All Topics / General Property / Structure v’s cost effectiveness

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  • Profile photo of MarkyMarkMarkyMark
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    @markymark
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    Hi,
    I am currently seeking advice on setting up the correct structure to begin investing. I am by no means skimping on this cost as I think it is definitely needed. The structure that I am looking at is a company/trust set up.

    However, as a ballpark according to one of Steve’s resources, I will be looking at about $2000 to set it up and then about $2000 ongoing per year.

    I am just wondering if I should start off with the whole structure set up correctly from the start and pay that amount, or is there a way that I can start with a less elaborate set up and then sort of transfer over once the ratio to cost/return gets a little more even.

    However I did read somewhere that I should start how I intend to proceed.

    How have others done it?

    Any ideas?

    Profile photo of melbearmelbear
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    To save on the company costs to start with, you could simply have yourself as the trustee, which will affect the extent of your asset protection, but will save you annual fees etc. for the company.

    I would definitely start with a trust if that’s how you wish to proceed. It is costly to transfer them over later, so most don’t do it, and have to wear the ‘risk’ of having them in personal names.

    I have a vending business, and my Mum was helping. She made the mistake of giving one kid a lolly – hundreds appeared!! One fellow came back for seconds – it had gone down his throat. She told him that he’d already had one. He then said ‘I’ll sue you for giving away free lollies!’. Gotta love where society is going when this is the automatic reaction from a 7 year old kid[:(]

    Cheers
    Mel

    Profile photo of TerrywTerryw
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    I’m with Mel. You could just start out with yourself as trustee. Cost to set up would be around $1000 and running costs not much at all. Maybe $60 extra per year for accounting.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of MarkyMarkMarkyMark
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    Thanks for that melbear,
    I did a unit of law in Uni, it was fascinating reading over the various cases from the past. It really highlights the risks. Thanks for your suggestion I will definitely look into this as an option.

    One thing though, I would need to distribute any income out of the trust otherwise this would get hit with 48.5% tax if the funds went undistributed. But then that is probably going to be cheaper than the costs associated with the company. It seems that this will just need to be timed it right.

    Thanks again

    Profile photo of MarkyMarkMarkyMark
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    Thanks Terryw,
    Definitely sounds like the go.

    Profile photo of JBJB
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    If you are going to set up a trust use a corporate trustee & get someone qualified to set it up for you. Did you know the most powerful individual/s in a trust are the principal/appointor, ie, those that have the power to remove/replace the trustee. Do you know the matrimonial implications of having the wrong person appointed to this role ??? Did you know trusts attract land tax on property without a threshold ??? Did you know that if your investment properties are negatively geared for tax, eg, after claiming depreciation, the losses are trapped in the trust and you cannot use to offset against other income ??? Do you know what a family trust election is & when you should make one ???
    I would suggest the response to these questions are all NO – if so get some advice & set it up properly. If you are worried about spending $3000 on advice you are not serious about having the right structure.
    JB

    Profile photo of melbearmelbear
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    JB, ever heard of a hybrid trust? Negative gearing can be used here. Also in a unit trust.

    If you’re going to make a blanket statement about using a corporate trustee, it would be nice if you gave the reasons.

    Obvioulsy MarkyMark has already done some research by using Steve’s resources, so I’m sure that he will be getting someone ‘qualified’ to set it up.

    Cheers
    Mel

    Profile photo of TerrywTerryw
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    Hi again. You should buy “Trust Magic” by Dale Gatherum Goss if you haven’t already got it.

    Some people have asked me about my statement above saying it should only cost about $60 per year for accounting-saying it was way too cheap. Many accountants charge a fee per property, I think mine was around $80 actually. So if you have 10 properties you would pay $800 plus another $80 for your personal tax return and another $80 for the trust tax return. You would be paying for the property tax schedules anyway, so having them held in a trust only means another tax return for the trust with minimal extra work. So really you are not paying that much extra.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of JBJB
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    Some people are very defensive in this forum aren’t they. That’s OK – stimulates the thinking !!!
    JB

    Profile photo of MarkyMarkMarkyMark
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    Hi JB,
    Thanks for the comments. I do admit that the answer to your questions at this point is no, but this came as no surprise to me. Offcourse I am getting a professional to help me with this, which has always been the intention. I went into researching what structure I need with my eyes wide open about the complexity. My aim is to be able to work with the professionals who will set this up for me, rather than them saying sign here and here and there you go.

    Through my research I found that some attention was paid to the affordability of the structure in relation to your investments and personal circumstances. I think it is prudent to investigate this before setting up a full-blown great structure that ends up stripping away profits. However, in saying that, this may simply be the cost necessary. If that’s that case I will need to plan accordingly.

    Thanks for the food for thought I’ll add it to my growing list of things to consider [:)]

    Profile photo of PropertyGuruPropertyGuru
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    $1100 for Hybrid Trust ( from good accountant) + $200 for Stamp duty

    =$1300

    and If you need company as trustee it will cost you $800 to $1200 depending where you get company.

    One can start without corporate trustee and can add company as trustee anytime later on.

    quote:


    Did you know the most powerful individual/s in a trust are the principal/appointor, ie, those that have the power to remove/replace the trustee. Do you know the matrimonial implications of having the wrong person appointed to this role ??? Did you know trusts attract land tax on property without a threshold ??? Did you know that if your investment properties are negatively geared for tax, eg, after claiming depreciation, the losses are trapped in the trust and you cannot use to offset against other income ??? Do you know what a family trust election is & when you should make one ???


    Don’t need to know much of these all if you got good accoutant. But if you read “Trust Magic” as Terryw suggested and couple of other books it’s easy to find answers to these questions. My answer to all these questions are “yes” I know all of this ( I am not accoutant). [:P]

    Cheers

    [:)]
    PropertyGuRu
    Who want to be billionaire?

    Profile photo of JBJB
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    @jb
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    For Mel et al
    Yes I know what a Hybrid Trust and/or unit trust is and yes you can “construct” these so that negative gearing is achieved for a trust asset individually.
    However, the ATO have a provision called Part IVA that applies to schemes entered into with the sole or dominant purpose of obtaining a tax benefit.
    My educated view is that using hybrid trusts to achieve negative gearing for the unit holders where the underlying investment (say property) is held by the trust is high risk and will be subject to close scrutiny by the ATO. If you want your financial empire to be based on chance as Steve McNight commonly reminds us go right ahead. But beware of the risks you are taking.
    Corporate trustees – necessary if you are looking for asset protection which in my view is the No 1 priority (especially for business owners). I apologise in making a blanket statement here – if you are an employee and not likely to be sued individual trustees are fine as your No 1 aim for using the trust would be on income splitting & tax minimisation not asset protection.
    JB

    Profile photo of melbearmelbear
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    Thanks for your ‘educated’ viewpoint JB. If the ATO is going to look that closely at trusts, why do they not look that closely at individuals who do the same thing?

    I’ll go with Dale GG’s ‘educated’ viewpoint on this one, but thank you for sharing another investment accountant’s opinion. More knowledge makes for better decisions.

    Cheers
    Mel

    Profile photo of JBJB
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    Mel
    You are not comparing apples with apples.The loss from negative gearing for individuals is able to be offset against other income – no problem. For trusts, including hybrid trusts, losses cannot be dsitributed to unit holders/beneficiaries & are c/fwd in the trust. The unit holders may be able to claim an interest deduction for their borrowings to acquire units & this is where the strategy becomes high risk. In return for your investment in the units you would expect a commercial investment return at least equal to the cost of your borrowing.
    I’m starting to rave – just be aware that the hybrid trust strategy has risks attached for negative gearing outcomes that some wouldn’t want to take. As you acknowledge more knowledge makes for better investment decisions.
    Merry Xmas
    JB

    Profile photo of gmh454gmh454
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    Mel I am in the middle of a Tax audit on a guy with a negative Unit trust style property investment. I advised against it but he had a big Firm advise.
    The rub is they have knocked out ALL the neg dedustions but have kept in the Unit trust dist.
    Efective tax rate is 100%+++, plus penalties and fines.
    We are seeking adice and will let you all know the result.
    Now the chance of this happening is very remote…but does make one think that you need to be very careful.
    TerryW can you give me the name of your accountant I would love to subcontract to him.
    “Pay peanuts get mokeys”
    JB thanks… glad to see someone else thinking beyond the obvious.

    Profile photo of JBJB
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    @jb
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    gmh454
    Thanks for your input into this. As you would know the onus of proof is on the taxpayer to defend the structure & strategies they use – even if this advice comes from a professional.
    I have “raved” on about this issue because it seems from reading threads on the forum that people are setting up trusts at minimal costs & it worries me they are not getting adequate advice. I like trusts & use trusts but they are not for everyone. One other thing – over the last six mths I have received more audit/review requests from the ATO than ever before & mostly in relation to neg gearing & Interest deductions. They have certainly deployed more audit resources in this area & the possibility of being reviewed is probably no longer remote.
    JB

    Profile photo of melbearmelbear
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    JB, in Dale GG’s manual Trust Magic, he says that a hybrid trust can in fact distribute losses if a person borrows the money from the bank and buys the units (similar to unit trust I think). Then at a later point, the trust can borrow the money itself, rebuy the units, and revert to a discretionary trust. So all income (- or +) is distributed to the ‘unit holder’.

    Are you telling me that this is not correct?

    Cheers
    Mel

    Profile photo of gmh454gmh454
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    Mel I think that is what JB is saying the Trust cannot distribute a loss. The Negative is formed by the Unit holder borrowing,
    Actually if the debt funding come from the Unit holder, It would be very hard for a trust to make a loss, not impossible but unlikely.
    This actually agrees with your interpretation if I am not wrong, just takes it a little further.
    JB thanks for the feedback on the ATO.
    [:)]

    Profile photo of TerrywTerryw
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    Gmh454

    I agree about the monkeys and the peanuts!

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of melbearmelbear
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    @melbear
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    Gmh454 you are right. I apologise. The trust will in fact profit, as there are no interest costs for it to pay. So it will distribute the profit (rent-all expenses) to the unit holder, who will then claim both his interest costs, and the income, and will in fact come up with a loss (if a negative geared property – I can’t see why you would use the hybrid option otherwise).

    This in fact does allow you to utilise the benefits of negative gearing through a trust, which was my point, although I obviously messed up when typing it.

    Cheers
    Mel

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