Forums / Getting Technical / Legal & Accounting / Asset Protection & Structures

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  • Profile photo of LeabeeLeabee
    Participant
    @kenree2430
    Join Date: 2016
    Post Count: 3

    Hi all, some of the following is partially covered by other Topics in this L&A section but…… I’m having trouble pulling it all together.
    We’re based in Sydney, NEW to PI and feeling our way. We have our own business which has operated as a Sole Trader for 20+ years and we’ve just bought our first PI. (I derive an income from the business & my wife doesn’t). Its on old house on a 3R block and we have a DA in Council to build a 2x2br duplex in the rear. The block is too small to subdivide so we have plans to Strata it as 3 dwellings, rent them out and refinance so we can move on to PI No. 2.
    Our Question is: We’re well overdue to move our business into a PtyLtd structure and we understand the concept of protecting the business and PI assets by having my wife & I ‘insulated’ from direct ownership for asset protection purposes. We also understand the basic idea of having a PtyLtd Trustee control a ‘Trust’ which then owns the assets ie 1) real estate & 2) the business (which may itself be a PtyLtd business).
    We can establish the various PtyLtd entities by using someone like ClearDocs but getting the Trust Deed and the ownership/shareholdings structure correctly established to achieve true asset protection & without leaving any ‘legal booby-traps’ would probably require professional $$ help. Can anyone in this forum community help educate us on these matters before we seek that professional assistance otherwise we’ll probably be left with as many questions as we get answered. We feel it’s better to have some more basic knowledge in this area so we can ask meaningful questions and also engage in an ‘educated’ discussion with a professional. Of course, Tax implications are to be considered as well…… Can we have our cake & eat it too? Any recommendations on the most helpful & cost effective professionals to speak to in Sydney?

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

    I am a lawyer specialising in asset protection. I have half finished a book on the topic and am still finding out new things each day it is a very complex topic.

    It is not as simple as setting up a discretionary trust. It is important how the trust is set up – who takes what roles, the terms of the trust – some ways to set up will achieve little asset protection and how you cause the trust to transact. Do it wrong and there will be little asset protection.

    And before you set up a trust to own property in NSW you have to ask yourself if you are so worried about asset protection that you are willing to pay 1.6% pa in land tax each year?

    It sounds like you are concerned about creditors in bankruptcy, but also consider other aspects such as asset protection in death. Trust owned assets cannot be willed at death so you have to carefully pass on control of the trust so it doesn’t fall into the wrong hands.

    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 LeabeeLeabee
    Participant
    @kenree2430
    Join Date: 2016
    Post Count: 3

    Thanks Terry – Excellent! I suspect you’re on a winner with that book….
    Your second paragraph gets to heart of the problem. With the questions you’ve raised, a DYI set up would obviously give a false sense of security. No good having a set up that anyone can shoot holes through.
    The Land Tax aspect could be a concern but at the end of the day it may be the ‘cost’ of being adequately protected.
    I’m concerned about all aspects of asset protection, particularly claims from tenants or clients of the business in these days of ‘litigate first, negotiate later’ plus protection in death and eventually passing on control of assets to children etc.
    Sounds like you’ve just picked a another client….
    regards, Leabee

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

    Also consider a trust is not the only option. A not at risk spouse may be an appropriate owner. This can also be set up where there is little to no asset protection or set up well with stronger protection – against creditors, but new family law risks emerge.

    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 PeterPeter
    Participant
    @pjhawk
    Join Date: 2016
    Post Count: 2

    Leabee, unfortunately there is no one single answer to cover this issue. Like Terryw I have been playing in this field as a tax accountant for several years and agree that there is something new every day and many accountants and lawyers have difficulty with trusts.

    There are just so many factors that it isn’t possible to have a one size fits all. In many instances the actual structure you choose depends on how you purchase the property: IE with or without borrowing. Once you borrow to purchase, then if you are looking at negative gearing it isn’t going to work as the tax rules on deductions against discretionary trust distributions are very limiting. If you borrow independently and then lend to the trust – you haven’t protected the asset.

    If you are borrowing, then holding property in a trust generally doesn’t work for everything. If not borrowing then it works well but does have the land tax issues.

    You need to determine what is the most important parts of the investment. Is it (just to name a few):
    asset protection
    negative gearing benefits
    capital gains distribution
    ownership and ability to draw down on equity
    death benefit and transfer.
    PLus costs EG annual land tax ( and stamp duty if thinking of changing to a trust)

    And as Terryw says, a trust is not the only option.

    And you will NEVER get the main residence exemption in a trust.

    Good luck on the quest for a cost effective professional who is also knowledgable. (Maybe Terryw is the man)

    Profile photo of LeabeeLeabee
    Participant
    @kenree2430
    Join Date: 2016
    Post Count: 3

    Thanks for your comments Peter….Just more for us to think about. Your suggestion that “one size fits all” doesn’t exist is where I figured this would probably end up. There are obviously too many variables.
    Asset protection from litigation is very high on the list.
    Negative gearing isn’t an issue & doesn’t apply for the foreseeable future
    Capital gains……mmmm, maybe somewhere down the track this will be a consideration
    Ability to draw down on improved equity is critical to moving on to IP 2, 3 etc
    The strategy we intended to pursue in buying our first IP has changed twice (for the better) as we’ve crunched the numbers and the end game with this one is still in play. (we’re fortunate to have a few options which all have good outcomes) We need professional advice as you’ve suggested but I haven’t had much luck with the various “professionals” we’ve approached so far in preparing an overall strategy/game plan and guiding us to this point.
    Thanks again for your contribution, regards, Leabee.

    Profile photo of Tony BurnettTony Burnett
    Participant
    @tonyburnett
    Join Date: 2016
    Post Count: 17

    Hi Terry, you mention that trusts are not the only option, but I always thought they were as good as it gets, could you throw some light on what other options there are?

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

    spouses, parents, SMSF (a trust!), related party loans, gifts, etc,

    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 MarcusMarcus
    Participant
    @parpa021
    Join Date: 2016
    Post Count: 2

    A little bit off topic but just to throw it out there for the professionals to ponder over: Peter’s comment ‘And you will NEVER get the main residence exemption in a trust” may not necessarily be correct.

    There is a scenario where the beneficiary lives/rents the property in the trust (IT 2167 allows this). A long term lease contract (+50 years) is drawn up (using a solicitor who understands this) for this tenancy where the tenants treats this property as their main residence. In this case the beneficiary and the director of the company trustee of the trust are the same person. Years later, when the trust goes to the sell the property the trust will need to remove the tenant as required by the purchaser. In order to break this tenancy agreement the trust will need to pay the tenant (who is also the beneficiary) an amount which just happens to be similar to the amount of the capital gain the trust would receive in the sale of the property. The long length of the tenancy agreement is important here to justify the significant break lease payment to be received. This break-lease payment will increase the cost base of the property which in effect will reduce the amount of the capital gain. The payment from the trust received by the tenant (which would normally be seen as the capital gain amount) can then be exempt from tax using the main residence exemption. Main residence exemption requires there to be an individual and an ownership interest (ITAA97 118.110). Ownership interest includes a licence or right to occupy (ITAA97 118.130) which is the long term tenancy agreement.

    Structured correctly, there is no tax avoidance or benefit being received here other than the benefit of asset protection through the trust structure compared to owning this property in your own name.

    Disclaimer: I have not yet seen this tested or been applied by any of my clients. I have only heard that others have done this.

    I have queried this with various other tax professionals who are not sure on this either (they have not seen it). One response said the payment to the tenant would not be seen to be at arms length which I think is arguable with the carefully drafted long term lease agreement.

    Something different to think about, like i said throwing it out there for professional tax agents/lawyers to ponder over.

    Marcus | CTA | CPA

    Invest in yourself first. Education is everything.

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

    Great post Marcos.

    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 ALJOALJO
    Participant
    @aljo
    Join Date: 2014
    Post Count: 3

    Is there any possibility of taking out a caveat on your property by a trust, when there is equity and not to mention the amount owes on the caveat. increase the amount as the property price goes up so if anyone sues you there is no money left in the property after paying mortgage and the other trust who put caveat on your properties.
    It may not be easy to figure out but it is a possibility

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

    Is there any possibility of taking out a caveat on your property by a trust, when there is equity and not to mention the amount owes on the caveat. increase the amount as the property price goes up so if anyone sues you there is no money left in the property after paying mortgage and the other trust who put caveat on your properties.It may not be easy to figure out but it is a possibility

    Yes. But how strong it will be will depend on how it is set up and documented. It will also be subject to the claw back provisions and uncommercial contract provisions of the bankruptcy act and conveyancing acts.

    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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