Sale of rental property owned in company name

Question

We have a basicaly dormant Pty Ltd company which purchased a unit about 15 years ago for $54000. The company has just accepted a offer of $226500. The company only receives the rent of 2 properties as income , about $26000pa (basicaly dormant).After the sale of the mentioned property only one property will remain (value about $475000)

Is a company subject to CGT or is it taxed on the profit $226500 – $54000 = $172500 at company tax rate of 30% ?

The company owes $200000 loan (not secured against the property and not borrowed to buy the property) . If the company pays the $172500 off the loan does that negate the tax ? Idealy we would like to reduce the loan but do not have to – no urgency.

MY wife and I, 54 & 63 yr old directors of the company and have a SMSF. If the company payed the $172500 into our super fund would that be allowed, and offset the $172500 profit the company made – thus no tax payable by the company ?

Or can the company pay the directors a wage or dividend to negate the tax ?

Answer


Companies are subject to CGT but in the case of non business assets it doesn’t do them much good because they do not qualify for the 50% CGT discount. So the gain on this sale will be fully taxable to the company at the rate of 30%. When you take the cash from the sale out of the company it will be considered a dividend, which can be fully franked. The advantage is that you can choose how much you take each year so drip feed the dividend in an attempt to keep your personal tax bracket capped at 30%. This will mean as you take the dividend the franking credit you receive will be enough to cover the tax.
Just in case you don’t understand how franking credits work. Imagine a company you fully owned made $100 profit it would pay $30 in tax and then may choose to distribute $70 to you, fully franked. In your tax return you would include $100 in income which represents the $70 cash and the $30 tax credit. If you are in the 31.5% (including Medicare levy) bracket then the tax on your $100 will b $31.50 but you will only have to pay $1.50 because you can use the $30 franking credit to offset you personal tax.
Paying out the loan will not reduce the company’s taxable income. Paying wages to the directors will but that just means the money is then taxable to them instead. In the end this would have the same effect as paying a dividend.
If the company made some deductible superannuation contributions for you they would be deductible against the gain and not taxable to you but taxable to the super fund at the rate of 15% which is a bit of an improvement. The trouble here is that you are only entitled to contribute $50,000 (in deductible contributions) each to super each year and this is from all sources including super contributed by your employer.

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