Setting up a trust

This topic interests me as well. To my surprise, property investors in Australia seldom talk about setting up a structure such as family trust/company. It adds hassle to the process, true. But in the long run there are numerous benefits.

Problems:

1. Setting up trust/company costs money (tax deductible)

2. Running costs are added – annual accounting, for example

3. Capital gains tax on companies is higher (though not significantly)

Benefits:

1. Company tax is lower than highest bracket of individual tax. (30% vs. 48.5)

2. Your assets are distanced from yourself, therefore protected from litigation.

3. More things are tax deductible in case of a company.

That’s my thoughts. Hope it’s helpful.

What do you consider “significant”?

The difference between the discounted CGT rate for someone on the top marginal rate and the company rate is 5.75% (allowing for the Medicare levy). If you sell a property for a CG of say $100,000, that “insignificant” difference is $5,750. If you’re dealing with higher-end properties that might give gains in the $1m area, then it becomes around $57,500. You can give me that “insignificant” amount any day! [].

But that’s only the start. After the company has paid this extra $5,750 tax, the rest is then company money, the use of which is governed by some pretty strict rules (look at it sideways as an individual and it will be deemed a dividend). If the company shareholder is on the top marginal rate, getting the funds out to use personally would involve more tax – ultimately giving the full 48.5% tax rate on the initial amount.

In my opinion, as someone stuck in this predicament right now, owning capital appreciating assets in a company structure is NOT a good idea.

And if you do use a company for business or income-only type assets, I’d consider having the shares owned by a family trust rather than an individual, to give more flexibility in distributing dividends (although there is an issue to do with distributing franking credits from a trust).

I’m also told there’s a new rule pending release that would turn interest-free or cheap private loans TO private companies into capital, making it difficult to start a $10 company and get sufficient funds in there to use. Don’t know how that rule will turn out yet though.

GP

Hi GP,

The solution is to liquidate the company and pay out the capital gains to the shareholders as the proceeds of liquidation.

It does mean closing down the company, and it does mean that all of the properties should be sold, so all of the capital gains have been crystallized.

In NZ, this would preserve the tax-free status of the capital gains. If the properties are pre-July 1985, then the tax-free status would be preserved also in Australia. If they are subject to CGT, then you still gain the 50% CGT exemption.

The full amount of imputation credit at 30% will not have been paid, owing to the 50% CGT exemption, so if the net profit is paid as a dividend, it will be short of the correct amount.

This is why you would seek to liquidate the company once all the properties have been sold.

As you say, owning capital appreciating properties in a company is not a good idea.

Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz

Profiteer.

In that scenario, a company would own the property as trustee. ie its the trusts asset. So profits could be distributed to any of the various beneficiaries – not necessarily the company.

Trusts cost as little as $137 to setup and can go up to $10,000. Companies cost another $900 +. You will also need to get the trust deed stamped = $200 in NSW.

Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email me

Hmmmn…So let me see if have this right then….Under a trust with a company as trustee and say myself and wife as directors of that company, any losses incurred by property owned by the trust could not be offset against our personal income but can be offset against any future income made by the trust…..So what can be offset against our personal income?…..What if the property owned by the trust are all negative geared, does the loss incurred accumulate?…..So what tax advantages are gained by having it under that type of structure apart from paying tax on any income earnt from the trust at company rates of 30%?…If I have it wrong please advise.

Kind regards

Profiteer [blink]

I’ve set up a hybrid trust to purchase my first IP in QLD. It is cashflow positive but if after applying the rental expenses against the rental income, the trust incurred a loss of $3.5K for FYE 30 June 2005. I am the sole director of corporate trustee and if I elect not to roll forward the tax losses to next year, can I apply it to my other income (from job) for FYE 30 June 2005, considering I am the highest income producing person in trust and I’ve bought units in the hybrid trust?

Thanks
john

Want to join financial independence before 31 years old, currently 25

John

Nope, unless the loan was in your personal name, I don’t think you can. The trust is a separate entity and losses can’t be transferred.

But talk to your accountant who may have some ideas. Its not such a large loss, so don’t worry too much.

Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]

Greg,

I’m no accountant, and have just read up a little on this for my own benefit. You should seek professional advice on this issue.

You can read about it yourself in the tax act if you’re that much of a masochist:

http://tinyurl.com/5n6lk

You want Schedule 2F under the 1936 act.

Also, if you do a search there on “trust losses family election”, you’ll get a number of hits on various related interpretive decisions.

Probably just easier to ask your accountant though!

If you do need to make a family trust election, I believe there’s a form from the ATO you need to fill in.

Cheers,
GP

Hi Greg,

A discretionary trust and family trust are the same thing.

Family trust elections were introduced around 1996 by the ATO. They were brought in to reduce the number of tests a family trust had to pass before being allowed to claim its prior year losses.

They are also required when imputation credits over $5,000 are distributed to beneficiaries. This can be particularly relevant where you operate your own company and your trust owns shares in it.

Once a family trust election is made, the trust is restricted by only being allowed to distribute to the nominated individual and their family group. Two generations up and two generations down.

Generally this isn’t a problem as most people only distribute profit to their own family members.

Cheers,

Mark Unwin

Mark Unwin
Williams Partners Pty Ltd
http://www.wp.com.au