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  • Profile photo of gavsamgavsam
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    @gavsam
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    I have a sit down meeting with my new accountant in the coming days, and want to have an idea prior to the meeting regarding his quick trust option proposal:
    ie: borrow loan from bank in my name which I can offset against the investment property and claim neg gearing?,  but then placing the loan amount borrowed into/against the investment property held in the family trust name – controlled by a company.
    Does this sound right?
    Borrow in own name,
    Pass loan amount into family trust which owns the investment property?
    Still claim neg gearing against property in family trust / against my personal wages?
    That rent/profits earned are therefore able to be distributed and not quarantined in the trust?
    what CGT, neg gearing, depreciation, land tax, stamp duty etc would I be faced with?

    Can you explain to me what the difference??, pro's and con's  are between a Hybrid Trust and a Family/Discretionary trust….. vs purchasing an investment property in my own name…..

    I understand Hybrid trusts may provide more positives – similar to borrowing in your own name, but that the main draw back is that the ATO are looking at these closely and that they haven't been tested in court …. that may see hybrid trust structures deemed illegal, tax dodge???

    Profile photo of morpheusbushymorpheusbushy
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    I'm also interested in what you have asked so looking forward to getting some feedback!

    Profile photo of LinarLinar
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    It is very difficult to get lending for a hybrid trust.  Or at least it was a couple of years ago.  Some of the mortgage brokers may want to comment on this. 

    Cheers

    K

    Profile photo of Richard TaylorRichard Taylor
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    No Linar you are bang on.

    I am only aware of 3 lenders who will openly and knowingly accept an application in a HDT and not of these lenders are particularly competitive.

    I remember clients who borrowed in such a structure with Seiza mortgages just prior to the GFC who when everyones else interest rate fell theirs went up. They had no choice as you could not refinance a HDT loan.

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    Profile photo of jacqui_03jacqui_03
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    I am in the same position as I am wondering when is the necessary time to change financial structure into a company/trust set up. I own 2 IPs, one in my name and the other in joint names with my partner. My current accountant does not think it is beneficial at this stage to form a company and discretionary family trust. When is a good time to make the change?

    Profile photo of TerrywTerryw
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    gavsam wrote:
    I have a sit down meeting with my new accountant in the coming days, and want to have an idea prior to the meeting regarding his quick trust option proposal:
    ie: borrow loan from bank in my name which I can offset against the investment property and claim neg gearing?,  but then placing the loan amount borrowed into/against the investment property held in the family trust name – controlled by a company.
    Does this sound right?
    Borrow in own name,
    Pass loan amount into family trust which owns the investment property?
    Still claim neg gearing against property in family trust / against my personal wages?
    That rent/profits earned are therefore able to be distributed and not quarantined in the trust?
    what CGT, neg gearing, depreciation, land tax, stamp duty etc would I be faced with?

    Can you explain to me what the difference??, pro's and con's  are between a Hybrid Trust and a Family/Discretionary trust….. vs purchasing an investment property in my own name…..

    I understand Hybrid trusts may provide more positives – similar to borrowing in your own name, but that the main draw back is that the ATO are looking at these closely and that they haven't been tested in court …. that may see hybrid trust structures deemed illegal, tax dodge???

    Doesn't sound correct to me.

    If you borrow in your name and lend to a trust, you will not be able to claim the interest.

    If you are referring to the hybrid trust method, then you would be buying the property in the name of the trustee and you the individual personally borrowing to buy income producing units in the trust. To be able to claim the interest on this then you will need to be able to show you have a good chance of receiving an income on your investment. Therefore the trustee should have no discretion in deciding whether to distribute to the unit holder or not. But if the trust is set up this way, most of the benefits are lost.

    Another problem is the loan as the others have mentioned. The company will own the property, so you getting a loan using the property as security won't be easy.

    As for the ATO, I don't see them as having a problem with hybrid trusts if they are set up commercially.

    And there has been a court case involving hybrids – with the tax payer winning. The taxpayer had a fixed entitlement to income of the trust, but not capital gains and the trustee was able to change income to capital to enable some tax savings (seems ATO stuffed up a bit here).
    see Forrest v Commissioner of Taxation [2010] FCAFC 6
    http://www.austlii.edu.au/au/cases/cth/FCAFC/2010/6.rtf

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    jacqui_03 wrote:
    I am in the same position as I am wondering when is the necessary time to change financial structure into a company/trust set up. I own 2 IPs, one in my name and the other in joint names with my partner. My current accountant does not think it is beneficial at this stage to form a company and discretionary family trust. When is a good time to make the change?

    It will rarely be beneficial to make the change once you have purchased a property as the costs will be too high (CGT and stamp duty on the transfer). You need to set up the structure before you buy.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of gavsamgavsam
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    Hi there,

    having got a fuller version of how this works from my accountant guru, here's what i found:

    Discretionary Family Trust

    to create u need:   The legal owner (in name only) – trustee
                      The assets (business or other assets, such as a home) – trust fund
                      The beneficiaries
                      The individual who hires / fires the trustee – appointer or guardian  (can be yourself and your spouse)
                      The trustee can be you and your spouse, just you or your company
       
    So you – Borrowing money in your own name from bank and then providing that loan amount to the trust is much the same as borrowing money to invest in shares which is used for investment purposes and can be used as negative gearing against your personal wages, ie same for borrowing investment property.
    The bank can still hold your title for the investment property as security – even though its owned by the trust (thus making it easier to get the bank to approve the loan).
    As your paying the bank back the loan in your name, the trust is making very little in the way of losses, (perhaps maintenance, rental management fees etc) but by and large you are reaping the bulk of the rent, (so no losses are quarantined in the trust).
    Pull the rent out of the trust as it comes in – then use that to help with your loan repayments etc
    – CGT is still the same at 50%

    I invite any positive / negative thoughts, theories

    cheers

    Profile photo of TerrywTerryw
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    Hi Gavsam

    Sounds like you are describing a unit or a hybrid trust there. With these it may be possible to have the trustee own the property and you use that property as security and borrow to buy units in the trust. You can then personally claim the interest. This is not possible with a discretionary trust though.

    This structure, the unit or hybrid, will have significant disadvantages though:
    – no asset protection (units are property under the bankruptcy act)
    – no tax flexibility. Unit holder must get all income and capital gains to be able to get the tax deductions
    – Possible double CGT. If the trust redeems the units to convert into a discretionary trust and then again if the trust sells the property.
    – problems finding a lender
    etc

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    Profile photo of gavsamgavsam
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    Hi terryw,

    Hmmm, will have to further clarify then…..
    I was told that it is a Discretionary Family Trust, I mentioned a hybrid trust to my accountant, but was told that was not what the proposed 'discretionary family trust' is.
    anywhere you would suggest online i can resolve / clarify this, ato ….?

    Profile photo of jacqui_03jacqui_03
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    Terryw,

    If I decide to start investing in a company/trust structure I wouldnt change my current IP's due to the costs involved so how do I know if it will be beneficial on the next IP purchase or if I should just stick to buying in my own name?

    Profile photo of TerrywTerryw
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    gavsam wrote:
    Hi terryw,

    Hmmm, will have to further clarify then…..
    I was told that it is a Discretionary Family Trust, I mentioned a hybrid trust to my accountant, but was told that was not what the proposed 'discretionary family trust' is.
    anywhere you would suggest online i can resolve / clarify this, ato ….?

    Try IT 2385
    http://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2385/NAT/ATO/00001&PiT=99991231235958

    for staters – Beneficiaries of a DT cannot claim expenses.

    Also try thinking it through logically. X is a beneficiary of a DT.
    -a)  If X borrows money and gifts it to the trust – Its a gift so interest won't be deductible.
    -b) If X borrows and onlends the money to the trust. X could only claim the interest if X was charging the trust interest, otherwise it wouldn't be a commercial transaction.
    -c) 'investing' into a trust (??) – there is no connection between borrowing and any income earning capacity or potential. X would be one of hundreds of potential beneficiaries and there is no guarantee if that X will ever get a distribution. Even if X controls the trustee there is still no guarantee X would distirbute to himself.

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    Profile photo of TerrywTerryw
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    jacqui_03 wrote:

    Terryw,

    If I decide to start investing in a company/trust structure I wouldnt change my current IP's due to the costs involved so how do I know if it will be beneficial on the next IP purchase or if I should just stick to buying in my own name?

    Jacqui – the only way to know is to crunch the numbers and to make some projections (guess future incomes and growth).

    Also consider the non-monetary benefits.

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    Profile photo of gavsamgavsam
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    thanks for the ato link Terryw,

    I will keep researching and seek further clarification from my accountant,

    You seem to know your stuff, are you a CPA??

    Cheers

    Gavsam

    Profile photo of Dan42Dan42
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    gavsam wrote:
    Hi there,

    having got a fuller version of how this works from my accountant guru, here's what i found:

    Discretionary Family Trust

    to create u need:   The legal owner (in name only) – trustee
                      The assets (business or other assets, such as a home) – trust fund
                      The beneficiaries
                      The individual who hires / fires the trustee – appointer or guardian  (can be yourself and your spouse)
                      The trustee can be you and your spouse, just you or your company
       
    So you – Borrowing money in your own name from bank and then providing that loan amount to the trust is much the same as borrowing money to invest in shares which is used for investment purposes and can be used as negative gearing against your personal wages, ie same for borrowing investment property.

    The bank can still hold your title for the investment property as security – even though its owned by the trust (thus making it easier to get the bank to approve the loan).
    As your paying the bank back the loan in your name, the trust is making very little in the way of losses, (perhaps maintenance, rental management fees etc) but by and large you are reaping the bulk of the rent, (so no losses are quarantined in the trust).
    Pull the rent out of the trust as it comes in – then use that to help with your loan repayments etc
    – CGT is still the same at 50%

    So you – Borrowing money in your own name from bank and then providing that loan amount to the trust is much the same as borrowing money to invest in shares which is used for investment purposes and can be used as negative gearing against your personal wages, ie same for borrowing investment property.

    Wrong. Borrowing to buy shares in your own name is different to lending money to a family trust, as the shares will (hopefully) provide income to you in the future. With borrowing to lend to a trust, there is no income producing asset in your name.

    If it's a discretionary family trust, as you have said, you as the individual will not be able to claim any interest deduction for onlending the money..

    The reason being is that it defies the basic rule of deductible expenses. ie, the expense has to be incurred in gaining or producing assessable income. If you are not charging the trust to borrow money from you, then you won't be able to claim the deduction.

    Even if this didn't contravene s8-1, you would have a hard time avoiding Part IVA, the anti-avoidance section. You are making a tax loss, the income from the trust is distributed in the most tax effective manner. It sounds like classic avoidance to me.

    If it is a unit trust, you could claim the deduction, because you are technically buying units in the trust. But U/T's have their own issues, as Terry has mentioned above.

    Profile photo of TaylorChangTaylorChang
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    Hi all,

    it is very interesting topic,

    Jacqui , i have very similar situation to yours. I got one under my own name and another one is joint name with my partner.

    But I wanted to start some property development ( such us subdividing, build a granny flat…)

    so next property I am thinking to put into company or trust , just in case if there is any thing go wrong I have my asset protection. I won't be personally liable.

    but I am not sure if this is a correct thinking ?
    my accountant also told me it's too early  or not necessary to purchase under company or trust……

    I am not sure.

    any comment anyone  ?

    please help

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    Profile photo of TerrywTerryw
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    gavsam wrote:
    thanks for the ato link Terryw,

    I will keep researching and seek further clarification from my accountant,

    You seem to know your stuff, are you a CPA??

    Cheers

    Gavsam

    No, a lawyer. I haven't studied much tax though have a personal interest and interest in trusts.

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    Profile photo of TerrywTerryw
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    scha9799 wrote:

    Hi all,

    it is very interesting topic,

    Jacqui , i have very similar situation to yours. I got one under my own name and another one is joint name with my partner.

    But I wanted to start some property development ( such us subdividing, build a granny flat…)

    so next property I am thinking to put into company or trust , just in case if there is any thing go wrong I have my asset protection. I won't be personally liable.

    but I am not sure if this is a correct thinking ?
    my accountant also told me it's too early  or not necessary to purchase under company or trust……

    I am not sure.

    any comment anyone  ?

    please help

    Hi Scha

    I don't think its a matter of being too early – its a matter of how 'big' you want to be. If you want to be buying several properties, doing developments or running a business then you should seriously be looking at trusts (separate ones for each too!).

    You cannot get much benefit from transferring existing properties or assets into trusts so you need to decide before you buy.

    Also I think you misunderstand the basic principles of asset protection. Just buying something in a trust doesn't mean you are protected.

    There are 3 ways, at least, that you are potentially at risk:
    1) you will need to provide personal guarantees to get credit
    2) you could get sued personally
    3) you could find the trust is sued.

    Doing a development would mean all  3 could happen at the same time!

    Where you could get some protection is if you had one/several trusts and were sued personally and ended up bankrupt. The assets held in trust would generally be safe (depending on how it is set up etc)

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    Profile photo of Jacqui MiddletonJacqui Middleton
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    I think a question a lot of people have in their minds is: should I buy every property in a trust…. even if I end up with say, only 3 properties?  Or should the first couple be in own name and then go into the world of trusts if planning to go larger?

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    Profile photo of TerrywTerryw
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    Ideally I would suggest buying at least one property in personal names as you get the CGT exemption – which will be huge as values increase over time. But this one I would suggest should be in the name of the spouse with the lower risk so as to increase asset protection.

    There after, ideally, in a trust, but again it would depend on the numbers. I just worked out buying the first IP in a trust in NSW may cost an extra $5,600 pa just in land tax. This and the inability to save personal tax on negative gearing could cost you an extra $10,000 pa in the early years. This is a huge amount.

    But after you buy a few in your own name you will be paying land tax on future properties (once you have used up the threshold) and as rents rise you will not have a loss – from then on it is smooth sailing, unless the government changes the rules again.

    Maybe it is easier just to invest in shares – no land tax, stamp duty or negative gearing issues (usually).

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