All Topics / Help Needed! / trust are they really all they are cracked up to b

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  • Profile photo of condogcondog
    Participant
    @condog
    Join Date: 2006
    Post Count: 56

    Went to see the 2nd accountant about trusts.

    Both severly question the benefits at this immediate point in time due to several factors.

    The fact that the High Court has allowed siezure of assets held in trusts by directors and advisors in the Westpoint fiasco.
    This places the so called asset protection barrier of trust in severe jeopardy in this country. My accountants advice was wait and see what hapens with this outcome.

    Secondly both accountants advised that it was not feasable to set up a trust until multiple (ie 4 or more) investment properties are already owned. As the setup, taxation preperation and auditing fees far outway the benefits up until you have about 4 properties. There advise was once you have four or so properties cashflowin then the accumulation of further properties will accellerate. So then place all future properties in the trust.

    They both very much advocate that a lot of trusts are pedalled by people with vested interests. ie lenders that charge higher fees to trusts and by people setting up trusts ie accountants and solicitors.

    What are your thoughts.

    Remember im only the messenger.

    Profile photo of ttmanttman
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    @ttman
    Join Date: 2005
    Post Count: 61

    I spent $2700 setting up a HDT in Melbourne, there was no instruction on how to use (e.g. borrow loan in individual names etc). Since then bought couple of IPs with the HDT, nothing but trouble. e.g. liable to $2500 nsw land tax due to the use of the trust. I am very suspecious as well if the whole thing was a con by accountants & solicitors peddling trusts, just like this bull dust by airlines and hotels that one need to travel somewhere else to have a good holiday.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Was it the high court? I know the Federal Court determined that interests in a discretionary trust could constitute property. The case is Australian Securities and Investment Commission (ASIC) in the matter of Richstar Enterprises Pty Ltd.

    The court was concerned with Carey controlling the trustee and its distributions. ie the role of Appointor.

    I don’t know if this went to the high court and think this was just an order for him to supply a list of his assets including any assets held by trusts etc which he controlled.

    Even if the courts determined the role of appointor could be seized by creditors a way around this is for the person at risk to not be appointor. eg appoint your spouse. This may be risky if your spouse gets sued, but having one of you as the safe person will reduce this risk.

    The role of beneficiary is different. There is no guarantee of income, just a possiblilty. So if the individual went bankrupt, then the trustee would simply stop distributing income to them – as the bankruptcy trustee would probably get their hands on it.

    Trust deeds can also be worded such that in the event of an appointor getting into trouble, then they are automatically to be removed from this role and another appointed.

    Terryw
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    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    Running costs of a trust are not expensive. Most accountants charge a fee for the return, which is not much. Your trust may have a lot of properties but, you would be paying your accountant to do the tax for these anyway if they are in your own name. So the only extra is the trust return.

    Having a company as trustee will cost a bit extra per year too.

    The trouble with buying a few in your own names is the extra tax you will be paying. Just think if you buy in your name to ‘save tax’ on a negative geared property and your then sell the property and have a $100,000 capital gain. Your wife is not working and your cousin has a capital loss from a business – you may end up paying $25,000 tax which you could have avoided!

    Trusts may mean you have to pay extra land tax as ttman has discovered.

    And I agree with Ttman that some accountants just set these up with no explanation on how to use them, and probably are just trying to sell another product.

    Terryw
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    Profile photo of condogcondog
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    @condog
    Join Date: 2006
    Post Count: 56

    You are correct it was the federal court, not the high court.

    As far as the discretionary nature of income distribution, both accountants advocate that to move income or capital from one person to the other is likely to cause a mjor problem and that it would be definitely against the rules of the ATO.

    They both said that the ATO looks at patterns of distribution and that you cant simply switch income or capital from one person to another. Any movement must be very gradual and in a progressive pattern. So if yes it is useful over the long term as a neg geared prop becomes positive, however it cannot be used for short or medium term selling or trying to offset CGT legitimately.

    You cant move income to your wife when she stops work for kids and then take it back off her if she retrns to work and earns more than you. That would fail the patterns of distribution test.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Hi Condog

    I know there are various rules regarding losses – to try to stop people trading losses. But I have never heard that you cannot distribute income or capital to certain persons – unless your deed prohibits it. Distributions will vary from year to year as profits move up and down and some years the wife will have more than the husband and other years the reverse.

    Terryw
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    Profile photo of trajiktrajik
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    @trajik
    Join Date: 2005
    Post Count: 102

    Hi Condog,

    I think you may have misinterpreted what your accountant was saying. The pattern of distributions test is to do with the trust loss measures and doesn’t usually have any consequence if you are not trying to inject income into the trust or use other measures to access trust losses.

    If the trust is a discretionary trust then the fundamental principle is that the trustee has absolute discretion to distribute income and capital to whomever they wish. The ATO have no issue with this principle, otherwise the validity of every discretionary trust would be comprimised, and some very unhappy people would make the minds known.

    If the trust is a hybrid trust then the issues do become more complicated and it is best to speak with your accountant to decide how you wish to interpret the rules on distributions.

    Your accountant should explain the advantages and disadvantages of using both trusts and other structures to hold your invstments and guide you to make the choice that suits your circumstances best.

    I would disagree that you need four properties before it is viable to setup a trust. I believe that it is very important to have an investment plan and establish your structure early. This way you can be in a better position to deal with issues as they arise and make the best possible decisions. Once the investments are owned by an entity there is practically no going back. So I think waiting until you own 4 properties is waiting too long, and you’ll miss out on the benefits that trusts offer. Obviously the setup cost for trusts is the biggest obstacle, but ongoing accounting/tax fees should not be much more than if you hold investments outside of a trust. And trusts do not require auditing either.

    Hope this helps.

    Ross

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    Profile photo of vyaw2003vyaw2003
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    @vyaw2003
    Join Date: 2006
    Post Count: 188

    so if i have 2 ip in my name. and i set up a trust, how do i transfer these into the name of my trust does that cost money, is there a cgt tax, or stamp duty tax on this?

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    vyaw – Regretfully both CGT (Assuming you sell the property to the Trust at a profit) and stamp duty will be payable.

    Maybe for IP3.

    Cheers

    Richard Taylor
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    Licensed Financial Planner. Ph: 07 3720 1888
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    Profile photo of condogcondog
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    @condog
    Join Date: 2006
    Post Count: 56

    Ross

    Both my wife an i are currently in the same tax bracket despite me being on about $25000 more than her, and with the new tax scales will probably remain so until our investment earnings kick in.

    So at the immediate and near future no benefit is derived.
    Also important to note is that when i went digging in literature, with proffessionals and on this forum nearly every body pedals hybrid trusts, not discretionary trusts.

    My accountant confirmed what you are saying about discretionay trusts being at the discretion of the appointor, but both said the rules of distribution patterns still apply and fluctuating or rapid changes in distribution pattersn would attract the wrath of the ATO.

    Id be real interested if anyone else in here has had similar or conflicting advice.

    Maybee both these accountants are too conservative. Although they are both pretty savy investors themselves.

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    You will find a very well written article on trusts in this months issue of Aust. Property Investor, which explains the pros and cons in easy to understand terms. Might be worth a read. All the best[strum]

    Profile photo of fallboyfallboy
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    @fallboy
    Join Date: 2007
    Post Count: 6

    I set up a trust and a company as trustee about 18 months ago against the advise of my accountant. I only have 1 ip in the trust and really cant see an advantage. Just some higher accounting bills is all. Maybe when I get more ips it will make more sense but at this stage I have to say that my accountant was probably right and it would have been better just to use my own name.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    Originally posted by fallboy:

    I set up a trust and a company as trustee about 18 months ago against the advise of my accountant. I only have 1 ip in the trust and really cant see an advantage. Just some higher accounting bills is all. Maybe when I get more ips it will make more sense but at this stage I have to say that my accountant was probably right and it would have been better just to use my own name.

    The advantages may come years down the track. Imagine in 20 years time if you sold and had $1mil capital gain!!

    The asset protection side is like insurance. You don’t think you need it until something happens – by then it is too late.

    Terryw
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    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    Originally posted by condog:

    Ross

    My accountant confirmed what you are saying about discretionay trusts being at the discretion of the appointor, but both said the rules of distribution patterns still apply and fluctuating or rapid changes in distribution pattersn would attract the wrath of the ATO.

    Id be real interested if anyone else in here has had similar or conflicting advice.

    I am not an accountant but this just seems wrong to me. The trustee (not appointor) can stream income to any beneficiary at their discretion (subject to the deed) and I know of know legislation, caselaw or ATO policy that would contradict this. Except where losses are involved and the trust has done a family trust election, then there are restrictions.

    Terryw
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    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of condogcondog
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    @condog
    Join Date: 2006
    Post Count: 56

    yes trustee not appointor. my bad.

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