Forum Replies Created
“If you established a hybrid trust however (cost is around $1,100 without a corporate trustee”. The price Dale has quoted includes a corporate trustee. I mentioned that this depends on your circumstances. Both Dale and I use the same deeds and I can assure you that you are not being ripped off.
Yes there are deeds which can be purchased online but unless you understand who the appointer should be, the trustee, the beneficiaries, who to issue special income units to and how this is calculated then in my opinion you are throwing $600 down the toilet.
You can buy a mattel porsche for $200 or the real one for $200,000. The difference is one works and the other doesn’t. Sometimes this is like buying online deeds without really knowing what you are doing.
Some bankers do not like HDT’s but it depends on who you are speaking with in the organisation. I have had no difficulties with HDT’s with Westpac Commercial Banking, ANZ Commercial Banking, St George Commercial Banking, Macquarie Bank, Suncorp Metway, GE Commercial.
It is more paperwork and their legal team does need to analyse the deeds so it will cost more in loan establishment fees.
Terry is correct. If you borrow the funds and gift them to the discretionary trust then the interest will not be deductible to you. Similarly if you borrow the funds and lend them to the trust and anything less than the interest you are paying then again that portion will not be deductible. So effectively you will loose out on interest deductibility for the $120K you borrow.
Sure you could on-lend to the trust but what would be the point. You would receive interest on the funds on-lent and also receive a tax deduction for the interest you pay to the financial institution. So the net result would be zero.
If you established a hybrid trust however (cost is around $1,100 without a corporate trustee – the use of a corporate trustee would depend on your circumstances) then you have a number of options. The trust could borrow the $245K and you borrow the remaining $120K and purchase special income units in the trust. Alternatively you could borrow the full amount and purchase special income units in the trust (with the trustee of the trust providing the property as security). Depends on the projected result (i.e. whether the property will be positively or negatively geared).
You also need to consider what is currently in your DT and whether it is conducting any business activities and therefore whether it would be unwise to include the commercial property in a structure which is exposed to business risk. This may not be the case but I do not know the answer from the facts you have provided.
Gross is right. You need to speak to someone experienced in these matters. Dale Gatherum-Goss is based in the outer suburbs of melbourne and is well versed in these matters. Contact him at http://www.gatherumgoss.com
James,
You could try Nick Moustacas at Strategic Wealth Management who is located in Bligh Street, Sydney.
Alternatively we are located at Norwest Business Park but a bit out of the way from Innery Sydney.
Terry,
Based on Section 104.10 it would be the 29th June as the date of disposal.
If finance was not approved then obviously the disposal would not occur (as the purchaser wouldn’t have funds to purchase the asset and the sale would fall through) and CGT Event A1 (dealing with disposals) would not apply.
Section 104.10 of the ITAA 1997 states that :
(3) The time of the event is:
(a) when you enter into the contract for the * disposal; or
(b) if there is no contract—when the change of ownership occurs.So if you enter into the contract for disposal in say April 2006 then this is the date of disposal of the CGT asset. If you have a long settlement i.e. 90 days it will have no impact on the timing of the event. The only way to defer the CGT is to enter into the contract in July 2006 or after.
Terry,
You may not know but we have a new office in Norwest Business Park in Bella Vista in conjunction with our Central Coast office.
Mike
The first issue to consider is whether the gain is on revenue account or on capital account. The facts are limited so you firstly need to determine whether this constitutes part of your business operations or whether it will be captured on revenue account as an isolated transaction.
Taxation Ruling TR 92/3 provides guidance in determining whether profits from ‘isolated transactions’ are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.
Paragraph 1 of TR 92/3 defines the term ‘isolated transactions’ as those transactions outside the ordinary course of business of a taxpayer carrying on a business and those transactions entered into by non-business taxpayers.
Paragraph 15 of TR 92/3 states:
If a taxpayer carrying on a business makes a profit from a transaction or operation, that profit is income if the transaction or operation:
(b) is not in the course of the taxpayer’s business, but
(i) the intention or purpose of the taxpayer in entering into the transaction or operation was to make a profit or gain; and
(ii) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.
Have a good chat to your accountant about this.
Michelle,
That’s a fair request. Being charged $330 to answer that simple question is, in my opinion only, not reasonable. I now know it’s not me because noone has called to ask me that question.
Gross, no blatant advertising for my firm. Just making comments on the fees. $330 – $550 per hour is the standard charge out rate for partners in accounting firms these days. With respect to profits you need to take into account overheads costs, etc but are partners earning over $500K per annum ? Many of them are. If I wanted to I could be relaxing in the Cayman Islands on a yacht but I couldn’t think of anything more boring so I choose to work. Since I have the choice I ensure my time is worth the effort.
Anyway that’s my thoughts in relation to fees. As Gross says a good accountant will help you build your business, structure things from a tax effective and asset protection point of view and in the end hopefully help make you wealthy.
Michelle,
I could very well be the person who quoted $330 for the hour consultation as I do charge that. Fees are always a difficult thing. If your accountant is well versed in trusts (hybrids, unit and discretionary trust), understands family trust elections and interposed entity elections and is able to ensure that you are structured well from an estate & retirement planning, asset protection and taxation flexibiltiy perspective then it does set that accountant from the majority of practitioners.
I know many clients who who told never to purchase in a trust but were never told about hybrid trusts (purely because the majority of public practitioners do not understand how they work). I have seen new clients recommended into companies for purchasing residential property (even worse as you lose the 50% CGT discount) and generally given very poor advice.
As the old adage says “you get what you pay for” most of the time. Sometimes however I do agree people get ripped off. To give a comparison though the Big 4 and medium tier accounting firms charged their partners out at $550 per hour.
But at the end of the day it is you who has to pay the bill.
TradeOff,
This is totally incorrect. As per my previous post the income is deemed to have been received for CGT purposes when the contracts have been exchanged NOT when settled. When the income is received is irrelevant.
Read Section 104.10 of the Income tax Assessment Act 1997. The example provided in the legislation makes it abundantly clear when income is recognised for CGT purposes. Income will be DEEMED to have been received in the 2005/06 year despite the fact the income was ACTUALLY received in the 2006/07 year.
I don’t think it is unfair at all. Basing it on settlement date would be unfair as it would allow people to take advantage of the CGT discount when they may not be entitled to it (i.e. they held the property for less than 12 months but had a settlement date to ensure they went over the twelve month period). Or alternatively move the gain into a year when they earn less income or even no income at all.
Remember Australia is the only country that did not retrospectively apply the CGT regime. EVERY OTHER COUNTRY (Canada, UK, US, France) retroespectively applied CGT so we don’t have much to complain about in that respect.
Section 104.10 of the 1997 Income Tax Assessment Act makes it clear and even includes an example. Sorry Michelle your CGT event has occurred when you exchanged contracts which sounds like March.
Disposal of a CGT asset: CGT event A1
(1) CGT event A1 happens if you * dispose of a * CGT asset.
(2) You dispose of a * CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
(a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
(b) merely because of a change of trustee.(3) The time of the event is:
(a) when you enter into the contract for the * disposal; or
(b) if there is no contract—when the change of ownership occurs.Example: In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.
The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).
Note 1: If the contract falls through before completion, this event does not happen because no change in ownership occurs.
Note 2: If the asset was compulsorily acquired from you: see subsection (6).
Land tax on special trusts (hybrid discretionary trust and discretionary trusts are considered special trust) are taxed at 1.7% of the land value. So $1,241 would be the land tax component on $73K.
Where adjacent land is disposed of and the event covering that disposal is not the same event covering the disposal of the dwelling, then the main residence exemption cannot relieve the gain arising on the sale of the adjacent land under Section 118-165 of the ITAA 1997. This is no different to the pre-existing Section 160ZZQ(4) ITAA 1936 which precluded the main residence relief where adjacent land was disposed of separately.
Taxation Determination TD 1999/73 makes it clear that, in the Commissioner’s view, land under a unit of accomodation which is subject to the main residence exemption does not qualify for the main residence exemption if it is sold separately from the unit of accomodation.
Yes there are strategies for minimising CGT on the sale of both properties (provided you do build on the new block and move into it ). Discuss with your accountant.
GST is a complex issue and something you need to address with your accountant. In particular refer to Miscellaneous Tax Ruling MT 2000/1.
I would agree that you find an accountant who can explain the margin scheme and determine whether it is suitable to your circumstances. Of course if you have already sold the property and not elected to use the margin scheme then it will be too late. However for future property sales it will be worth considering.
Gavin,
You are wrong. Under Section 104.10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. Section 104.10 is included below with relevant sections and examples in bold. Note this is taken directly from the Act.
You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
(a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
(b) merely because of a change of trustee.
The time of the event is:
(a) when you enter into the contract for the disposal; or
(b) if there is no contract—when the change of ownership occurs.Example: In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.
The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).
Note 1: If the contract falls through before completion, this event does not happen because no change in ownership occurs.
Note 2: If the asset was compulsorily acquired from you: see subsection (6).
Cata,
Just wanted to clarify one point. Even with a hybrid trust any losses incurred by the trust are still retained in the trust and carried forward (provided they meet the trust loss rules). These losses are not distributed to the unit holders as you seem to suggest.
For clients who have purchased a new residential unit and if it is not rented for a period of time then it is indeed possible that a loss will be incurred in the first year as depreciation deductions and capital allowances, etc may be such that they exceed the rent received (particularly if the property isn’t able to be rented out for a period of time). In this case the losses are retained in the hybrid trust and carried forward to the next income year when they can be offset again the gain made at the trust level.
I like using the names of Greek Goddesses for the names of my companies and trusts. Nothing more satisfying than knowing you have a multitude of Greek Goddesses that you control.
terry,
You can certainly sell property in a company structure without actually selling the shares. However any capital gains made will be taxed at the company tax rate of 30% and the 50% CGT Discount cannot be applied as companies do not receive this concession.
The next issue is how to get the funds out of the company. Do you pay out a dividend over time to the shareholders ? Do you put the company into voluntary liquidation ?
It is possible though to purchase properties and sell properties through a company. Due to the inability to access the 50% CGT Discount then this must be carefully considered. If however you are doing property developments or selling within a 12 month period then it’s something to discuss with your accountant.
I agree with gross. I post all of my information on the public forums and with people like Gross, TerryW and others also posting on the public forum I honestly am not concerned about the results group and what is posted in there.
Between this forum and Somersoft I doubt you couldn’t find an answer to a question in the public forum. Of course if you want specialised advice on property development structuring, complex tax advice, specialised mortgage structuring, etc then you will always have to consult with your team of advisors.
