All Topics / Legal & Accounting / Is a hybrid trust using a company as trustee/beneficiary best overall structure?

Viewing 11 posts - 1 through 11 (of 11 total)
  • Profile photo of ChoubiChoubi
    Participant
    @choubi
    Join Date: 2011
    Post Count: 13

    Hi

    This is my situation:

    – Beginner investor (current finance/law/property studies student).

    – Will start by purchasing +CF properties

    – Will be mostly funded by parents (loan will be on parents name)

    – 100% geared (using equity from family home as deposit)

    – Negative gearing, developing, lump sum profits etc strategies will follow later on.

    What would be the best structure for my situation? I keep getting different answers from different accountants. Most say to use a discretionary trust.

    Wouldn't I be better off to use a hybrid trust (so I can deduct losses in case I am negatively geared) and later down the track if my profit is high, set up a company as trustee/beneficiary to cap tax at 30%.

    Any comments are much appreciated.

    Thank you!

    Profile photo of Dan42Dan42
    Member
    @dan42
    Join Date: 2008
    Post Count: 619

    I wouldn't advise the use of a Hybrid Trust, as the ATO have released several rulings about the uncommercial use of Hybrid Trusts, and the deductibility of interest.

    If you are going to be cashflow positive, I would use a Discretionary Trust. Another reason to use a DT over a Hybrid Trust is that it is easier to borrow funds in a Discretionary Trust.

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    I think discretionary trusts are better, as many banks do not lend to Hybrid Trusts. Also as Dan has suggested, the ATO is cracking down on Hybrid Trusts. If your properties ar positively geared, then why do you care that losses are trapped in a descretionary trust as you will be making a profit?? Discretionary trusts would be much better in your case as they are much more flexible when it comes to distributing profits.

    Also, I think it is better to use a company as a trustee and a seperate company as a 'bucket' company for asset protection purposes, but this would probably be clarified by someone who understands trusts better (such as your acocuntant).

    Luke.

    Profile photo of ChoubiChoubi
    Participant
    @choubi
    Join Date: 2011
    Post Count: 13

    Thank you for your comments guys.

    Once I have purchased a few +CF properties I want to then balance my portfolio and purchase capital growth properties. Plus I also want the option to deduct interest if I have to.

    If for example my parents would borrow money in their name then buy units in the trust. What would be the problem if they are the beneficiaries/unit holders of the trust. There should be nothing wrong with deducting the interest if they are the income receivers of the trust.

    What about just a unit trust?

    Profile photo of Dan42Dan42
    Member
    @dan42
    Join Date: 2008
    Post Count: 619

    A unit trust doesn't offer the protection that a discretionary trust with a corporate trustee does. If your parents went bankrupt, the units would be an asset that would be available to the bankruptcy trustee.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Hybrid trusts can work if they are used commercially. But they have significant draw backs in trying to get a loan. Can you imagine your parents trying to get a loan to buy the units when the property title is in the name of you or a company? I don't think you will find a bank to do that these days.

    Also if your parents sold their units back to the trust they will have to pay CGT at the market value of their units – maybe stamp duty also.

    I think you should look at multiple discretionary trusts. Start off with one and then add more down the track as you acquire more properties.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of 4jojo4jojo
    Participant
    @4jojo
    Join Date: 2009
    Post Count: 18

    Hi,

    I'm really confused (yes, I'm going to see some accountants, and buy some books etc) but can anyone please explain to me how a discretionary trust with corporate trustee work?

    I understand the discretionary trust side of things but I am having trouble understanding the corporate trustee side of things.

    We are planning on setting up a discretionary trust (for all the usual reasons, asset protect, tax min, and to buy CF investment properties), but like I mentioned I don't understand  how, why of a corporate trustee??

    Thanks in advance.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    The trustee is the legal owner of the trust assets. So the title to any property will be in the name of the trustee.

    A company is generally recommended as control of the trust can be passed on to others without the need to change title deeds. There are also asset protection benefits – if the trust is sued, for example, the trustee could be liable for any shortfall if the trust assets are not enough.  But, directors of trustee company could be personally liable for debts of the company in some instances, so having a company as trustee won't save you in all situations.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of 4jojo4jojo
    Participant
    @4jojo
    Join Date: 2009
    Post Count: 18

    Thanks TerryW.

    Now I get it.

    Profile photo of nm95nm95
    Participant
    @nm95
    Join Date: 2021
    Post Count: 0

    Hi TerryW,

    I am considering setting up discretionary trust using company as a trustee. However, while I am doing research about this structure, there is a drawback with land tax. Please shed some light.

    Thank you.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    That will depend on the circumstances such as where the land is located and alternatives. There could be less land tax with using a trust to hold property, the same or more.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

Viewing 11 posts - 1 through 11 (of 11 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.