Hi,
My wife and I are looking at kick starting our property investment plan.
We hoping to be in a position to buy in the next 6 months. Before we actually start buying, we want to make sure that we choose the best investment structure which meets our plan.
To summarise our plan:
We would like to build a portfolio of properties in NSW (where we based). We would like to buy positive or at worst, neutral cash flow properties, with the intention or creating additional cash flow. We are not worried too much about capital growth as we feel Cash flow is King. Obviously we would like there to be capital growth so it allows us to access the equity to purchase more property. We also have 2 kids, so estate planning is something we need to keep in mind. At this stage, our thinking is buying to hold and benefiting from the cash flow over the years.
We are very keen to purchase out investment properties in a trust as we know all the benefits (tax and asset protection). In South Africa (where we are originally from), the initial costs of transferring a property into a trust were alot higher than when purchasing a property in your personal name, which is why i always bought property in our own name opposed in a trust.
Correct me if I’m wrong, but there is no difference, in terms of initial costs, associated with buying a property in your personal name versus a trust? From my understanding, there are additional costs to setup a trust as well as annual auditing and accounting fees for a trust, but thats it. Stamp duty remains the same.
If this is the case, surely most investors are buying properties and building portfolios in their trusts? What are the advantages of buying a property in your personal name opposed to a trust?
Also, in South Africa, the Capital Gains Tax is much higher if selling a property from a trust. Is this the case in Australia?
Besides assets protection, a trust is a very tax efficient way of reducing the amount of tax you pay. From what i remember about trusts, money can be given to your beneficiaries (i.e your kids) pretty much tax free as they not earning a salary, hence aren’t liable for tax provided they under the threshold in terms of being liable for tax.
Lastly, obtaining finance is also a big factor in our plan. What are the banks views of applying for finance in a trust? Are the % loans the same as if buying in your personal name? Would finance be applied using my wife and my income?
Would love to hear from all of you who use trusts and those who stay away from them at all costs.
Regards,
RobbieMate, that is incorrect. In NSW you will also have to factor in land tax. There are no land tax free thresholds for trusts, other than fixed trusts, so you will be paying an extra 1.6% pa.
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
But land tax is applicable to both trusts and if you buy in your personal name right?
nope. An individual has a land tax free threshold of about $380,000 where they pay no land tax.
Some other disadvantages are no negative gearing.
I would probably suggest you look at using a fixed trust with the units held personally. Later on you can transfer the units to a discretionary trust. This will add great flexibility, but will come at a price as:
– more complex
– more costly to set up and maintain
– harder to get financeBut it is so much more flexible – you may even be able to transfer the units to your SMSF on retirement. Once there the property could be CGT free and income tax free
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
So with a fixed trust is the tax free threshold applicable?
Silly question, but who decides on the value of your land and how do they determine this value? Is it a simple calculation done by multiplying the size of your land by the value (per squate meter) of the land? Might get tricky if different suburbs have differnent values in terms of the land vlue?
Lets say you land value was just below the threshold, is it up to you to alert the tax office that its now over the threshold or is this something done automatically by the tax office?
Land tax is a State tax administered by the State Revenue Office in NSW. They use the values decided by some system – forget the details. SRO will notify you once you have to pay land tax. Also remember it is one threshold per person.
With a fixed trust you could get the threshold – if it is properly set up. Not all unit trusts are fixed trusts.
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
If it were me I would buy my first property in my own name. It can get complicated learning about trusts and investing in trusts and you are probably having enough trouble just getting into the market in the first place.
You want to protect yourself…yes. But buying with a trust might complicate things so much that there is nothing to protect.
I would get my first property purchase down first. Then look at using trusts for future investments once I am more confident at buying property.
ps. If the trust has no income lenders will take into account the income of the trustee. If the trustee is a company then the directors of that company.
Ryan McLean
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Email MeYeah, I think you should get one in personal names to take advantage of the CGT and land tax exemptions. But, if you have a spouse it is best to get it in the name of the lower risk spouse. make an asset protection plan on how to pay for this one – ie don't contribute to it!
Make sure the spouse has a will and that the will has an asset protection plan in place too. You would hate to be set up in business and then your spouse dies just as you were about to become bankrupt and she leaves you the house!!!!
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
By asset protection in your personal name do you mean getting sufficient life cover to pay for any outstanding debt of your property in the even of either one of you passing away?
No. But that is a good idea too. You should consider life insurance
You need to hold the asset in the low risk name so if the high risk person goes bankrupt there is less chance of losing the house.
This all comes in the planning on how you operate the system.
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
So the only real difference, in terms of costs, is the flat 1.6% rate for land tax?
So by purchasing property around $150k, the land value could be around $100k, which is $1600pa ($133pm) for land tax. For one property its not so bad, but if you have 10 it might quite high.
On the same note, if the value of the land is going up, im sure the value of the property is too (good sign).
I guess you would need to weigh up the land tax (1.6%) versus the potential savings in the medium term (tax) as land tax will be applicable for property bought in your own name once its reaches the threshhold.
If you also plan to only buy positve cash flow properties (from day one), wouldnt it make sense to use a trust structure to avoid having to pay tax on the addtional infome your properties are making?
There are some other differences in terms of costs.
More for legal advice and taxation advice and tax returns. Prob not much more if you are just buying a few properties.
The major added cost is the fact that any loss incurred by the trust cannot be used to offset your personal income.
I think a discretionary trust makes sense, especially if postive geared. Without a trust you have no flexibility. It can save you tens of thousands.
eg. a few years ago my mate purchased in WA. I told him to look at using a discretionary trust because he was the highest income earner and his wife stay at home with no income. He wanted to negatively gear to bought in his name.
A year later the property doubled in value so he sold it. Since it was in his name he had a $200,000 capital gain which increased his income by about $100,000. But his wife still had no income. If only he had used a 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
Dont forget land tax can be minimised by buying in different states. And buying after 31 Dec – off the top of my head I think it is settlement that counts.
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
Terryw wrote:Dont forget land tax can be minimised by buying in different states. And buying after 31 Dec – off the top of my head I think it is settlement that counts.Hi Terry, What happens after 31 Dec?
New year.
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
This is the date for that the land tax in NSW is calculated on. So buying on 1 Jan instead can mean you have 1 year without having to pay.
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
Terryw wrote:This is the date for that the land tax in NSW is calculated on. So buying on 1 Jan instead can mean you have 1 year without having to pay.ah I see, At first I thought there may have been something new coming up after 31 Dec. cool thanks
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