Can someone advise me which trust would be best, a fixed unit trust or discretionary trust. It will only be my husband and I, the trustee with be a company we have set up.
Thanks.
I really think this issue should be discussed with your Accountant. The following is an extract of a document off our website that explains the difference further:
Trust ownership is probably the most flexible way to own an investment property. The most common Trusts are: Discretionary Trust
A discretionary trust is often referred to as a "Family Trust". It provides flexibility in sharing income within a family and can operate for up to 80 years.
Income is distributed according to the trustees’ discretion, by allowing the income to be distributed to lower tax earners and relatives, including children (conditions apply).
Some advantages are low establishment costs and asset protection, as only the trustees can be sued. Disadvantages include the fact that if there are losses, these will be quarantined within the trust and cannot be distributed to beneficiaries. Therefore a discretionary trust may not be suitable for investors who practice negative gearing – unless the trust receives income from other sources. Also, land tax thresholds are lower than for individuals.
In a unit trust, the trustee holds assets on trust for the unit holders. A unit in a unit trust is like a share in a company, as it reflects your wealth in the unit trust. A trustee can be either a company or an individual. Advantages of unit trusts are that they are cheaper and more flexible than a company setup, non family members can own units, and also the fact that they can borrow money and carry on business. The main disadvantage is that the trustee has no discretion in the distribution of income, as the distribution is determined by the unit entitlement which was agreed when the trust was established.
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This reply was modified 10 years ago by
AmandaBS. -
This reply was modified 6 years, 7 months ago by Forum Moderator.
What are you trying to acheive?
Unit trusts provide no, or little, flexibility or asset protection.
With a unit trust the percentage of holdings is fixed in proportion to the number of units held. So if you own 50% of the units, you must get 50% of the profits.
Also there is little asset protection as if you went bankrupt your units are property which can be seized by creditors.
Comparre this to a discretionary trust where there is maximum flexibility and asset protection. The trustee has discretion on where to distribute income each year, so usually distributes to the lowist income earner among the beneficairies. This will change each year as each beneificiaries circumstances change. Unlike unit trusts, there is a huge range of potetenital beneficiaries with discretionary trusts – even those yet to be born or coming into the family through marriage, adoption or divorce (eg future wife's ex husband!),
WIth discretionary trusts the interest held by a beneificary is not classed as property. So if a beneficiary were to go bankrupt, they couldn't lose any asset held by the trust. The trustee would simply stop distributing to them (otherwise it woudl go to creditors).
The only reason to use a unit trust would generally be when two unrelated parties wish to do something jointly. And then the units should be owned by a discretionary trust – one trust for each party.
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
Hi Guys
To continue this discussion, I have a few questions. I am thinking of setting up a trust to funnel my investment income. I'm looking for advice regarding:
1. The pros and cons of using the trust system vs. a company vs. investing as an individual. As background, I am single and do not hold any property, an Australian Permanent Resident and intend to invest long-term as opposed to trading. Basically looking for any tax advantages and possibly future income splitting.
2. How easy/difficult it is to transfer assets under my name to that of a trust. Further, what are the tax implications in this situation?
3. How would one go about setting this up? Can you recommend a good lawyer/accountant in Sydney?Thanks guys and appreciate all the help!
Cheers,
EnigmaEdit: I am looking primarily at a discretionary trust + company structure. Possibly looking to funnel income to the company and use the trust as a holding structure (for flexibility w/distributions in the future)
Enigmait
all depends on what your exact situation is and what you wish to purchase with the trust.
A discretionary trust is the most flexible with reducing tax and offers the greatest asset protection. A company would only be needed as trustee if you were going to be running risky investments through the trust with the possibility of being sued. So if you were buying shares there is no risk, if buying property there is a slight risk and if buying business then there is a high risk of being sued. Businesses should be run using a company because of the limited liability factor. The company can still operate as a trustee and/or the shares in the company can be owned by your trust.
Discretionary trusts are also flexible as your circumstances change. Usually the deeds are worded so that any new children/grandchildren etc would be beneficiaries even though they may not yet be born. same with divorcing and new spouses and step children and adopted children etc. This gives the greatest flexibility in income distribution. A company cannot offer this as the shareholdings are fixed.
it is very easy to transfer existing property to your trust but this will be considered a sale and CGT and/or stamp duty and other costs may apply.
A trust should probably be set up by your accountant rather than a lawyer. Lawyer's draft the deed and an accountant can help you determine who should play which role etc as this may have serious tax consequences later. Not every accountant knows about trusts so beware. I would recommend http://www.guardianpartners.com.au
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
I guess my only reason for including a company in the structure would be for the tax benefit. I'm getting pretty close to the 40% bracket and will likely hit it next year… In such a case, would it be beneficial to use a trust with myself and a company as a beneficiaries? I assume the company will only be taxed at 30%. Also, do companies get the benefit of imputation credits?
Does a company need to be set up to act as the trustee or is there a benefit there as opposed to being an individual?
Is there any way to transfer investments to a trust without triggering a CGT event – say a gift?
Will look into Guardian Partners.
Thanks,
EnigmaHi Enigma
Usually DT deeds are worded so that a company in which you are director or shareholder will also be a beneficiary of the trust. Usually the company does not have to be in existance when you set the deed up so they can be added later when needed. Having a company as trustee is a different matter and is mainly used to protect yourself as if the trust is sued and the trust assets are not enough to meet the debt, the trustee's personal assets could be at risk. It is also helpful haivng a company as trustee for changing things around – eg you could change directors and have someone else guarantee the loans down the track if something ever happens to you (like bad credit). There is also the privacy factor as it is the company name that appears in the land title records.
Company's only pay tax at 30% and can be used to limit the tax rate to this. Not sure what you mean about the imputation credits. It a trust makes an income this is distributed to a company or individual etc and they pay tax on it. if the company then makes a dividend payment to a shareholder the shareholder may get a refund of tax or have to pay more tax depending on their incomes.
I don't think there is anyway to transfer assets to a trust without triggering a CGT event.
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
So to extend this topic a little further I'd like to know what to do in this situation. My wife and I have three investment properties where we're renting them out. One is cash flow positive and the other two are used for negative gearing purposes. We are about to buy another property. One where we can live in the front, develop the land at the back and eventually sell them both off. Should we be looking at a DT arrangement for this purchase as our primary aim is not for negative gearing but purely for profit on the development? The front place will be our primaryt residence so after 12 months, wouldn't be subject to CGT? My wife deosn't work and I earn over 120K per annum.
Many thanks
Andrew
Hi Andrew
It is a bit difficult as you are mixing business and pleasure with the one block. Having a trust will save you tax by allowing distributions to the non-working wife, but you may pay tax on the owner occupied portion which you could avoid if you purchased in your own name.
There are a few options which you could consider such as buying a larger share in your wife's name. This will give you the main residence CGT exemption for the front portion and keep tax low for the investment portion.
Another option is to purchase jointly with a trust and your own names. A deed of partition needs to be set up at the start and with you and the trust owning x% and y% each. when sub-division occures you can have your name on one title and the trust name on the other and stamp duty can be avoided. You can then sell wihout CGT on the owner occ and then minimal tax on the trust portion. This can cost a few thousand to set up.
And don't forget if the ATO deemds you to be entering into the purchase with the intention to make money from it they can still deny you the main resident exemption.
To sum up you could:
1) buy in own names only
2) buy jointly with non working spouse receiving the majority of ownership
3) buy in a trust
4) buy jointly with a trust and your own names and using a deed of partition.
So i think you need to work out the rough figures such as profit on sale and holding costs and then work out which way would be best. Then you should go to a good accountant and get some propert advice.
I have also assumed that you don't have any other property which you could be claiming the main residence exemption.
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
Hi all,
Andrew we are in a similar boat to you. We've just purchased a property as our PPOR with land at the back to build 3 townhouses.
I'm debating about a company and/or family trust before we settle on the property). My husband and I earn a professional income that is nearly the same. He however is a contractor and I a full time employee. We both have an IP each (purchased before we got married).
I've been told that setting up a family trust is pointless when both our children are just 1 and 3 and you can't distribute much to them and both of us earn the same. I'm not sure if this is true or we are missing any other benefits with the family trust.
I'm also looking for a great accountant in Melbourne (who of course doesn't charge the earth) and specializes in property. Any recommendations would be appreciated.
Thanks,
Margaret
Hi Margaret
If you have already signed and exchanged contracts, then it would probably be too late to change it to a trust or a company now without incurring stamp duty – but things vary from state to state so at least make some enquiries.Its true that children cannot earn much income from a trust without getting hit with very high taxes, but each child can earn arouind $1300 pa without paying tax. So if you have 2 children and you are on the top bracket having a trust could save you $1300 pa approx.
But children are not the only beneficiaries. There may be times when one of you is not working for a year and has no other income. The trust could then divert income to this person who will pay the least amount of tax. The next year things may change and so the income can go to the other person. DTs give this flexibility.
Also your family will change over time. You may only have 2 children now, but could have neices and nephews, grand children, adopted children, your children could marry etc. This will make the number of potential beneficiaries huge giving wide scope to reduce taxes.
And if you are on the top tax bracket, or if you are not on the top, but paying more than 30% in tax, then you will be able to set up a company and distribute to that capping the tax at 30%.
But your situation is a bit complex so you will need to get some good advice and will need to consider land tax, any negative gearing losses and loss of the main residence exemption if purchased in a trust.
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
With the property going to auction in Melbourne and if we successfully got the property. If we bought it in our own names then wanted to change it (before settlement) to a joint purchase between us and a trust or purely the trust, would we need to do this before settlement or before the auction?
We do have a property in Perth that we built and lived in for a few years and are now renting it out. I guess that would still be our main residence (for up to 6 years). If we chose the front portion of the block (with the house on it) to be our main residence, will it mean the Perth house no longer becomes the main residence? Is this rule based on houses per financial year?
ThanksAndrew
Hi Andrew
You will need to check with your solicitor, but my understanding is that the trust will need to be established before you enter into any contracts. You may be able to sign "xxx and/or nominee" you may be able to nominate your trust prior to settlement. But you need to be careful as some states do not allow this – so you may be charged stamp duty twice (on initial purchase and on your sale/purchase to your trust).
The main residence CGT exemption can only apply to one property at a time. I don't think there is any limit on the number of properties you can claim CGT exemption on, as long as no overlap, but if you do it in a business like manner, the ATO could deem it a business and still tax you.
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
Many thanks Terry
Hi Everyone,
I have a couple of questions and hope someone can help clarify it.
What is the difference between a unit trust and a company ? and
Does a unit trust have the same obligations as a company ?I would like to eventually set up a company to sell brand new properties/apartments and was going to set up a company initially.
Thank you
CharlieHi Everyone,
I have a couple of questions and hope someone can help clarify it.
What is the difference between a unit trust and a company ? and
Does a unit trust have the same obligations as a company ?I would like to eventually set up a company to sell brand new properties/apartments and was going to set up a company initially.
Thank you
CharlieI can't help with any of the preceeding questions as am new to the game myself. However I have a question regarding unit trusts and potential dangers when splitting units.
I have just a read a book that recommends (when negative gearing) issuing income units to the main income earner to gain maximum tax benefits from the loss and the capital units to the non (or low)-income earner so if you sell, minimum CGT applies. If this is a husband and wife, in the event of divorce (hopefully never happens), would setting up a trust this way leave the person with the capital units with the ownership of the property – or would the property still get split equally?
Thanks a lot for your help.
Jackicchandra wrote:Hi Everyone,I have a couple of questions and hope someone can help clarify it.
What is the difference between a unit trust and a company ? and
Does a unit trust have the same obligations as a company ?I would like to eventually set up a company to sell brand new properties/apartments and was going to set up a company initially.
Thank you
CharlieHi
There are a lot of differences between a unit trust and a company. I think the main one is the limited liability of the company. A company is a separate legal entity so if sued it is treated like a 'person'. It is the company that is sued and if the company does not have enough assets to meet creditors it will go down, The directors and shareholders personal assets are not at risk. (director's assets can be at risk if they act illegally).
With a trust, it is not a separate legal entitly (though is treated as one at tax time). When a trust is sued it is the trustee that is sued. The trustee is usually covered by the assets of the trust, but if these are not enough, then their personal assets can be at risk.
So if trading a company is usually the preferred structure.
Another aspect is the public reporting requirements of a company. The details of a shareholder, or director must be reported to ASIC and this information is publically searchable – including name, address, DOB, place of birth etc. With a unit trust the unit holders are generally not searchable as the deeds are not registered.
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
Jacki wrote:I can't help with any of the preceeding questions as am new to the game myself. However I have a question regarding unit trusts and potential dangers when splitting units.
I have just a read a book that recommends (when negative gearing) issuing income units to the main income earner to gain maximum tax benefits from the loss and the capital units to the non (or low)-income earner so if you sell, minimum CGT applies. If this is a husband and wife, in the event of divorce (hopefully never happens), would setting up a trust this way leave the person with the capital units with the ownership of the property – or would the property still get split equally?
Thanks a lot for your help.
JackiHi Jacki
That book must be out of date now. It would not be possible for a set up like this to pass muster with the ATO as there would be no commercial reason for the unit hold to buy the units if they would not be entitled to the capital gain.
see http://law.ato.gov.au/atolaw/view.ht…/NAT/ATO/00001If it was set up like this, then the family law court could still look at the set up and divide the asset in a manner they think fair. They have the power to look behind companys and trusts.
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
Hi all,
First post here so sorry if my questions have been asked before (I have searched through the forums)
I hoping someone may be able to point me in the right direction.
I am after some further information on the pros/cons of the different structures mentioned here. Pty Ltd companies/UT/DT.
Its been a while since I studied them at uni and could use a freshen up.
Specifically the-
-Ability / Inablilty to distribute profit/losses
-CGT concessions (from what I understand only individuals are able to claim the 50% CGT concession)
All pertaining to investment property (long term income and short term renovating and capital gain)
I am currently self employed and hold the business in a company and my wife is on maternity leave for a few years.
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This reply was modified 10 years ago by
AmandaBS.
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