holding a trading company’s shareholding). They are also more suited to Family investments with a common goal.
kicked-off this post with a quote from well-known property investor and author,
Jason Lee. I share his sentiment that protecting your wealth is as
important as creating it. The proper use of Trusts can
create investments that are 100% creditor proof. However, please note that such
protection can only be achieved over a period of time and through effective
management of your Trust.
I favour a double
Trust structure as the best defence against Creditors. There are a couple of
people who claim credit for this structure but, in my opinion, it stems from a
book by Peter Carruthers called CrashProof your Business and developed by Rob
Velosa. Irrespective of who developed it, this structure is recommended
by a vast number of the Trust experts and gurus in South Africa.
did you know that
on your Death, your Estate may lose up to 55% in fees and taxes?
did you know that
these are expenses that must be paid by your heirs?
did you know that
on your Death, your assets will be frozen?
great benefit of Trusts is that it does not form part of your estate if you are
declared insolvent or pass away. There are no estate duties, capital gains tax
or executor fees. No assets are frozen. You will not have this benefit if you
use a company unless a trust owns your company’s shares.
Style of Ownership
Trusts are created
by the Founder and managed by Trustees for the benefit of Beneficiaries.
The Founder can be both a Trustee and a Beneficiary. There are several reasons why it is essential to have an Independent
Trustee (follow the Link) and the owner cannot treat the Trust ownership of the
Assets as an extension of his personal ownership.
principle that only applies to trusts is also a great mechanism to channel and
split profits or capital gains to beneficiaries, which makes a trust even more
property in a Company makes sense
if a trust owns the company, but this structure can be more expensive. Company structures are most suited where investment/business risks/liabilities are high.
Section 77 of the Companies Act
prescribes certain statutory liabilities, which are placed on the directors of
a company. A director of a company may be held liable for any loss, damages or
costs sustained by the company as a consequence of any breach by the director
of the duties contemplated.
A director of a company will, in addition, be held liable where that
purports to bind the company without the requisite authority;
acts in the name of the company in a way that is false or misleading; or
knowingly or recklessly signs or consents to the publication of a
financial statement which is false or misleading.
The Act further provides for the liability of directors, where they
trade recklessly or conduct the company’s business with the intention of
defrauding a creditor.
Section 214 of the Act renders a director (or any person) guilty of a
criminal offence if such director / person was knowingly a party to an act or
omission by a company calculated to defraud a creditor or employee of the
company, or a holder of the company’s securities or with another fraudulent
In terms of both the Income Tax Act and the VAT Act, all juristic
persons are required to appoint a representative taxpayer who accepts
responsibility for ensuring that the company meets its tax obligations. Even
though the Acts afford certain protection to these representative taxpayers, this
is paltry compared to the onerous provisions of section 48(9) of the VAT Act
and section 16(2C) of the Fourth Schedule to the Income Tax Act.
However, as yet no court has had the opportunity to consider these
provisions; leaving one with little certainty as to how these elements will be
A company has “perpetual
succession” – it survives the death/incapacity/insolvency/exit of the directors
and shareholders. ... Transferring ownership and management is easy –
shareholders and directors change but the company lives on.
Style of Ownership
Companies are owned by the Shareholders and managed
by Directors. The Investor can be both a Shareholder and a
Director. The South African Trust Law is not nearly as developed as its Companies
Act counterpart and therefore greater legal certainty exists regarding rights
and obligations surrounding Companies.
In my experience, where there are groups of people investing together, a
Company is the most nimble vehicle to accommodate the entry and exit of
Investors (death, insolvency, sale of shares, etc.). A Trust is extremely
cumbersome when having to cater to shifting investor demands and expectations.
And although the
tax rate is lower, the conduit principle does not apply, which makes it very
inefficient to move funds out of the company and benefit from your portfolio.
IS THIS THE BEGINNING?
Moving assets out of one legal entity (or from a Natural Person) into
another can trigger donations taxes (at 20%), deemed interest charges (at 8%,
Section 7C), capital gains tax (CGT) and transfer duties.
I prefer a combination of Trusts and Companies but each individual
Investor is different and should seek their own advice.
Getting things right from the start will
save a lot of time, money and aggravation down the line!