Hi guys,
Sorry to post another trust thread *rolls eyes*, I know there’s about 4000, 3999 which I’ve read on this forum already. I have a pretty good feel for the different types of trusts etc. out there, just after a little advice on my situation specifically there is such a wide variety of solutions and a even wider variety of situations.
I am about to buy my first investment property (I currently do not own a place of residence), finance is all approved and ready to go. For a while yet, this property will be negatively geared (rental income less than loan interest and property fees). I am in the 30% tax bracket at the moment. If all goes well, I hope to buy a place to live in in about 3 years (at which stage this investment property should be positively geared)
My question is, would it be beneficial for me to setup both a unit and discretionary trust? The reason I ask is when this property is positively geared, there will be tax benefits as I can distribute the income to various trustees on lower tax brackets using the discretionary trust.
The reason for the unit trust though, is at the moment I would like to negative gear the loan under my name as I am in a 30% tax bracket. If I was to put the property in a discretionary trust and negative gear, the discretionary trust will only be eligible for the minimum tax rebate which is lower than mine.
Alternatively I can just ignore the trust side of things all together and purchase the property in my own name.
Your thoughts?
You may find the ATO doesn't allow the loan interest as a deduction
I recommend you read this web page below to understand the likely problems with tax deductibility
http://www.ntaa.com.au/media/associationatwork/yourassociationatwork2007/yourassociationatworkapril2007.html
http://www.ntaa.com.au/download.asp?RelatedLinkID=169
http://www.trustmagic.com.au/inf/Finance-Hybrid-Trusts.pdf
http://law.ato.gov.au/atolaw/view.htm?docid=CTD/TD2009EC17/NAT/ATO/00001
http://www.apimagazine.com.au/api-online/web-specials/2008/06/hybrid-trusts-julia-hartmans-commentsIn my opinion you have to be careful with hybrid discretionary trusts as the deductible tax is questionable by the ATO and good professional advice from a tax accountant is required.
Thanks for that, very useful information indeed.
The last question I have is, I have about 30% of the market value for the house price I am looking at in cash. Will the banks want to use the house I purchase as security for the loan (in addition to the 30%)?
The reason I ask is, if I take out a loan to buy units in a trust, the house will be under the trusts name and not mine. Can you use the units as security? Or will the banks not look kindly on this when lending.
The ATO are cracking down on Hybrid Trusts, and I think it's getting harder and harder to find a financial institution that will lend to such a structure.
If it is only going to be negatively geared for three years, then I would recommend a discretionary trust. Sure, the losses will sit in the trust until you have profits to offset them, but the flexibility of income distribution down the track is an advantage over a unit trust.
Its still possible to claim the interest personally by using a unit trust – but this offers no asset protection and is inflexible.
I would also suggest a discretionary trust is probably the way to go.
There are also land tax implications to consider. eg. In NSW there is no tax free threshold for land owned in a discretionary trust.
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
As Dan mentioned financing a deal in a HDT is getting harder and harder so if your lender has told you that you have pre-approval I bet they werent aware you maybe using a HDT or even a UT with some lenders.
Richard Taylor | Australia's leading private lender
Keep it simple, keep it flexible. Save on the additional costs and hassle of having a trust.
When you have a stable of properties – think about trusts etc.
Keeping it simple is all well and good, but transferring these properties later if I decide to set up a trust will cost alot more than the additional costs that may be incurred now.
The way I see it, if I have collateral (30% cash deposit) for a line of credit from the bank (not a home loan), then the bank does not care how I use this money to invest? Whether I invest it into a hybrid trust or whether I invest it into Joe’s investment scheme down the road?
The loan will still be under my name, using my collateral to invest in something which I think will show a good return. That’s all the bank has to know?
Chris,
its not where the 30% goes, but how the remaining 70% is borrowed that is the problem. With hyrbid trusts the owner of the property is usually not the same as the borrower and this is what creates the problems.
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
Terryw wrote:Its still possible to claim the interest personally by using a unit trust – but this offers no asset protection and is inflexible.I would also suggest a discretionary trust is probably the way to go.
There are also land tax implications to consider. eg. In NSW there is no tax free threshold for land owned in a discretionary trust.
Can you explain why a unit trust offers no asset protection?
Because units are property.
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
May I should elaborate.
if you are sued you may have to pay some one a sum of money. If you don't they have a few options available such as having your assets seized and sold or being bankrupted.
Assets which can come under the control of the bankruptcy trustee or be seized and sold includs all sorts of property such as land, real property, cars, units in unit trusts etc.
Discretionary trusts are different. Because the trustee in a discretionary trust holds the property of the trust for the benefit of a wide class of beneficiaries and they have absolute discretion on who they distribute profit or capital to no one beneficiary has an absolute entitlement to the property of the trust. If any one beneficiary went bankrupt the trustee would simply not distibute anything to that person while they weere in bankruptcy (otherwise they will loose the distribution to the bankruptcy trustee).
Unit trusts have no protection because the unit holder holds a fixed interest in the assets of the trust. But you can still obtain asset protection by having the units of the unit trust owned by a discretionary trust.
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
Thanks Terryw for the information.
Cheers
RyanTerryw wrote:Unit trusts have no protection because the unit holder holds a fixed interest in the assets of the trust. But you can still obtain asset protection by having the units of the unit trust owned by a discretionary trust.
If the property was negative, using a unit trust would filter down the tax benefits. But if the units were owned by a Discretionary Trusts, wouldn't they then still get stuck inside the DT? So in the end wouldn't it just be cheaper to use a DT to begin with? Or not use a trust at all as you won't be able to claim the deductions? Assuming the property was going to be negative for a long time.
Although.. is it true that a Unit Trust will get a land tax benefit if it owns the IP?
If so would it be better to buy each property in a separate unit trust, then having all the units owned by a FDT (assuming positive here). So you'll keep the land tax down and still have flexibility in who gets the money.Unit trust only allow negative gearing, or losses to be offset against personal incomes, where an individual has borrowed to buy the units (rather than the trust borrowing to buy the property). This wouldn't work if the units were owned by a DT as the trust would then claim any costs.
Unit trusts get the land tax threshold in some states.
Not sure on the land tax issue, but it may work – that is each property owned by a separate unit trust.
Also in some states, it may be possible to transfer units to a SMSF without stamp duty when you retire. This means you could get your property into the SMSF and all the benefits that go with it.
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
Yes I've just now read about getting IP's into a SMSF, though the trust needs to be a unit trust.
Would this work??
(Assuming the property was a long term keeper)1- Buy each property in a unit trust. (where available the land tax threshold would apply each time then)
2 – Have the units owned by a FDT if positive.
or
Have the units owned by myself, bought with a banks money, if negative, to allow gearing tax benefits.
Then when property goes positive, sell units to my FDT. (Not sure what would happen here, but as the property hasn't been sold there'd be no stamp duty, though I guess the units have gone up in value so there would be a capital gains issue??)3 – Then as grey takes over black, sell the units to the SMSF.
I've been reading a lot on trusts, and must confess I'm more confused than anything!!!
On another issue, does a Trust HAVE to have it's tax done by an accountant, or is that just companies?
in NSW units in a unit trust are dutiable property s11(1)(e) Duties Act.
But, under s34 duty on transfers of marketable securities is to be abolished on 01 July 2010). In the dictionary to this act 'marketable security' includes units referred to in s11(1)(e)
Currently Stamp duty would be 60c for every $100 in value of the units.
http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/.
So your idea may work in NSW in the future. I am not sure on the rules to transfer to a superfund though. But CGT would be payable on the transfer of units also.
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
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