[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 20, 2008 - 1:21 am

For tax purposes, a trust is taken to be an entity in its own right. Therefore, even though the trustee is a company (or any other entity for that matter), the entity type of the trustee is irrelevant.

The trust can pay personal expenses but beware of Division 7A issues – for instance, if the trust has made distributions to a corporate beneficiary and owes the company an unpaid beneficiary entitlement, any monies owed by an individual to the trust (assuming the individual is a shareholder of an associate of a shareholder of the corporate beneficiary) at year end will be caught by the Division 7A provisions. In the worst case scenario, the monies owing will be treated as an unfranked dividend, which will attract tax in the hands of the individual.

If the personal expense is treated as a business expense (rather than through the beneficiary's current account as drawings), then FBT will be payable on the private expense.

No substantial advantage in getting the trust pay private expenses but for some potentially small benefits through the FBT system.

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 12, 2008 - 11:00 pm

elkam wrote:

I wondered whether the situation had changed in the OZ tax world.

Many  years ago I accepted a 2 year contract to work overseas and while I thought I would come back after that time more contracts followed , life happened and I haven't been an Oz resident  since.  When I left Australia I organised my affairs so that I would be a non resident for the ATO for pretty much the same reasons as jc1979 probably should. Being away for at least 2 years make that easier I thought. 

I think there is no law against finding out that you'd rather live in Australia after all and coming back.  

Thank you for the answer eddiec.

Elka

Agreed, Elka. Residency is a question of fact. 2 years away is the general rule of thumb but it is not law. For those who can't sleep at night and want something to make them sleepy, check out taxation ruling TR 98/17, which deals with the tax office's views on residency.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 10, 2008 - 1:07 am

elkam wrote:

Hello eddiec

I tried to find the sections you mentioned on the ATO site but got totally lost.
Because of this I don't know if the situation changes for jc1979 if he is deemed to be a non resident for tax purposes.

Does he still have to declare the income he earns in his country of residence (UK)  to offset against his Australian losses?

Just out of interest.
Elka

LOL. Yep, the 1936 Act is ridiculously convoluted.  The situation would indeed have been different if jc1979 becomes a non-resident but there will be a few hurdles for him to get over to make himself one (he already talked about coming back, etc).  If he becomes a non-resident,  his UK employment income wouldn't be caught by the Australian tax net at all, so it wouldn't be exempt income under s23AG, which means that it wouldn't reduce the negative gearing loss.

ipfreely – good luck with asking the ATO. They would probably ask you to formally apply for a private ruling, which will take months and months to resolve. Either that or they would give you their interpreation of the law, depending on who you get on the other end, which may or may not be legally correct.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 8, 2008 - 10:29 pm

The normal disclaimers apply:

1. In your original post, you said, " I won't be earning any income during this period".
2. I note that you are now saying you will be earning GBP15K pa.
3. The negative gearing loss is $10K.
4. Section 36-10 (ITAA 1997) deals with how a tax loss is calculated, ie, total deductions – total assessable income – net exempt income.
5. Section 36-20 (ITAA 1997) prescribes how net exempt income is calculated, which includes foreign employment income exempt from Australian tax under section 23AG (ITAA 1936).
6. You should check that section 23AG applies (especially in the first year and its interaction with the double tax agreement between Australia and the UK).
7. Assuming that section 23AG applies, the tax loss calculated for the year will be $30K – $20K – GBP15K (say $38K aussie dollars) = -$5K
8. Therefore, you will not have any tax loss in Australia because your foreign employment income that is exempt in Australia is deducted from your negative gearing loss.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 8, 2008 - 2:37 am

Subdivision 36-A of the Income Tax Assessment Act 1997.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 7, 2008 - 11:25 pm

Yes, you can – and for an indefinite period as well.

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 7, 2008 - 5:32 am

Agreed with Richard.

The standard instalment warrant arrangement costs at least $10K+. 

Be very careful with JVs involving super funds – it may potentially breach the most basic "sole purpose test", which could render your fund non-complying. In which case, drastically adverse tax consequences will arise.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 7, 2008 - 5:28 am

kev2008 wrote:

yeah i am planning on it, just doing what research i can aswell thanks for your help.

Let me know if you need any referrals. 

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 6, 2008 - 10:26 pm

A trust is a relationship – the trustee agrees to look after the trust assets for beneficiaries.  In a discretionary trust, the beneficiaries are usually not known until the trustee decides to make a distribution.  In tax though, a trust is an entity in its own right and in some ways, it is like a funnel – income goes in and comes out to beneficiaries as directed by the trustee.

I think it will be worthwhile for you to see an accountant, Kev, just so that you get a good understanding of these things.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 6, 2008 - 12:07 am

nevwhite wrote:

Hi all

I'm looking to get some details of a good property solicitor in Brisbane (I live North Brisbane) for conveyancing/contracts etc. Looking to do some lease options and hopefully, flips, minor developments and wraps. It would be good to have someone who specialises in this area to help me avoid potential pitfalls!

Cheers

Nev

Hi Nev

Send me an email – I tend to like to keep my referrals private where possible.

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 5, 2008 - 11:16 pm

Kev

A company is good to limit liability, so if you are buying the houses for development, as opposed to long term hold, it should do the job (you might even want to use a separate company for each project). 

However, a company is not eligible for the 50% CGT discount when a property is eventually sold, so if you are holding the property as a long term investment, a discretionary trust is usually a better way to go.

Obviously, tax is not the only consideration (eg, asset protection, matrimonial issues, estate planning issues, etc).  Should really talk to an advisor to consider what is best for you in your specific circumstance.

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

October 5, 2008 - 11:10 pm

Based on the limited facts, my understanding of the law is:

1. If you become non-residents, you will still be subject to Australian tax on your Australian sourced income, ie, income from the Sydney property.

2. However, if the property is being negatively geared, the loss created will sit there indefinitely to offset other future Australian sourced income of yours.

3. Query if you are becoming non-residents, especially if you have an intention to come back to Australia. Google "TR 98/17" to see the Commissioner of Taxation's view on the subject. This is rather important as Australian tax residents are taxed on their worldwide income (not just Australian sourced income).

4. You will become residents of the UK, which presumably taxes your worldwide income, including the income from the Sydney property.

5. Again, as the property is negatively geared, you will need to find out if the UK would allow you to use the net loss to offset your UK income (more likely not based on common sense because Australia will let you carry forward the net loss indefinitely and if the UK allows you to use the loss as well, it seems to me that you could potentially double dip). 

6. If the property is not negatively geared (ie, taxable), the double tax agreement between Australia and UK should provide double tax relief.  This usually takes the form of you having to include the rental income in both your Australian and UK tax returns but the respective jurisdictions will provide a foreign tax credit on the tax already paid on the same income in the other jurisdiction.

7. There will be CGT when you sell in Australia but you will be eligible for the 50% CGT discount.

8. As alluded by someone else  before, there may be an apportionment of the CGT, given that the property has been used as your main residence at some point. There is also an alternative way to assess the CGT if you turn a property that has always been your main residence to an income producing asset, ie, you may be treated as if you acquired the property at its market value when it becomes a rental property without the need to apportion.

Like the others have said, this is a complex area and professional advice should be sought.  While my summary seems straightforward, the specific facts of your circumstance may come into play, which may give you a different set of outcomes.

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 30, 2008 - 11:02 pm

In my view, a HDT could potentially  work but there are a few critical threshold issues that must be dealt with with caution, including:

1. Valuation of the income units at redemption – The ATO may argue that these units have material value, given that they have been giving rise to a present and future income stream.

2. Reasons for the trust – It must be shown that the dominant purpose (or co-dominant purpose) of entering into the arrangement is not to obtain a tax benefit. I tend to think a lot of the more commonly cited "commercial reasons" put forward have not been tested and query if they would stand up in court (which you would try to avoid!).

3. Borrowings – Ensure that the holder of the capital units is not the borrower as interest incurred on a loan to buy capital units will not be tax-deductible. The question that arises then is – to what extent is the husband's interest tax-deductible considering he is borrowing to acquire the income units, rather than the property itself?

In a normal negative gearing environment, the owner borrows to acquire the property to enjoy both income and capital gains, and bear the risks of ownership in their entirety.  In a HDT environment, the income unit holder has effectively alienated the ownership and capital risk of the underlying property to someone else but are paying the same for just the income units.

In light of the fact that the splitting of income and capital rights is between husband and wife (related), query if borrowing and paying the same amount by the husband for the income units is commercial, ie, if you are borrowing and paying the same amount as if you were in a conventional negative gearing environment where you bear the ownership and capital risks of the property, could it be argued that some of the purpose of the borrowing under a HDT structure is attributable to something else?

Regardless of the technical arguments and issues, I think one needs to assess the cost benefit of putting together these trusts. For more simple affairs, even if you have a justifiable position, I would be averse to having an argument with the tax office in the first place, which is often costly and may erode or negate the benefit of having the structure.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 29, 2008 - 1:53 am

Great idea. Make sure the draft deed provided to the tax office is exactly the same as the one you are going to use. Otherwise, the ATO may distinguish the ruling on the basis that the facts are different from those disclosed in the application.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 26, 2008 - 4:16 am

Very  broadly, you would want a discretionary trust to protect valuable assets that will grow in value.  The trust will cater to both tax and asset protection needs.

A business should generally be run by a company because of liability risks.  The shares in the company may perhaps be owned by the trust (and your partner's own discretionary trust). 

If the business needs to use the assets in the trust,  the company can pay a market value "royalty" to use the assets.

This is very very general and must be tailored to your individual circumstances.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 26, 2008 - 4:11 am

AnthonyJF wrote:

Hi All,

I came across and article on the net after investigating trust options etc and a particular company are offering a trust setup ideally suited for property investment. I was unsure of the exact etiquette about mentioning company names so I have left it out for now….if its ok I'll respond as to whom the company is…although they are national in Australia, two partners which have released a few books on property investment. 

My question is (if you can guess whom the company is) has anyone got one of these trusts? 

thanks

I think I know which mob you're talking about (the firm includes the initials N and C?).

I am aware of tax accountants and commentators having issues with some of the trusts you are referring to. Proceed with caution.

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 24, 2008 - 6:09 am

And those children become exceptionally tax effective when they turn 18 and don't earn substantial income because they will be taxed as adults under the normal marginal tax rates!

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 23, 2008 - 10:16 pm

Where are you based, Anthony?

Also, the plan sounds good. I presume you will be maximising your borrowings in the trust to buy the property off you at market value.  There should not be any CGT (but duty will be payable) as the property has presumably been your main residence since its original acquisition. If the property is negatively geared in the trust, beware that any tax loss incurred is trapped in the trust and various tests under the trust loss provisions  will need to be passed before those carried forward tax losses can be recouped in future.  Then there are issues associated with making a Family Trust Election for the trust to safeguard those losses in the interim, etc, etc. 

Depending on where you are, I can most certainly recommend a lawyer to set up the trust.

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 18, 2008 - 6:57 am

corhig wrote:

This question is to any would-be accountants, or just knowledgeable trust people, regarding Unit trusts.
I've recently read the Melvin & Chan book, How to legally reduce your Income Tax.  It explains the rules of a unit trust as below.
 Units are divided into Income & Capital
* Income units can be allocated to husband (working)
* Capital units can be allocated to wife (not working)
* Husband can still negatively gear as he's receiving income units
* If property becomes positively geared, Trustee can redeem Income units from husband and re-issue them to wife.

Does anyone know if these rules are still relevant as the book was published in 2006.  I know there has been a ATO alert on Hybrid trusts, but not sure about Unit trusts.  It sounds too good to be true.  There has to be a catch.
 

Apart from the provisions of the deed, which is of utmost importance, the redemption may give rise to some interesting issues, eg, potential CGT on redemption under the market value substitution rule, CGT event E4, direct value shifting, Part IVA (general anti-avoidance provisions, etc. Tread with caution in this area!!

Eddie
[email protected]

[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

September 18, 2008 - 6:03 am

robertsp wrote:

Advice welcome.

If I was to buy a block of land and engage a builder to build a 2 Unit Duplex, will I be required to pay GST on the sale of the Units?. 

I am an individual PAYE tax payer and not in the business of developing.

 

The law looks at your intention, ie, whether you are buying a capital asset as a long term investment or whether you are buying to develop and sell.  For GST purposes, even if you are not carrying on a property development business, one-off profit making undertakings constitute an "enterprise".  It seems to me that the latter applies to your circumstance.  My view is that the duplexes will be considered "revenue assets" (as opposed to "capital assets") for both GST and income tax purposes.  Therefore, given that the sale proceeds of the properties will be counted towards the $75K annual turnover threshold, it is likely that you will be required to be registered for GST, which means that you will be subject to GST on the sale of new residential premises. Having said that, depending on a few factual issues, you may be able to reduce the GST by way of using the "margin scheme" if eligible.