Hi. I have decided to start property investment with a family trust (company trustee) and have talked to couple of accountants and they tried to convince me to buy under my name in order to get the benefits of negative gearing!! It seems that I need to find someone who understands benefits of trusts in property investment and have the experience of setting up trust for asset protection / tax benefit.
Could you please help me with some reliable contact details (in Melbourne) so that I can get some valid and reasonable advise on setting up a trust with a suitable structure.
Thank you for you help :)
They are right! You cannot distribute a loss from a trust, so to access the (so-called) benefits of negative gearing, namely to offset the income loss from the property against your other taxable income, you will need to buy in your own name.
Are you wanting to negatively gear?
Thank you for your response.
My investing objective is not to only save tax by using negatively geared properties and buy and hold with hope of price increase in long term. I am trying to generate lump sump in short term (1year or less) by finding properties with subdivision/renovation potential and resell to increase my investing capacity and use the cash to buy again.
That’s why I need a good structure with trust to have tax benefit by distributing the profit to my parents (who don’t have an income) while using the 50% discount on CGT. Also to use asset protection of trust.
However, it seems that not all accountants are a big fan of this approach and their only advice is to buy& hold strategy while using the tax saving using negative gearing tax deduction.
I am a big fan Steve and started reading your books 5-6 months ago. Now I have reached to a point that I am absolutely sure that I want to start property investment using your strategies to reach my financial freedom in 10-12 years.
I understand I have to learn so many things in action and I can’t learn only buy reading books so I have started reaching to accountants and mortgage brokers to make sure I have a realistic understanding of my structure, borrowing capacity etc. And that’s why I would like to work with people who look at property investment the way you see it not the typical buy hold negative gearing concept! This way I can be confident that I get good advise and I save my time !
Thanks again Steve for you great books.
Hope I can get good contact details here :)
Have a good day.
Thanks for clarifying. If you go into a project with the intention of ‘turning it’, say a renovation or subdivision, then it is unlikely to qualify for a CGT discount, as you may hold it for <12 months, and even if you don’t, your intention is not to hold it for long term gain, but to buy-improve-sell, and so the profit is likely to be an ‘income’ profit rather than a ‘capital’ profit.
Just on a point, you can’t make a (real) profit and not pay tax on it! Or, if you want to defer your income tax on your salary income via real estate losses, you have to make a real loss against an unrealised profit (i.e. the negative geating strategy).
So, back to your situation… as I see it:
1. You want to do value add projects for quick-turn profits
2. You expect to make a profit from improving the property, as opposed to a long term hold
3. You may lose money in the short term holding it, but your intention is for the improvement profit to exceed those holding costs
4. You hope to use those near term losses to offset your other taxable income (i.e. salary income)
5. You want to distribute the profits to your parents as part of an income splitting plan
Give the above, if you buy in your own name you can do 1, 2, 3 and 4, but cannot do 5.
If you buy in a trust you can do 1, 2, 3, and 5, but not 4.
Therefore, it’s up to you to figure out what combo of options you want more.
In respect to capital gains, as I said, it is more likely the profit is not capital, but rather income. Regardless, if you think it could qualify for a CGT discount then this would be available (subject to meeting the eligibility requirements) both as an individual, and distributing trust income in the form of capital gains to individuals (i.e. trust distribution).
It can be hard finding an accountant to assist. First, get clear on your strategy, then seek an accountant to support. That is, make sure you ask the right person the right question.
Thank you for the great information on CGT.
As I am more interested in 1,2,3 &5 I believe trust works much better for me.
I will absolutely think more about the strategy to get more clarity as you advised.
Here is a great source of information. Will definitely spend more time here from now on. Thank you.
You shouldn’t go to an accountant to set up a trust as this involves legal advice. An accountant, assuming they are a registered tax agent, can only advise on the Commonwealth tax aspects. You would need advice on the structure of the trust, who the trustee should be, injecting funds into the trust, succession on incapacity and death, stamp duty, land tax, asset protection and family law etc – in addition to tax.
See a lawyer
This might be one of those professional demarcation issues.
I’ve always used an accountant to arrange my new structures.
Whomever you choose, make sure they’re experienced and knowledgeable.
Thank you again.
I have some good contacts now and will be able to start with information gathering and getting advise from experts now. The good news is that the picture in my head is getting more clear everyday.
Yes plenty of accountants do set up trusts. But they have no qualifications or licensing to do – a hairdresser is just as qualified.
The accountant will argue they are not giving legal advice, but just providing a document drafted by a lawyer. If so why not go directly to the lawyer who can tailor the trust to suit your needs, advise on who should take what roles, terms of the deed, be able to modify the deed and more importantly be covered by insurance.
Tell me this Steve, would you let an accountant set up your will? Hopefully you would answer no.
If no, then why would you go to an accountant for a trust set up?
No. I wouldn’t, that’s true. I went to a lawyer and got good advice and a tailored document. But accountants don’t offer to do wills, as far as I know! Maybe that is an emerging opportunity for them.
Here’s what I’ve found happens pratically though re: trusts: accountants tend to work with a good lawyer (or major law firm) to get access to their latest and greatest trust deed as, as you have mentioned, lawyers typically are experts at law, but not tax, or accounting, succession planning, or in many cases, practical business operational matters. This latter part is then ‘wrapped around’ the trust deed to provide the best of both worlds: a trust deed that works, and accounting assistance with tax and succession planning.
Bye for now,
Since it is illegal for accountants to give legal advice, they shoud get the lawyer to set up the trust directly with the client, they can jointly advise if they want, but the contract would need to be between the law firm and the client. Otherwise no insurance coverage.
WHat happens in practice is an accountant will buy a deed template and fill in names and addresses, often giving illegal advice along the way. I have seen a few of these where the accountant had used cleardocs deeds, which could about $300, and then charged the client $1500. There is no value added and the client would have gotten a better result if they had went directly to cleardocs. The accountant gave legal advice indicating the trust would provide asset protection on divorce, which was wrong, but also the discretionary trust did not have an appointor position, and upon review I found it impossible to vary the deed to add one.
As for succession planning this is also legal advice. I am not sure what a non lawyer could add in terms of trust law, corporations law, superannuation law or succession law. How could an accountant advise on succession? I have 2 masters of law degrees in this area, one in Estate planning and the other in wills and estates, plus the undergraduate law degree.
Accountants should stick to commonwealth tax and accounting.
Well, let’s agree on what we agree on: that accountant’s cannot give legal advice.
As for the rest: lawyers, in my opinion, usually run good legal practices (small businesses), but otherwise make poor accountants, business advisers, and financial planners.
Just look at government: beset by ex-lawyers who argue for the sake of arguing, while the rest of us get on with the job.
That said, accountants stare at numbers too much and often make decisions from ivory towers.
People just need to find an adviser they feel they can trust, and go in with their eyes open. Hence, I think our discussion has been useful in achieving that goal. Thank you.
I am not sure what your comment about “lawyers, in my opinion, usually run good legal practices (small businesses), but otherwise make poor accountants, business advisers, and financial planners.” means or relates to. We were discussing whether non-lawyers can set up trusts and no one claimed lawyers can act as accountants etc.
The fact remains that a trust is a complex legal relationship in equity set up by deed, and only a lawyer should set them up and advise on the structuring of a trust. Once they are set up the trustee could then go and get accounting or financial advice depending on what they want to do. They would only need financial advice if investing in financial products perhaps, prob don’t need much accounting advice, but would need some tax advice along the way.
I guess I mean a lawer usually makes a good lawyer, but that is not necessarily the same as a good business person.
And perhaps you and I see the use and role of an accountant differently. You seem to narrow the application to compliance. That would be the same as saying that a lawyer is really only a word processor, or a filing clerk.
Naturally, you have a bias as a lawyer, and I have a bias as an accountant.
Setting aside our personal and professional bents, my recommendation for someone seeking to decide on their right structure would be wise to seek advice that ties the desired end with that person’s affordable means.
And that’s knock off time for the weekend for me, so allow me to finish with this:
An accountant and a lawyer were laying on a beach in Tahiti sipping mai tai’s.
The lawyer started telling the accountant how he came to be there.
“I had this property in Pitt Street, Sydney that caught fire and after the insurance paid off, I came here.”
The accountant said, “I had a city property, too, in Melbourne. It got flooded so here I am with the insurance proceeds.”
The lawyer took another sip of his mai tai, and then asked in a puzzled voice, “How do you start a flood?”
I think you are conflating different things. The lawyer is not trying to give business advice when drawing up a deed, but giving advice on the legal issues.
An accountant might be the one to talk about for business advice, but they would need to be a registered tax agent to give tax advice and a lawyer to give legal advice such as who should play what role in a trust, terms of the deed, what happens on death, incapacity, stamp duty effects of the trust etc. Once the trust is set up the accountants can knock themselves out with all the business advice they want.