All Topics / Legal & Accounting / Asset protection and Tax minimisation via Family Trust

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  • Profile photo of kong71286kong71286
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    @kong71286
    Join Date: 2009
    Post Count: 261

    Hi everyone,

    Before I start investing in properties I would like to setup the right structure to protect my assets, and minimize tax. I am currently thinking of using the same Family Trust structure Steve McKnight is using, because the only debt I have is my HECS loan and based on my income/expenses I am able to easily service a 500k loan

    From my understanding you have a 'company' that acts as trustee on behalf of your 'family trust' to purchase a 'property', whereby you act as the 'guarantor' and also lend the company the 20% deposit costs. What I don't quite understand is how the taxing system works

    I.e. Is the rent from the property considered the company's income?
    If so, is it taxed at a flat rate of 30%, or does it act like another individual?

    0% tax for<$6,000
    15% tax for <$35,000
    30% for <$80,000

    Also,
    Since the loan is for an 'income producing asset', is the 'interest' tax deductible'?
    Can you deduct it from the director's tax? or only from the company's tax?

    Any comments and advice is appreciated! :)

    Regards,

    Kong

    Profile photo of Dan42Dan42
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    @dan42
    Join Date: 2008
    Post Count: 620
    kong71286 wrote:

    From my understanding you have a 'company' that acts as trustee on behalf of your 'family trust' to purchase a 'property', whereby you act as the 'guarantor' and also lend the company the 20% deposit costs. What I don't quite understand is how the taxing system works

    I.e. Is the rent from the property considered the company's income?
    If so, is it taxed at a flat rate of 30%, or does it act like another individual?

    0% tax for<$6,000
    15% tax for <$35,000
    30% for <$80,000

    Also,
    Since the loan is for an 'income producing asset', is the 'interest' tax deductible'?
    Can you deduct it from the director's tax? or only from the company's tax?

    Any comments and advice is appreciated! :)

    Hi Kong,

    The taxable entity in this example is the trust, not the company. This is because the company is acting as trustee, rather than trading in its own right.

    A trust generally does not pay income tax, because it distributes it's income to other entites / individuals. One of the benefits ofd a discretionary (family) trust is that the income is distributed at the discretion of the trustee. So the trustee can distribute income to individuals with lower incomes, providing they are allowable beneficiaries in the trust deed.

    The asset is held by the trust, so the loan interest will be deductible in the trust, rather than individuals / directors.

    Profile photo of casanovawacasanovawa
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    @casanovawa
    Join Date: 2010
    Post Count: 63

    Hmm, this is probably something i need to look at more…   a couple of things, how much does it cost to set up such trust?   and can you transfer a house you are about to buy into a trust later or will that incurs fees and stamp duty etc, etc???

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Just think of the trust as another 'person'. Totally separate from yourself. any expense incurred in relation to the property is incurred by the trust. The trust therefore claims any expenses.

    The company is only the legal owner, not the real owner of the assets. its name appears on the legal documents such as the title, but that is its sole role.

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

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

    Profile photo of Paul DobsonPaul Dobson
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    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi

    We recently got a company/trust structure for $1,500 via our accountant.

    If you settle on a property in, say, your name and then transfer it into a trust, then yes new stamp duty will be incurred and associated legal costs.

    As always, check with your lawyer.

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of kong71286kong71286
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    @kong71286
    Join Date: 2009
    Post Count: 261

    Hey guys,

    Thanks for your comment and input =)

    From what I've read so far, I now understand that the tax is dependent on the 'beneficiaries' whom the trust distributes income to

    However what I still don't quite understand is how you would deduct tax from the interest of the loan, when the trust does not have any tax to deduct from

    Further clarifications, and thoughts on this issue are more than welcome

    Regards,

    Kong

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    No tax is deducted, but expenses are deducted from income to arrive at the profit or taxable income of the trust.

    A simple example may help

    Discretionary trust has a rental property
    Rent $20,000 pa
    Interest + deductions $15,000

    Profit = $5,000

    This profit can be distributed to beneficiaries and it then becomes income to them and is taxed in their hands (The trustee will pay tax at 46% of this amount if it is not distributed).
    If you had 2 kids who you distribute this $5,000 to then it is possible that no tax is payable at all.

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

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

    Profile photo of kong71286kong71286
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    @kong71286
    Join Date: 2009
    Post Count: 261

    Thanks for the clarification Terryw =)

    I noticed you are a finance broker, and you are fairly active in these forums with over 8,690 posts – this tells me that you are quite knowledgeable and also have a strong desire to help others out

    Once I have my 'Family Trust' setup and start investing in properties and commodities such as gold/silver, how would I go abouts accessing your services?

    P.S. One thing you could consider is to have a signature with your business contact details after each post you make – not only will this make your business flourish because other forum readers can tell you are a man of integrity, but also because most of the members here are investors, and understand the need to have good advisers

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    hi Kong

    thanks for the message.

    I am very selective about taking on clients at the moment. I used to have a signature, but have taken it off because of getting too many tyre kickers

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

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

    Profile photo of casanovawacasanovawa
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    @casanovawa
    Join Date: 2010
    Post Count: 63

    Do the profits have to be distributed every year?

    its not like they could accumulate for 3 years and then if you were expecting a year when u might have a much reduced income (take a year off etc) choose to distribute profits in that year???

    or does it have to be distributed every year or automatically taxed at that 46% rate?

    Mark

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    every year.

    You could always distribute to a company which would pay tax at 30%. From there it could be diverted to an individual later on with franking credits.

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

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

    Profile photo of jonesy06jonesy06
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    @jonesy06
    Join Date: 2010
    Post Count: 10

    Trust are really tricky – so can you let me know if I understand this correctly.

    If you set up a Family Trust and purchase property under the Trust, then all the income from rental and deductions will be made under the trust.

    If the property purchase is negative geared then how much tax does the Trust pay? 30%?

    What's more beneficial to have a Company as a Trustee or an Individual as a Trustee?

    Where I am confused is if you have a Company as a Trustee then the company pays 30% in Tax, but the the loss (due to negative gearing) or the profit would be distributed to the beneficiaries and then they would have to pay tax on that income again?

    Whats the benefit of a Trust against and Individual or Company buying property?

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Just think of the trust as a separate person – nothing to do with you.

    lets use an example. Trust buys a property.
    Rent = $20,000 pa
    Interest = $20,000pa
    other costs = $10,000 pa

    This would mean there is a loss of $10,000. This loss has nothing to do with you as an individual. The loss stays in the trust and can be offset in the future if the trust makes a profit. Since there is a loss there is no income and no tax payable.

    Now lets assume the rent is more and the trust makes a profit:
    Rent $40,000
    Interest = $20,000
    Costs = $10,000

    Profit = $10,000.

    Since the trustee holds the trust assets for the benefit of the beneficiaries they income of the trust must be distributed. If it is not distributed the trustee will be taxed on this income at the top tax rate. So the trustee will decide to distrbute this $10,000 amoung the various beneficiaries. Who it goes to is usually up to the trustee.

    The recipient of the trust distribution pays tax on the income they receive from the trust.

    eg. If Mr A has earnt $50,000 from his job as a cleaner and he gets a $10,000 distibution from the trust his new income is $60,000 and he will pay tax based on this.

    In summary, trusts don't (usually) pay tax, the recipients do.

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

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

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    on the question "What's more beneficial to have a Company as a Trustee or an Individual as a Trustee?"

    A company is more beneficial for a few reasons:

    1) trusts can get sued. If a trust gets sued it is actually the trustee of the trust that is sued. The trustee is then usually indemnified out of the trust assets, but if these are not enough then their personal assets are at risk. If the trustee was a $2 company with no assets then there is less risk to your own personal assets

    2) flexibility in terms of changing trustees. Imagine you buy a property in your own name as trustee for the X trust. You hold the property for your family on trust. You want to hand over control to your son. If you are trustee that means you are the legal owner and your name is on title. If the son wants to mortgage the property or sell it etc you will have to do it as you are trustee. Now imagine if you had a company as trustee and you as director. Everythign would be in the name of the company. So to hand over control you just resign as director and replace yourself with your son. No title deeds need to be changed.

    3. Flexibility in terms of finance. Imagine you own a proeprty as trustee for the X trust. You then have a dispute with a builder over the installation of a kitchen. It goes to court and you lose. You now have a judgment against your name. It will be much harder to get finance and you may be stuck with all that equity which cannot be used.

    If you had a company as trustee, you just resign as director and appoint the son (assuming he is over 18). You no longer have to go on the loan documents or give guarantees (if trust is set up well). The son takes this role and the trust is able to increase the loan and access the equity (to pay the builder maybe!).

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

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

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Now for the questions "Whats the benefit of a Trust against and Individual or Company buying property?"

    There are a few benefits with Discretionary trusts. 2 main ones:

    1. Trust assets are not your personal assets so if you are sued and go bankrupt the trust assets are, usually, not available to satify the debt. Shares of a company are assets is held in your own name. A property held by your company could come under the control of your creditors if you went down.

    2. Tax flexibility. If you own a property you must receive all the income. there is not much flexibility. If your company owns property then it gets the income and any profit will need to be given to the shareholders in percentage to their ownership. With a discretionary trust the income can be given to the lowest taxed beneficiary first and this can save lots of tax.

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

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

    Profile photo of kong71286kong71286
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    @kong71286
    Join Date: 2009
    Post Count: 261

    Hi Terryw,

    I understand your time is limited, and its a good thing you are selective about your clients, and making most use of your time

    According to the Pareto principle, 80% of a business income come from 20% of its clients, and in your case it looks like you want to focus on this 20% good clients rather than wasting time on the other 80% i.e. tyre kickers

    I'll be honest with you – Having only graduated a few months ago I am not intending to apply for any loans for another 1-2 years. For the time being I am happy to continue investing in my financial knowledge, saving $700 per week, and seeking advise about my future plans

    Regards,

    Kong

    Profile photo of jonesy06jonesy06
    Member
    @jonesy06
    Join Date: 2010
    Post Count: 10

    Hey Terry

    Thanks so much for clarifying all that for me – you are very knowledgable.

    Can you recommend any Financial advisors in Sydney or the Parramatta area?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Thanks Kong and Jonesy. Jonesy – do you need a broker or a financial planner? I can point you to either in Parramatta – probably best if you PM me please.

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

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

    Profile photo of The ImmigrantThe Immigrant
    Member
    @the-immigrant
    Join Date: 2008
    Post Count: 73

    Hi Terry,

    I agree with the others, your knowledge is invaluable and much appreciated.
    Where are you based? we might need your service once we get the planning permit.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Thanks novus

    I am in Sydney, but reluctant to take on new clients at the moment.

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

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

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