To Trust or not to Trust: that is the question.

Hi Daniel

Thanks for the update.

As you can probably gather I am a big fan of trusts.

You keep talking about HDT – but these don't really work and I think you should be looking at DTs as this is where all the tax and asset protection advantages lay.

Here is my response to your points:

1. Not true. All lenders understand trusts. They are very common and lenders deal with them everyday. They also understand hybrid trusts – these are nothing special, just unit trusts with a discretionary component. The problem is they won't accept them or won't accept the loan in a different name to the person on the title of the property.

2. With falling interest rates and high rents your properties will be only slightly negative cashflow. Therefore this should not be a major factor in holding you back from using a trust.

3. The running cost of a trust is Nil. All that needs to be done is a tax return. If the trust owns one property then you can do it yourself. Nothing hard or complex about that. Or you can get your accountant to do it for you. For a trust return it may cost $200 and slowly rise as your trust buys more property and the tax return gets more complicated. The thing is you would be buying the same investments in your own name anyway, so you would incur similar charges by your accountant to prepare your own tax return. If you use a company as trustee then there is a tax return for the company too – but this should be a nil return and there is an annual fee to ASIC of about $200

4. The majority of people may not use a trust, but do you want to be like the majority? What do the wealthy people do?

5. Getting insurance may help, but doesn't cover everything or every situation. Not many landlords get sued, but that is not what you should be worried about. You could get sued personally for a number or reasons if you are start a business the risk increases dramatically. You can be forced into bankruptcy through circumstances that are not your own fault.

6. Distributing income may not be relevant now, but what about the future? eg. your wife may take a year off work to have a baby, she may even work part time for a few years after that. Did you know each kids can earn $2666 pa tax free each year? If you were on the top bracket that means a trust could save you $1300 approx in tax per kid (and they don't even have to be your kids, most relatives under 18 would be covered).

And what about CGT if you were to sell? Like my example above.

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One disadvantage with a trust is that you may pay more in land tax – in NSW it is about 1.7% of the value of the land above a certain threshold, think it is $320,000. But trusts do not get this threshold and pay land tax straight away. Other than this it is all positive i think.

Dan

its not that complex – you can easily do it yourself. But I agree if using an accountant it will cost a little more.

Its great to get information on the finance side of things. As we all know without first sorting out how you are going to finance your property acquisition is the most important factor. 

Well my question is to Terry or Richard if you want you buy in your own name and claim depreciation and interest deductiblity that is all good.  But what about if you want to plan for the future especially where you are married and have kids etc.

Do you purchase some IP's now in your own name and then later on purchase in a Trust and which Trust should you use if you cannot get the benefits of depreciation which does kind of help with cashflow. Otherwise you will have to only try and purchase positive cashflow property.  I am assuming that most investors want to purchase property for capital growth first as the way to build wealth.  But as I know what is the correct answer I am here to learn from others.

What about Dale Gatherum-Goss an accountant who has left  his business but always said that once you are serious about wealth do what the wealthy do and run your investments through a Trust.

 I am confused about what I have read and the reality of what to do.

Thanks for the input it is a great learning experience.

Hi Pos

If you are PAYE then it is hard to get some income into your trust. It is easier if you are self employed or run a part time business. Maybe you can find a relative or friend and do something creative.

You cannot have a benefit of your personally borrowing with the trust owning the asset – unless you use a unit trust type arrangement.

Finance is not really harder for trusts, but there are a few restrictions with Low Doc loans – ANZ and now St George won't lend to trusts

Hi Daniel,

This is not correct. Capital Gains CAN be offset against income losses. It is only Capital Losses that must be offset against capital income.

You mentioned that your accountant quoted you $1000 for a trust tax return / financials. This seems high to me. For one rental property in a trust, you should be able to get it done for about half of that.

Dan

Hi Terry,

You've got me thinking now!

We have completed trust tax returns for clients with a rental loss and capital gain, and it was fine to offset the income loss against the gain. You couldn't stream the income, eg give the gains to someone and the revenue loss to someone else. As long as the beneficiary received an overall amount of distribution, it was ok.

I'm not 100% sure, but I think this may have changed only in the last year or two. I found this on the ATO website, which shows a similar situation:

Debra's trust distribution shows that she received $2,000 as her share of the net income of a trust.

This is made up of a primary production loss of $5,000, non-primary production income of $2,000 and a net capital gain of $5,000. (The net capital gain does not include any discounted gains.)

At the partnership/trust distributions section of her tax return, Debra will show a $5,000 loss from primary production and $5,000 non-primary production income (that is, $2,000 non-primary production income plus sufficient net capital gain [$3,000] to offset the loss from primary production).

Debra takes her remaining $2,000 net capital gain ($5,000–$3,000) from the trust into account in working out her net capital gain at the relevant item on her tax return.

So Debra has received an overall income loss from the trust, offset by capital gains.

Dan