Forums / Getting Technical / Legal & Accounting / Benefit from Building Depreciation in HUT or HDT

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  • Profile photo of apapworthapapworth
    Participant
    @apapworth
    Join Date: 2005
    Post Count: 14

    *First Post Newbie*
    We have a chris batten suggested trust structure with:
    Hybrid Unit Trust holding commercial property
    Hybrid Discretionary Trust as single unit holder of the HUT.
    Loan in my name – to purchase units in the trust.
    Trustee’s and in both trusts include me.

    Question>> How can the depreciation of the building (by using a depreciation schedule from a QS) be used to minimise tax?

    Eg:
    Lease from Tennant: $90K paid to HUT
    HUT Expenses on Property: $10K
    Depreciation: $30K
    Interest paid by me to bank: $80K

    Now since losses from the depreciating asset cant be passed down to me as the beneficiary and trustee, what can I do with it apart from carry it forward?

    Many thanks

    Adam

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,173

    I beleive the HUT trust must claim the depreciation against the rental income received in its tax return. Whatever is left over after costs and depreciation is distributed.

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

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Profile photo of apapworthapapworth
    Participant
    @apapworth
    Join Date: 2005
    Post Count: 14

    Thanks Terryw,

    Hmmm… If this is the case, I cant see the advantage in the trust…

    Another example: I have a group of residential units in my own name (a ‘no no’ i know) and works to my advange over a trust. The figures go something like this:

    Rental Income: $20K
    Interest and Expenses: $20K
    Depreciation on Units on Depreciation Schedule: $5K

    So therefore I get a $5,000 tax deduction on my personal income… If this were in a trust, I would not be able to pass on this tax deduction to myself….

    If I understand this correctly (and im not sure I do) it means I am better off having the units in my own name…

    Any thoughts or clarifications??

    Thanks

    Adam

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Adam, that sounds right with your units. Trusts can’t distribute losses. But they will not always be returning a loss. After a few years the rents will go up etc, and you will be making a taxable profit. Then it would be good if it was a trust. There are also other advantages such as asset protection etc.

    With the Hybrid trusts it is a bit different. The loan is in your name, so you personally claim the interest – not the trust. This should leave you trust with a nice profit. From this profit other costs and depreciation are deducted and the net profit is then distrbuted in accordance with the trust deed.

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

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of apapworthapapworth
    Participant
    @apapworth
    Join Date: 2005
    Post Count: 14

    Thanks again Terryw,

    I understand mostly now. I think I might sit down and read Dale G’s “Trust Magic” and then revisit this to more fully understand my position.

    [cap]
    Adanm

    Profile photo of coastymikecoastymike
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    @coastymike
    Join Date: 2005
    Post Count: 125

    Apap,

    If you have a loan in your own name to purchase the units in the HDT then the situation will be as follows:

    HUT

    Rental Income: $20K
    Expenses: $5K
    Depreciation on Units on Depreciation Schedule: $5K

    Net Income $ 10K

    Net Income distributed to HDT. You own all the special income units in the HDT so the $10K income will be distributed to you.

    Your position will then be

    HDT Income for Special Income Units $10K
    Interest in Loan to acquire units ($15k)

    Net Loss $5K

    This can be claimed against your other income and is how you negative gear through a trust.

    Profile photo of apapworthapapworth
    Participant
    @apapworth
    Join Date: 2005
    Post Count: 14

    Thanks coasty,

    Excuse my ignorance, but does this mean that I would then have to fund $5K out of my own pocket and therefore be tax deductable? And what happens to the $5K of depreciation that is still in the trust…? Could this then be distributed to other beneficaries?

    Adam

    Profile photo of coastymikecoastymike
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    @coastymike
    Join Date: 2005
    Post Count: 125

    Apap,

    Yes you will have to find the net loss of $5k (if you are on the top tax bracket the ATO will be funding about $2.5K so you will need to find another $2.5K) that is why it is called negative gearing.

    Im at a loss as to what you mean by the $5K in depreciation remaining in the trust. It doesnt remain in the trust at all. It is used to reduce your rental income in the trust and ultimately arrive with a net profit figure that has to be distributed to the special income unit holders.

    Profile photo of apapworthapapworth
    Participant
    @apapworth
    Join Date: 2005
    Post Count: 14

    Coasty,

    Thanks again… The $5K is as you explained: Net Profit.

    I now understand all (well maybe not all, but a whole lot more.[biggrin]

    Cheers,

    Adam

    Profile photo of SebastianSebastian
    Member
    @sebastian
    Join Date: 2003
    Post Count: 55

    We have a chris batten suggested trust structure with:
    Hybrid Unit Trust holding commercial property
    Hybrid Discretionary Trust as single unit holder of the HUT.
    Loan in my name – to purchase units in the trust.
    Trustee’s and in both trusts include me.

    apapworth,

    I was just reading your post because I also have a Chris Batten HUT. However you mention above that the HDT is the sole unit holder in the HUT, therefore none of the profits can be distributed to you personally because you don’t own units in the HUT.

    Also, if you are not receiving an income from an inverstment can you claim an expense? i.e. profits from HUT go to the HDT (not you) But you claim interest from the loan that you took out to purchase the units? (which are not actually in your name)

    I hope this makes sense!!

    Regards

    Sebastian

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