Hi everyone,
I'm new to this forum, have been reading alot but abit hard to take it all in with all the info provided! I just wanted to ask a quick question. If this has been asked before, can you please let me know the link of that thread and this one can be deleted.I recently built a house and moved in this year March. I was speaking to my broker the other day and she that maybe its time I bought my first investment. I'm looking to buy maybe end of this year. I've seen a few threads on trust and dont really quite understand it. Is it better to create a trust and then buy IP under that trust, or should I just buy the IP under my name?
Any advice would be greatly appreciated.
there are so many issues involved that it would be hard to provide an answer.
It would depend on many factors such as:
– which state will you buy in?
– are you at risk of litigation
– Your income
– You family's income
– any kids
– will the property be producing an income loss
etcTerryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry for your reply.
To answer your question, its just myself and my husband:
-We would like to buy in Vic (melb)
-No risk of litigation whatsoever!
-We currently have a joint income of around $120k
-when you say 'family income' do you ask whether i'm from a rich family? if so, then definitely not haha-no kids yet, but will start in another 2 years
-we will most likely negative gear the property
I hope those answer helps my case. I am starting to think that i wouldnt need a trust as my situation is so basic.
thanks.
Well, its still difficult to decide because:
– If you use a trust any losses cannot offset your personal incomes. If you add up depreciation expenses, travel expenses then there could be a large loss. maybe $10,000 pa. If in your personal name then you could tax maybe $3,000 in tax. Not so in a trust, unless you are self employed maybe.– You may have to pay more land tax in Vic if you hold in a trust. I am not sure of the current rules down there.
On the positives, if you have kids, each kid can get approx $3,300 pa in unearned income each year and not pay tax. So if the parents were both working and the property earned $6,000 after expenses then no tax may be payable. If it was owned in personal names then maybe $2500 in tax would have been payable.
But if you don't have kids and are both working and all your near family are working then you may have no one to distribute to so would pay tax just as if you owned it in your own names – or maybe you could cap the tax at 30% by distributing to a company.
Long term trusts will be great, but it can be painful in the early years, especially with the losses and land tax.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry. I think I will stick to my original plan and just buy our IP under our names. Makes it nice and simple!
Cheers.
Maybe do some cashflow projections and see how it goes. Just assume the trust is a separate person with no other income.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Good answers provided Terry
Choosing an appropriate structure for a particular investment property purchase is a very difficult question because, as Terry pointed out – there are so many factors to consider! Good topic for a sticky post.
You can always double check what is best by seeing an accountant or two – most of them will not charge (or will discount) an initial meeting so you can get some answers / confirmation from them too.
Nice to see that your broker is drumming up more business for herself by encouraging you guys to buy another property!
– just ensure it is the right advice for you and your hubby. Keep an eye on your budget and cash flow. People get so caught up on tax – however that is only part of the equation.Cash flow is so important – also stress test it – i.e. see what your budget looks like if interest rates went up 2-3% or if one of you stopped working etc. Also shop around for some income protection insurance – just in case you or your husband can't work due to accident or sickness – it is not too expensive if you are young and healthy. You can also self-insure via cash savings and accrued sick leave etc.
Good luck with everything!
SM
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Thanks Evolve for your advice.
When my mortgage broker told me that i could afford an IP, we were really excited. But as you said, she's probably just wanting the commission from my loan. So that's why i'm trying to read and understand this forum so that i am better aware of how it all works before I jump into anything.
cheers!Terryw wrote:Well, its still difficult to decide because:
– If you use a trust any losses cannot offset your personal incomes. If you add up depreciation expenses, travel expenses then there could be a large loss. maybe $10,000 pa. If in your personal name then you could tax maybe $3,000 in tax. Not so in a trust, unless you are self employed maybe.– You may have to pay more land tax in Vic if you hold in a trust. I am not sure of the current rules down there.
On the positives, if you have kids, each kid can get approx $3,300 pa in unearned income each year and not pay tax. So if the parents were both working and the property earned $6,000 after expenses then no tax may be payable. If it was owned in personal names then maybe $2500 in tax would have been payable.
But if you don't have kids and are both working and all your near family are working then you may have no one to distribute to so would pay tax just as if you owned it in your own names – or maybe you could cap the tax at 30% by distributing to a company.
Long term trusts will be great, but it can be painful in the early years, especially with the losses and land tax.
Hi Terry
I am in a very similar situation to the once described. I'm confused by your comment above "Not so in a trust, unless you are self employed maybe." on how I can offset losses in a family trust as I am self employed. How does being self employed allow one to offest losses from a family trust?My husband is a salaried employee and my work is flexible in that I can choose to be paid on payroll or via ABN. I do have significant litigation risk and that's why I was advised to buy our investment property under a family trust, and set up a company to act as trustees. It was also suggested that instead of being paid by ABN/payroll, that I set up a second company (let's call
to bill for my work (with ACN instead of ABN) which will offer more protection? I'm not sure which set up is most advantageous from a tax perspective and also what the banks prefer before lending us money.Thanks in advance for any advice!
bb8
bb8
If you are at risk because of your job, then operating thru a separate company will limit your liability to some extent. It may also allow you to divert income into the trust with the losses so the income from the business can offset the losses. This will reduce your taxable income too.
However, the banks will view this as being self employed and would want to see financials, ideally for 2 years.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terryw for your advice.
However if I am the director of the separate company and earning income that way or just as a contractor with an ABN, wouldn’t diverting my income into the trust with the losses thereby reducing my taxable income, be considered “dodging tax” – esp when all the directors/appointers etc for the trust and companies are the same people. Do you need to justify why you want to divert money into a family trust from an unassociated company or even as a self employed contractor?
Thank you, bb8
Yes, there are various rules to look at. especially the alienation of personal services income rule. Under some circumstances the ATO can deem income earned by a company or trust is actually the income of the person who does the work. Whether you can get around this will depend on your circumstances.
It doesn't really matter who is behind the trust so much as long as everything is done at arms length ie commercially justifiable.
You may be able to divert part of your income into the trust. Just enough to offset the loss maybe.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
In response to wonderland and BB8 the statistics with property investors is that up to 17% of investors purchase 1 property, 8% 2 properties 2% 3 properties and 0.2% for six or more properties. The reason this is so is that most investors do not have a long term investment plan that they have written up.
With property if you have a long term goal to accumulate assets that will set you up for the rest of your life then you must think of the ending rather than make it up as you go. I speak from experience. We have one property in the wife's name outside the trust structure and that was a mistake.
Very wealthy people own nothing but control everything. Having said that anything worth while is difficult. To go down this path you need to have a long term view and stick with it. Its a sure fire get rich recipe but its sssslow
Limited Recourse – thank you for your comment. I am certainly hoping to achieve a long term goal to accumulate assets and if this means short term losses than so be it, as long as the initial structure is set up correctly..
Terry, thank you for directing me to read about the alienation of PSI rule and in doing so also looked at the general anti-avoidance rules. I think I fall into the category of a personal service business and will not be able to divert my income into the trust without breaking the anti-avoidance rules. I work as a medical practitioner and can elect to be paid as a employee or through my ABN. If someone sues even if I was earning income through a Company B (with myself as the director) I would anticipate the person will sue the company as well as myself personally. So that’s why I wasn’t sure how setting up my earnings through a company entity would offer more asset protection.
I have also read your comments in the threads about family trusts. I think I may have come up with a loan structure based on your advice but not sure if I have understood everything correctly:
We are based in Victoria. Currently my husband and I own a PPOR worth 900,000. We have a P+I loan for 600,000 with an offset account that contains 100,000. Right now we have only paid off about 20,000 of our loan – 580,000 outstanding. Our combined income is 160,000. No kids.
So, we have just leased out our PPOR at 600/week because we will be housesitting for our parents for at least 1-2 years.
We have also paid a deposit for an off the plan apartment in Victoria which will be finished next year. The purchase price is 450,000. We anticipate rental income to be 400/week. The apartment is intended to be our first investment property, and this has been purchased under a family trust – with a company acting as trustees and us being the directors.
The issue is that with the family trust there is no negative gearing. So in order to minimise loss in the trust (which is not tax deductible) my understanding is to ensure the loan repayments for the investment property either equal or exceed the rental income (positive gear).
1. For the PPOR – Change the PPOR P+I loan to interest only loan and maximise the loan to 80% of = approx. extra 140,000 (0.8×900,000 – 580,000) in loan funds. Although the interest is higher with this IO loan of 720,000 – it can be negatively geared against our income given we are renting it out for 600/week.
2. For the Investment Property in the family trust – Get an IO+offset loan, for 80% of the property ie. 360,000. The 20% remainder will come from the extra 140,000+100,000 existing in the bank. Everything that is left (roughly 240,000-45000= 195,000)is put into the offset account for the investment property, so that in fact we will be paying interest on 195,000 not the full 360,000. This will ensure that we are breaking even and in fact, base on 8% interest rates may even mean some positive gearing..
I hope I am on the right track but please point out any deficiencies..
Thanks bb8
bb8
I would suggest you still see an tax advisor about structuring your business. It may be possible to set yourself up to get around the PSI rules. There are many medical practitioners doing this. You may be able to squeeze a service trust in there somewhere. The trust can provide administrative services for your business or maybe hold equipment and allow you use for a small fee.
But other than that the way you suggest above sounds good. If your trust has low interest, then it will be more likely be making a profit and then you won't have losses to worry about. Don't forget to factor in non cash deductions such as depreciation and loan costs.
Not sure what you mean about maximise the loan on the existing IP. remember you can't just increase the loan – the interest on the increase will only be deductible if it relates to investment use.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry for your advice.
Will be meeting with the accountant in 2 weeks but it has been really helpful at least to learn the basics. I will speak with him about the service trust but my work equipment is so portable and admin fairly straightforward that I would only be able to justify a small amount of fees to use the service.
In regards to maximising the loan on the existing PPOR now rented out as IP, if we don't do this then won't have enough money to move over to the family trust to "break even". So technically by increasing the loan amount on the existing property it isn't directly related to the existing property, just being diverted to offset the new one in the family trust to "break even". Does that mean we cannot tax deduct that portion?
bb8
the other question is, given IO loans attract higher interest rates, is there any benefit in keeping the 1st loan on the existing personal property that's rented out as P+I? Am I allowed to just tax deduct the interest portion? the reason I ask is that down the track, we intend to keep the home and will have to move back after few years anyway to avoid CGT.
thanks
bb8By increasing the loan you will be reborrowing money. What the money is used for will determine deductibility. If it isn't being used for investment purposes then no deductibility.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
bb8 wrote:the other question is, given IO loans attract higher interest rates, is there any benefit in keeping the 1st loan on the existing personal property that's rented out as P+I? Am I allowed to just tax deduct the interest portion? the reason I ask is that down the track, we intend to keep the home and will have to move back after few years anyway to avoid CGT.
thanks
bb8I have not seen a lender that has higher rates for IO loans. Who are you with?
I would still have it IO and have an offset because you may find your circumstances change and you may not move back in. If you want PI then that is ok and the interest portion would be deductible.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I'm sorry Terry I may have misinterpreted NAB's (who we're with under the choice package) interest rates list. The IO rate is the same as the standard variable rate at 1 year but it depends on the number of years – the rates get higher as you approach 5 years.
Does one decide how many years they want an IO loan and so then you pay higher interest rate from the beginning (eg. 1 year is 6.74% and 5 years is 7.79%) . Or is the rate charged based on how many years you've held an IO loan hence slow goes up over time?
bb8
– just ensure it is the right advice for you and your hubby. Keep an eye on your budget and cash flow. People get so caught up on tax – however that is only part of the equation.
to bill for my work (with ACN instead of ABN) which will offer more protection? I'm not sure which set up is most advantageous from a tax perspective and also what the banks prefer before lending us money.
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