Which trust would you recommend? Unit or discretionary?

What are you trying to acheive?

Unit trusts provide no, or little, flexibility or asset protection.

With a unit trust the percentage of holdings is fixed in proportion to the number of units held. So if you own 50% of the units, you must get 50% of the profits.

Also there is little asset protection as if you went bankrupt your units are property which can be seized by creditors.

Comparre this to a discretionary trust where there is maximum flexibility and asset protection. The trustee has discretion on where to distribute income each year, so usually distributes to the lowist income earner among the beneficairies. This will change each year as each beneificiaries circumstances change. Unlike unit trusts, there is a huge range of potetenital beneficiaries with discretionary trusts – even those yet to be born or coming into the family through marriage, adoption or divorce (eg future wife's ex husband!),

WIth discretionary trusts the interest held by a beneificary is not classed as property. So if a beneficiary were to go bankrupt, they couldn't lose any asset held by the trust. The trustee would simply stop distributing to them (otherwise it woudl go to creditors).

The only reason to use a unit trust would generally be when two unrelated parties wish to do something jointly. And then the units should be owned by a discretionary trust – one trust for each party.

Enigmait

all depends on what your exact situation is and what you wish to purchase with the trust.

A discretionary trust is the most flexible with reducing tax and offers the greatest asset protection. A company would only be needed as trustee if you were going to be running risky investments through the trust with the possibility of being sued. So if you were buying shares there is no risk, if buying property there is a slight risk and if buying business then there is a high risk of being sued. Businesses should be run using a company because of the limited liability factor. The company can still operate as a trustee and/or the shares in the company can be owned by your trust.

Discretionary trusts are also flexible as your circumstances change. Usually the deeds are worded so that any new children/grandchildren etc would be beneficiaries even though they may not yet be born. same with divorcing and new spouses and step children and adopted children etc. This gives the greatest flexibility in income distribution. A company cannot offer this as the shareholdings are fixed.

it is very easy to transfer existing property to your trust but this will be considered a sale and CGT and/or stamp duty and other costs may apply.

A trust should probably be set up by your accountant rather than a lawyer. Lawyer's draft the deed and an accountant can help you determine who should play which role etc as this may have serious tax consequences later. Not every accountant knows about trusts so beware. I would recommend http://www.guardianpartners.com.au

Hi Enigma

Usually DT deeds are worded so that a company in which you are director or shareholder will also be a beneficiary of the trust. Usually the company does not have to be in existance when you set the deed up so they can be added later when needed. Having a company as trustee is a different matter and is mainly used to protect yourself as if the trust is sued and the trust assets are not enough to meet the debt, the trustee's personal assets could be at risk. It is also helpful haivng a company as trustee for changing things around – eg you could change directors and have someone else guarantee the loans down the track if something ever happens to you (like bad credit). There is also the privacy factor as it is the company name that appears in the land title records.

Company's only pay tax at 30% and can be used to limit the tax rate to this. Not sure what you mean about the imputation credits. It a trust makes an income this is distributed to a company or individual etc and they pay tax on it. if the company then makes a dividend payment to a shareholder the shareholder may get a refund of tax or have to pay more tax depending on their incomes.

I don't think there is anyway to transfer assets to a trust without triggering a CGT event.

Hi Andrew

It is a bit difficult as you are mixing business and pleasure with the one block. Having a trust will save you tax by allowing distributions to the non-working wife, but you may pay tax on the owner occupied portion which you could avoid if you purchased in your own name.

There are a few options which you could consider such as buying a larger share in your wife's name. This will give you the main residence CGT exemption for the front portion and keep tax low for the investment portion.

Another option is to purchase jointly with a trust and your own names. A deed of partition needs to be set up at the start and with you and the trust owning x% and y% each. when sub-division occures you can have your name on one title and the trust name on the other and stamp duty can be avoided. You can then sell wihout CGT on the owner occ and then minimal tax on the trust portion. This can cost a few thousand to set up.

And don't forget if the ATO deemds you to be entering into the purchase with the intention to make money from it they can still deny you the main resident exemption.

To sum up you could:

1) buy in own names only

2) buy jointly with non working spouse receiving the majority of ownership

3) buy in a trust

4) buy jointly with a trust and your own names and using a deed of partition.

So i think you need to work out the rough figures such as profit on sale and holding costs and then work out which way would be best. Then you should go to a good accountant and get some propert advice.

I have also assumed that you don't have any other property which you could be claiming the main residence exemption.

Hi Margaret

If you have already signed and exchanged contracts, then it would probably be too late to change it to a trust or a company now without incurring stamp duty – but things vary from state to state so at least make some enquiries.Its true that children cannot earn much income from a trust without getting hit with very high taxes, but each child can earn arouind $1300 pa without paying tax. So if you have 2 children and you are on the top bracket having a trust could save you $1300 pa approx.

But children are not the only beneficiaries.  There may be times when one of you is not working for a year and has no other income. The trust could then divert income to this person who will pay the least amount of tax. The next year things may change and so the income can go to the other person. DTs give this flexibility.

Also your family will change over time. You may only have 2 children now, but could have neices and nephews, grand children, adopted children, your children could marry etc. This will make the number of potential beneficiaries huge giving wide scope to reduce taxes.

And if you are on the top tax bracket, or if you are not on the top, but paying more than 30% in tax, then you will be able to set up a company and distribute to that capping the tax at 30%.

But your situation is a bit complex so you will need to get some good advice and will need to consider land tax, any negative gearing losses and  loss of the main residence exemption if purchased in a trust.

Hi Andrew

You will need to check with your solicitor, but my understanding is that the trust will need to be established before you enter into any contracts. You may be able to sign "xxx and/or nominee" you may be able to nominate your trust prior to settlement. But you need to be careful as some states do not allow this – so you may be charged stamp duty twice (on initial purchase and on your sale/purchase to your trust).

The main residence CGT exemption can only apply to one property at a time. I don't think there is any limit on the number of properties you can claim CGT exemption on, as long as no overlap, but if you do it in a business like manner, the ATO could deem it a business and still tax you.

Hi Everyone,

I have a couple of questions and hope someone can help clarify it.

What is the difference between a unit trust and a company ? and
Does a unit trust have the same obligations as a company ?

I would like to eventually set up a company to sell brand new properties/apartments and was going to set up a company initially.

Thank you
Charlie

I can't help with any of the preceeding questions as am new to the game myself. However I have a question regarding unit trusts and potential dangers when splitting units.

I have just a read a book that recommends (when negative gearing) issuing income units to the main income earner to gain maximum tax benefits from the loss and the capital units to the non (or low)-income earner so if you sell, minimum CGT applies. If this is a husband and wife, in the event of divorce (hopefully never happens), would setting up a trust this way leave the person with the capital units with the ownership of the property – or would the property still get split equally?

Thanks a lot for your help.
Jacki

Hi Jacki

That book must be out of date now. It would not be possible for a set up like this to pass muster with the ATO as there would be no commercial reason for the unit hold to buy the units if they would not be entitled to the capital gain.
see http://law.ato.gov.au/atolaw/view.ht…/NAT/ATO/00001

If it was set up like this, then the family law court could still look at the set up and divide the asset in a manner they think fair. They have the power to look behind companys and trusts.