Hi there,
We have three properties – PPOR (with about $300,000 equity), an investment unit and an investment house.
Both investment properties have interest only loans. The unit’s in my name (cos I plan to go part-time, and we’ll probably sell it so want to avoid too much CGT) and the house is in hubby’s name (higher income, negatively geared).
We’re both on good incomes and can afford to invest further, but before we buy anything else we thought we should do what alot of investors on this site seem to do, and set up a discretionary trust.
However our accountant says no way because trusts can’t carry losses.
I understand this, but what if a property becomes positive after only a couple of years. If it’s in the higher income earner’s name (ie: hubby) then he’s getting taxed at the highest rate.
Do all people who set up trusts only do so because they’re buying property that’s positively geared from the start.
And do they only do so when they have family members (on low or no incomes) that they can siphon the income to and avoid tax? We don’t have kids and sending income to my old folks could affect their pension, so I’m not sure who we’d be sending the income to.
I’m confused!
thanks in anticipation of someone being able to help,
CarlinOriginally posted by carlin:Hi there,
We have three properties – PPOR (with about $300,000 equity), an investment unit and an investment house.
Both investment properties have interest only loans. The unit’s in my name (cos I plan to go part-time, and we’ll probably sell it so want to avoid too much CGT) and the house is in hubby’s name (higher income, negatively geared).
We’re both on good incomes and can afford to invest further, but before we buy anything else we thought we should do what alot of investors on this site seem to do, and set up a discretionary trust.
However our accountant says no way because trusts can’t carry losses.
Better “double” check this is what the accountant said IMO ??I understand this, but what if a property becomes positive after only a couple of years. If it’s in the higher income earner’s name (ie: hubby) then he’s getting taxed at the highest rate.
Do all people who set up trusts only do so because they’re buying property that’s positively geared from the start.
There a few different types of trustsAnd do they only do so when they have family members (on low or no incomes) that they can siphon the income to and avoid tax?
Tax avoidance is illegal…We don’t have kids and sending income to my old folks could affect their pension, so I’m not sure who we’d be sending the income to.
I’m confused!
Read a few books on Trusts such as Ed Chan’s, Ed Burtons and Dale GatherumGoss’s booksthanks in anticipation of someone being able to help,
CarlinMaybe e-mail your accountant and ask them what they mean (get it in writing)
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorHi Carlin
Sounds like your accountant hasn’t heard of hybrid discretionary trusts.
These are a discretionary trust with a unit component and effectively allow negative gearing to occur.
What you do is get the loan in the unit holders name, not the trustee (but they could be the same). The unit holder borrows money to buy the units, not the property. The unit holder then claims the interest on the loan. The trust makes a profit (cause the major expense of a loan interest is not there) and this profit is distributed to the unit holder. This will usually not be enough to cover the interest, so the unit holder has a loss which they can claim against other income.
Once the rent increases and the property would be positive geared, the trust could borrow money and buy back the units. This money would be for investment purposes, so the interest would be deductible by the trust, and you can use the funds to pay down non deductible loans.
Sound good?
If you accountant doesn’t beleive this is possible, it may be worth asking elsewhere.
There is an article in the latest Bantacs newsletter on these trusts. see http://www.bantacs.com.au
Even if you have no beneficiaries now, there will be advantages – such as the refinance principle (borrowing to buy back the units) and asset protection. And, circumstances change, so you never know, you may acquire some beneficiaries at a latter date.
Terryw
Discover Home Loans
Parramatta
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Don’t be surprised if your accountant doesn’t know..I talked to an accountant in WA that represents a well known investor/developer here and the response re HDT’s notbeing used was “Oh, no one uses them anymore”
Further talk revealed he didn’t know about them and he became interested as we discussed them..
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorThanks very much for your advice Terry and Redwing.
Redwing – surely if you send money to beneficiaries of a trust that’s not illegal tax avoidance.
Terry – that alternate trust set up sounds great! I’m setting up another meeting with the accountant ASAP and if he hasn’t heard of this then we’re going elsewhere.
thanks again,
CarlinHi Carlin
Tax Avoidence is illegal
Tax minimisation is not, and this is the technical name for what you want.I think you would be wasting your time meeting with that accountant again. If he/she didn’t know then they won’t know now.
CATA
Asset Protection Specialist
[email protected]as CATA Said ;o)
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorHi Carlin
I’m not suprised your confused. Unfortunately, there are a lot of accountants (and solicitors)who just don’t understand trusts.
Suggest you buy yourself a book (Dale GG’s is a good little read)or McKnights Wealth Gardian to bring yourself up to speed so you can talk the same jargon.
When it comes to HDT’s there isn’t a huge amount of published info out there, but run a search here or on the somersoft site.
However, I find for people starting out that land tax is the biggest trust structure killer, (in NSW). Once clients get above the threshold then it ceases to be an issue, but until then it really is a thorn in the structuring side.
Regards
Tony
Well, I went on to that Bantacs site, and read the bit about hybrid trusts.
However, the writer (Bantac’s accountant Julia Hartman) suggests that salary sacrifice is “another and cheaper method of achieving the same result”.
We’re then encouraged to buy Bantac’s $150 “rental property salry sacrifice kit”.
So – does anyone know how salary sacrificing might work when it comes to investment property? And will it work for us, who work in the public service (but in very different areas)?
And what are the advantages and disadvantages of this set up compared to hybrid trusts? (I gather one advantage is cost 0 hybrid trust sound expensive to set up and run.)
thanks,
CarlinNickM at Strategic Wealth Management also has some good info re Trusts as does Chris Batten..
The more you read (and Post), the better informed you will be about what suits your personal situation..
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorO.K. the theory behind a Salary sacrifice is this –
Tax Without Salary Sacrifice:
You earn $1000.00 Gross Per Week
You Pay $300.00 Tax Per week
You also Pay $150.00 Per Week on Your I.P.
You Nett $550.00 Per Week After Tax and your investment are paid for.
Tax With Salary Sacrifice:
You earn $1000.00 Per Week
You put $300.00 Per Week Towards your Salary Sacrificed I.P. via your employers payments on your behalf
Leaving $700.00 Per Week
You Pay $150.00 Per Week Tax
You still Nett $550.00 Per Week, but have managed to reverse the Tax man and yourself so your I.P. gets owned a hole lot quicker, and you pay less tax.
Is it any good for your situation? I couldn’t tell you. I do know of a whole group of guys and it is the only viable way for them to go, because their employer pays their Super directly to them matching Dollar for Dollar their Total Earnings. They then pay 47.5% Tax on every dollar earnt, and paid in Super. Basically in their situation they need it and we set it up for them through their Employer to ensure they not only had some tax benefits, but also to ensure they had something to retire with.
I’m not an FP. I only know how the system works. Oh and when discussing it remember this – Every Dollar you Sacrifice comes off your gross earnings AND lenders will not assess it as income because technically under the law it isn’t. Think long and hard about just how good it really will be for your situation and if you have doubts speak to another 3 people and get their ideas…
Stuart Milne
Non-Conforming Specialist
READY Mortgages
http://www.readymortgages.com.au
[email protected]
Mob: 0404 056 055Can you Sal, Sac. payments to a trust?
Hi Everyone
This topic has just come at the right time for me as I just didn’t sleep last night worrying about my trust situation.A friend lent me a DVD from Ed Chan and in it he covers structuring and the importance of getting it right. He says that property in a Discretionary Trust is a disaster because I quote:
“with a discretionary trust you can’t distribute the losses or the negative gearing. It actually gets quarantined in that trust. You can’t offload it against your wages and claim a deduction. Also if it’s in New South Wales then you lose your land tax threshold as well.”My accountant in WA has formed a dicretionary trust for me and I have bought 3 houses in it – they were intended to be CFP but the rents never cover the shortfall so they are as close to neutral as I could make them but are still neg geared by about $25-$50pw. After reading the above article, I am worried that I have the wrong structure in place. One house I do want to sell in the short term but the other 2 have development potential and I intend to dvlp them, sell off the original and keep the new. Am I in the right structure for this???
CONFUSED TOOOO!!!!!! HELP!!! Anita – WADon’t worry too much Anita. A hybrid may have saved you a little in tax however. Still better in the long run than holding them in your own name.
Terryw
Discover Home Loans
Parramatta
[email protected]
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I agree with Terry
Don’t worry to much. You will get tax credits for the losses and when the trust makes a profit you can use the credits.
CATA
Asset Protection Specialist
[email protected]I thought Anita just has a normal DT ??
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorI do have just a normal Discretionary Trust and there is only myself as trustee and my partner as beneficiary. My son was in it but as he is 21, I was told that if he went for a loan for himself, then my debt would show up against him so we had to amend the deeds and remove him.
Is it possible to change to a Hybrid Trust as I only formed this discretionary trust earlier this year?
Thanks for you concerns and kind advice – Anita
Cata shoul be able to advise here……….
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorYou shouldn’t have any named beneficiaries in a trust, or the lenders may want a guarrantee from them. Seen this happen this week with RAMS. Man set up a trust, then changed the trustee to his mum, but he was a named beneficiary so the lender has asked for guarrantees from him as well as the mum.
From what I have seen, it is easier to just buy a new trust deed. Costs for changing it can be expensive as a solicitor has to review the document. If the trust already owns things, this may create problems too.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.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
Anita,
What extent are the developments?
Reno, split block, extensoins ect.Resettling for changes like the ones you want is something that I would be reluctant to do. It is more than likely to be more expensive to resettle than restructure. If the amendments are not correct the structure may be worthless.
But all is not lost, you have 2 other options that I can think off.
1-Can you afford the loss? If you can, why restructure? You will get the deductions when you make a profit.
2-Can you make the trust positive or netural? e.g rent rise, reduce costs, new IP that is CF+ inside the same trust.
You mention that you are intending to sell one IP, if you do will you make money on that IP and could you use the profit to pay down some debt inside the trust and reduce your expenses?The structure may not be the right one for you now, but sometimes you need to think outside the square to make it work. How can you reduce debt or increase cashflow?
I hope this has helped
CATA
Asset Protection Specialist
[email protected]
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