Hi All,
This forum has been a wealth of information for a novice such as myself and reading the posts of many insightful posters has led to me do some research on tax structures.
Since a lot of you are very experienced with the tax structures, it would be very helpful if you could review this structure I came up for a property investment group with close family (myself, parents, uncle and cousin).
Of the above, all of us have used our FHOG other than my cousin who hasnt bought a property as yet but still wants to invest in a property while retaining the FHOG and stamp duty exemption for his first PPOR.
Since we are living in NSW, Land tax is a very important issue for us as paying 1.7% of the value of the land is quite hefty especially if there is no threshold.
From what I have read so far, the best structure would be having a Fixed Unit Trust since it is still eligible for the Land tax threshold. The particular trust I was looking at was one provided by Patricia Holdings.
http://www.patricia.com.au/page/unit_trusts/
, who is trying to start out in the development game. That is why in the prospective structure I appointed my mum (Individual D) who will only own 1% of the units in the trust as trustee. Will this affect any borrowings as she does not have any income?</p><p>2. I read somewhere on the forum that negative gearing is possible with a unit trust where the individuals borrow to buy the units in the trust as long as the trust deed mentions that the units have to be redeemed at market value instead of at cost. Is this possible with the above trust, and if so can the four of us borrow and negative gear the property initially?</p><p>3. I called the OSR about the land tax threshold for the Fixed Unit Trust and they advised that if a Discretionary Trust was a unit holder of the trust, then there would be no threshold. Is this correct or does the Unit trust have to be the sole unit holder of the trust?</p><p>4. Who should the appointer be?</p><p>5. As stated above, my cousin has never purchased a property before. With the above structure, will he be able to claim the FHOG and stamp duty exemption when he purchases his PPOR (If he had purchased an IP in his own name, in which he had never lived in, he would be eligible for the FHOG but not have stamp duty exemption)?</p><p>6. How much would it cost to set-up this structure? Are the only costs the cost of a Trust Deed ($258.5) and getting those deed stamped ($530)? I am not worried about ongoing costs as I can do the tax return and accounts myself since I work in an accounting firm as a cadet.</p><p>Thanks for all your help.</p><p>Cheers,</p><p>Kaiser Iqbal</p></div><div
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Looks good in theory. Each unit holder could also hold their own units in their own discretionary trusts too.
But in practice, it will be messy! First of all banks don't really like to lend to people borrowing to buy units in a trust. They will want all unit holders to be on the loan, or guarantee the loan. Each will be jointly and severally liable that means if A, B, C and D stop paying then E must pay or if things go wrong the bank can sue all or just 1 or more people involved.
Asset protection in a unit trust is nil. The units are 'property' of the person that owns them. That means if person A is sued, their units are at risk. If the trustee of the trust enters into some contract all unit holders could be liable too.
Appointor should always be you as that is the one in control.
Why not just use a discretionary trust?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry,
Thats what my manager told me as well. He said the accounting/tax side of it was fine but the banks will kick up a stink with this structure.
I was shying away from a Discretionary trust due to it not receiving the Land Tax threshold of $380,000 in NSW which is quite a fair bit at $6460 (380K*1.7%).
Hi Kaiser
Thought land tax may be an issue. Don't forget it is only on the land value, not the whole value. It is expensive and is deterring a lot of people.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
My only suggestion would be to make the appointer a company pty ltd. Limiting your risk further. you can set up a company for around $500.
Your cousin will still be able to claim the FOG because it is an investment property.
One other point I would like to make but it is only a rumor and I don’t know it for is that I believe that each unit holder must put contribute the same amount, that is your all putting in money but one person doesnt put anything in and gets a percent of the property? Wouldnt you just have her percent in the name of her husband who should be getting more because he has paid for more of the property?
Hope it helps
Lockymac
Thanks for the replies.
Land tax is a big expense for many Sydney investment property owners as there are many propertiesIP's which have a land value greater than $380,000.
With regards to asset protection, as both you and Terry have pointed out, this structure will not provide much asset protection but I think is the cheapest way to own an IP with a group of investors that are not family as it avoids Land tax, and in the case of an invesment group, provides fixed apportionments to each investor depending on how much they have invested.
Lockymac, I'm not sure about the last point that you make, but I only gave the wife since she can pay for it by cash (not a large amount) and since she is a low income earner (no income) will not benefit if negative gearing was in place. I also included her so that she can be trustee as she is least likely to get sued (but as you pointed out, there is no asset protection).
With regards to financing by the individuals to purchase the units, how does the loan structure work?
If banks lend to the individuals for the units in the trust, do they charge at mortgage rates and I assume they have a charge over the property. How likely are the banks to lend to individuals to buy the units in the trust?
Another point i wasnt sure about was the FHOG. I know that my cousin will be eligible for the FHOG when her purhases his own PPOR later, but is he still eligible for stamp duty exemption? If he bought an IP in his own name or a partnership, he would forgo the stamp duty exemption when he would purchase his PPOR, but is this the case of purchasing a property through a trust?
With the lending side, normally the banks lend to the legal owner of the property and there is no other party involved. But here you will have the legal owner as one or more trustee – this may be a company or you or two or more people. You want need the loans in a different name to the legal owner. Banks don't like doing this probably because it is more risky for them. If things go – they must take back a property that the borrower doesn't own.
If you do find a bank that can do it (St G used to be one) the bank will take the property as security and then lend the money to the borrowers. Your accountant will arrange things so that the people are borrowing the money to buy the units. The bank doesn't really look at it as lending to buy the units, they see it as lending to buy the property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Sorry my point wasn’t really clear. My thoughts were that legally she is getting something for nothing, ie share in land for no monetary gain. But i dont think it really matters so I retract my last statement:)
In regards to the finance there are much more experienced people on here then me. When we do ours each person is guarantor for each other but dont know if thats the best way to do it.
Let us know how you go or if you need any help email me at
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