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  • Profile photo of mixedupmixedup
    Participant
    @mixedup
    Join Date: 2008
    Post Count: 79

    Hi,

    Any feedback on whether I should be considering a trust or not for my next IP?

    * Asset protection – we’re not in a high risk profession so no need from this perspective
    * Tax optimisation re when it goes from negative to positive geared – with current IP the current taxable incomes wife’s is only about $15k less – not sure what value to put here re future saving down the track
    * Tax optimisation re capital gains being better against lower income earner – we’re going to hold the property – who knows in 20 years re passing onto kids what will happen
    * Land Tax (Qld) – current threshold is $600k, so re land value we should not cross this with our next IP so no advantage here I assume

    Overall I’m not seeing any major reasons to buy in a trust? Also there are some extra costs maintaining the trust per year I assume? (say $1k extra per year?)

    Re type of trust – I assume if we did a trust we’d go for a property trust like the one Chan & Naylor have that doesn’t lock up losses in it.

    thanks

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    I would suggest you run some figures on both scenarios. It will be impossible to comment without doing the figures. If using a trust is not going to make much difference they the benefits will be well worth it.

    Occupation is only one reason for asset protection. Most people that go bankrupt don't go bankrupt because of an occupation related incident.

    I would also suggest you do some reading about the types of trusts and the so called hybrid trust. Times have changed – actually they haven't changed much, but the benefits of hybrid trusts are not what some made them out to be. I would suggest a discretionary trust.

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

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

    Profile photo of rudra_rrudra_r
    Participant
    @rudra_r
    Join Date: 2009
    Post Count: 61

    I’m very much in the same situation as you mixedup and have been considering whether to get my next IP in my name or in a trust. While not married at this stage, I am investing with my parents to assist me in building a portfolio to assist both them and I. Will definately be doing my reading on trusts to get a better understanding.

    Profile photo of mixedupmixedup
    Participant
    @mixedup
    Join Date: 2008
    Post Count: 79

    I just run some figures on Land Tax costs over the next 10 years, and for me it at this stage (2 IP’s only) it doesn’t seem worth it

    Also had a chat to someone re trusts:
    – Unit Trust: Can’t redirect who profit/loss goes to
    – Discretionary: Doesn’t handle negative gearing (i.e. lose it)
    – Hybrid: ATO apparently don’t like / lots of hype re this, it currently problematic getting an equity release from banks where you have purchased via a Hybrid

    If this all correct, then there isn’t really a Trust that will do it for me anyway it seems, not to mention the upfront costs & per annum costs. These costs aren’t that high in the grand scheme of things, but losing the negative gearing gain is.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    With unit trusts the entitlements are fixed. The trust consists of unit holders who own fixed percentages. All profits go to the unit holders in proportion to their holdings. The units could be held by an individual, company or discretionary trust. Unit trusts are generally good for two or more separate parties to go into a venture together as they can have fixed shares of the profits.

    Discretionary trusts are trusts where the trustee decides each year who to give the income of the trust to and what amounts. This makes things flexible as one year the trustee may give to a beneficiary who has a low income – each adult can earn up to $16,000 pa tax free. So if you had 2 kids at uni you may be able to have a trust income of $32,000 and pay no tax on it. This is also the best way for asset protection as no one beneficiary has an entitlement of income of the trust – only a mere expectancy. So if a beneficiary goes bankrupt, the trustee would just avoid giving them any income of the trust until they come out of bankruptcy (otherwise it would go to their creditors). This isn't the case with a unit trust as the entitlements are fixed.

    No trust can distribute losses, but this was gotten around by a person borrowing to buy income producing units of a unit trust or a hybrid.

    Hybrids are a mixed trust with a discretionary component and a discretionary component. The ATO has no problem with them if they are used in a proper commercial manner. The problem is some promotors seemed to be saying A could borrow to buy units but the trustee could give the income to B. the ATO's view is that why would A borrow to buy units if they had no or little chance of getting any income from the trust.

    So if you set up the hybrid so that the unit holder has to get the income and captial gains in proportion to the units held then you could probably negative gear with the trust. The trouble with this is no asset protection and no flexibility. However, it still may be worth considering as the trust could redeem the units later on and the trust will become a full discreitonary trust without needing to change the ownership and paying stamp duty. But CGT would be applicable on the transfer of the units.

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

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

    Profile photo of mixedupmixedup
    Participant
    @mixedup
    Join Date: 2008
    Post Count: 79

    so Terry I think you’re kind of agreeing with my bottom line no? Ie for a negatively geared situation there doesn’t seem to be an ideal trust here, ie that distrutes profit/losses & allows negative gearing & addresses the ATO concern.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    You can't have your cake and eat it too.

    There is no structure where you can have asset protection, max tax flexibility and negative gear your personal income. (there is if you are self employed).

    I personally would probably where the losses early on as the long term benefits will be great.

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

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

    Profile photo of mixedupmixedup
    Participant
    @mixedup
    Join Date: 2008
    Post Count: 79

    thanks Terry – by the way what did you mean by your last sentence exactly – couldn't quite understand

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    i think i should have said "wear the losses"

    If you are serious about investing then use a trust, even if it may cost you a bit extra in taxes in the early stages as the long term benefits will out weight the short term costs.

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

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

    Profile photo of Shell EShell E
    Member
    @shell-e
    Join Date: 2010
    Post Count: 3
    Terryw wrote:
    You can't have your cake and eat it too.

    There is no structure where you can have asset protection, max tax flexibility and negative gear your personal income. (there is if you are self employed).

    I personally would probably where the losses early on as the long term benefits will be great.

    Hi Terryw,

    You sparked my interest with this reply… regarding being self-employed.
    If you ran a business through a trust structure and made a profit, can this profit be distributed by the Trust to a beneficiary being a seperate Trust that holds a negatively geared Investment Property?

    Apologise if I am completely off the track!!

    Shell

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    yes. that is possible.

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

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

    Profile photo of scottsscotts
    Member
    @scotts
    Join Date: 2009
    Post Count: 63

    Terryw,

    If you ran a business through a Company and made a profit, can this profit be distributed by the Company to a beneficiary being a separate Trust that holds a negatively geared Investment Property?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Scotts,

    Not really. The company is a separate legal entity that doesn't allow distributions to beneficiaries. Any profits would be distributed to shareholders in accordance with the % of shares held. there is no flexibility in distributing money.

    But there are ways to get money into the trust.

    The first is for the trust to perform some sort of work for the company and for the company to pay the trust a fee for this. This may not be good for asset protection as the trust is engaging in business and could be sued – eg the company could go into liquidation and someone else, not so friendly, could control it and possibly sue for breaches of contract or mistakes made etc.

    Another way is for the trust to own some or all of the shares of the company. This way the profit would flow into the trust. But if you have an existing business then there may be CGT and stamp duty on the transfer of shares.

    A third way would be for the trust to run the actual business. There would be a company acting as trustee and legal owner, but it would be the trust that is the true owner in the tax sense. Any profits would go straight into the trust. This could be a separate trust than the property to make asset protection stronger or the same trust (if business fails you would very likely lose the property).

    Hope that helps – but check the tax aspects with your accountant first as there are many other issues to consider.

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

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

    Profile photo of scottsscotts
    Member
    @scotts
    Join Date: 2009
    Post Count: 63

    Terryw that's very helpful..

    I'm going to be into IT consultancy I know I can form a company and be paid that way but I'm not sure I can form a Trust and be paid into that. 

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Yes you can use a trust. But you will have to overcome the PSI rules – personal services income. Check with your tax advisor.

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

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

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