Cata,

Thanks for that, I was obviously reading it incorrectly.

Cata just to clarify from reading your post almost seems to indicate that if you run your business through a trust and the trust (and assume the trust holds asset) then a corporate trustee will provide total asset protection.

This is not the case as under State’s legislation a trustee has the right to be indemnified out of the assets of the trust if the assets of the trustee are insufficient to meets its obligations to the creditors.

Ive heard of some people claiming that because the company is a $2 company then that is the only assets available to the creditors. This is not correct as it ignores the RIGHT TO BE INDEMNIFIED FROM THE TRUST ASSETS.

A good reason for having separate trusts for your business tangible assets and leasing them to your business trading trust.

1. Very important to understand the responsibilities of properly managing a HDT. Also be cognisant of the advantages and disadvantages of operating through a HDT.

2. If you purchase all the income units then YES the TOTAL income should be returned to you. Although most trust deeds will allow distribution of income to other beneficiaries when special income units have been purchased and some of the income is distributed to another individual other than the income unit holder you will have interest deductibility issues based on Munro V FCT and Phillips V FCT.

3. May want to consider borrowing in the trust name, redeeming some of the special income units, using the refinancing principle and then distributing some income to other beneficiaries. Must be done properly and well documented.

4. Depends on the trust deed. Trust deed should allow distributions of capital to a wide range of beneficiaries.

5. Redeem units, apply refinancing principle, and then distribute according to the trust deed rules.

6. Income units can be issued at any time. Discuss with your accountant re acquisition and/or redemption of special income units.

7. Discuss with your accountant.

8. Need to discuss with your accountant asset protection. Corporate trustee still has a right to be indemnified against the assets of the trust. Essential to make sure business assets are held in a different structure to investment assets. Low risk investment assets generally are OK to have a low risk individual as trustee. Corporate trustee can be an overkill.

9. Generally better to keep family home in low risk individual name. Transfer to another party (.e.g trust) will result in stamp duty, land tax and loss of main residence exemption. Need to weigh up pros and cons.

10. Would love to help.

Cheers

Mike

If your friend is currently a resident for tax purposes and the assets are held in Australia then ceasing residency for tax purposes will not crystallise CGT.

The link that hellman provided should be printed out, given to your friend and they should provide this to their accountant.

It clearly states “If you stop being an Australian resident for tax purposes, you are taken to have disposed of assets THAT DONT HAVE A NECESSARY CONNECTION WITH AUSTRALIA for their market value on the day you stopped being a resident.”

Im beginning to wonder how some of these accountants havent been sued for professional negligence. The appalling advice I have seen lately disgusts me.

Once again Terry seems to know more than the average accountant. Isnt that a sad reflection on the profession when a mortgage broker knows more than a persons accountant (no offense intended Terry.) You ever thought of changing from mortgage broking to accounting. We need more competent accountants.

Rebecca,

Here is a little information with respect to trusts and how things work in the case of bankruptcy.

Firstly a trustee is personally liable to creditors in respect of debts and liabilities incurred on behalf of the trust. It is a statutory right found in the trustee’s legislation in all States. The right to an indemnity provides the trustee with a right in the nature of an equitable lien or right over the assets of the trust. The creditors cannot make a claim against the assets of the trust but are subrogated to the trustee’s right to be indemnfied.

So how does this provide protection. Well lets assume you run a business through a discretionary trust with a corporate trustee. Let’s also assume you have a separate discretionary trust with a different corporate trustee over your investment property. If in this case the business was sued the creditors will only have the right for the trustee to be indemnified over the business assets. Because the investment property has a different corporate trustee in a different trust then that investment asset is not available to the creditors. That is why a corporate trustee is the preferred entity as oppossed to an individual trustee. If you had two discretionary trusts and both had the same trustee then yes you could have a problem. The creditors might claim that they have a right to be indemnified not only against the assets of the business trust but also the assets of the investment trust. The risk is low but always subject to the Courts. However if the investment trust and business trust have two totally different trustees then the assets of one trust are effectively protected against claims made against the other trust. Thats the asset protection.

Imagine that you are a business owner and have a company which you are also a director. The company is sued and they then sue the directors. Lets assume your investment assets are held in your individual name instead of in a separate trust with a separate trustee. Well you have a problem because the investment assets are the assets of the directors and available to the creditors when they take action against the directors. Not so when the investment assets are in a different trust with a different corporate trustee.

That is why some people like to have a separate trust and sometimes even a separate corporate trustee for every investment type. I have some clients who have a separate trust for every single investment and also a separate corporate trustee. For the average person this may be overkill and in fact would be very expensive. However for others it provides a secure peace of mind.

At a minimum however I would always suggest keeping your business assets and investment assets in two separate structures. Good asset protection.

There are also advantages with respect to streaming of income as suggested by gross, the refinancing principle which is rarely discussed and sometimes even more importantly the estate planning issues.

Its been around for a while now. Ive been purchasing it through the Taxation Institute of Australia for the past few years.

In my opinion one of the best value books on trusts available. Easy to read, lots of diagrams and great for the professional.

I think it would be too heavy for the novice but for those interested in a good in-depth discussions on ALL types of trusts this is the book.

Has your sister considered having her husband entering into a salary sacrificing arrangement with his employer for the interest component.

Subsection 138(3) of the FBTAA considers the situation where a benefit is provided jointly to an employee and an associate. It states that where a benefit in respect of the employment of an employee is provided jointly to the employee and one or more associates of the employee, the benefit shall be deemed to have been provided to the employee only.

In National Australia Bank v. Federal Commissioner of Taxation it was held that where the benefits are provided jointly to an employee and an associate, the benefits are deemed to have been received solely by the employee.

If the husband was to enter into an SSA with his employer to salary sacrifice the loan interest and other expenses in relation to an investment property which he jointly own with his spouse the benefit of the payment of the interest and other expenses is being made jointly to him and his spouse who is considered to be his associate. Therefore subsection 138(3) of the FBTAA will deem the benefit to have been provided solely to him.

So the husband will be liable for FBT but subsection 24(1) of the FBTAA allows a reduction in the taxable value of certain expense payment fringe benefits (the ‘otherwise deductible’ rule). Given that the interest would have been deductible then it will not be subject to FBT.

The advantage is that the husband will be able to use gross dollars to pay for the interest expense resulting in a significant tax advantage to the couple.

Please discuss with your advisor and note that this does not constitute advice but merely another option to consider.

Redwing,

What amazes me is that some people are making recommendations to people to quickly setup a trust and move their one IP to the trust in case they get sued.

When you talk to these people they are working in an extremely low risk industry (usually an employee for a major corporate), have one investment property, basically have no equity and are worth under $1M. I mean its crazy to transfer an existing IP into a trust and incur the stamp duty and possible CGT if your chance of being sued is negligble.

But then they are told that you could be out mowing the lawn and a rock hits someone in the eye and they sue you for $20M. What then. Well if you have a net asset base of $200K then the chances of them getting $20M are pretty slim. So your $200K is a risk. Sure but life is about assessing risk and the costs of mitigating that risk. If you insured against everything single risk in life then your insurances would be astronomical.

I actually had a client tell me once that his insurance policy against anyone making a claim on his assets was a russian associate who would ensure that the claimant wouldnt have a tongue or fingers so speaking or writing down the claim would be impossible. I conceded that in that case his asset protection was probably pretty good.

Seriously its about risk management, risk mitigation and assesing the costs vs benefits. Unfortunately fear is a powerful tool and has been used many times to sell many types of products.

Holding an appreciating asset in a company (other than an active asset and residential investment properties are deemed not to be active assets) would be a terrible decision. You would loose the 50% CGT discount and pay a flat tax rate of 30% on the capital gains.

You could sell the shares in the company as opposed to selling the asset itself but you may find a vendor not willing to take on a company share as opposed to purchasing the property outright.

Some of my clients do have an additional trust at the top being a unit trust. The units are then issued to the hybrid discretionary trust and special income units issued to the appropriate individuals. The benefits of this structure, although slightly more complex, is to allow the asset to be transferred to a SMSF at a later stage (note if residential property is held in a HDT then it cannot be transferred to your SMSF). The other advantage is with respect to possible stamp duty savings.

With respect to costs if someone is charging $1,200 then they are loosing money. ASIC charges $800 for registration fees and a lawyer will be charging around $400 – $600 for the trust deed. If the accountant is merely copying past deeds and not preparing new ones by a qualified lawyer then they are in breach of copyright. Accountants are not allowed to prepare legal deeds. I think $2,500 for establishing a company AND a trust (excluding stamping costs) is quite reasonable and comparative for providing advice re structuring, establishing the structures, applying for tax file numbers and completing the appropriate resolutions. Did the accountant also consult with you on the structure, apply for appropriate registrations, deal with the appropriate resolutions, etc. If they did then I would argue they made nothing on setting up the structure for you. Id be concerned about an accountant who establishes something for nothing. In my view they are either poor (i mean if they keep doing things for cost then how will they ever make money) or they make it up through higher ongoing accounting fees for preparing the accounts, etc. Ive seen some trusts setup for $400 and the ongoing compliance costs are around $1,200 – $1,500 per annum (with one investment property in them). This can be done for around $500 so you might get caught out later on. If however they have decided to give their time away then good on them. Im not a registered charity so wouldnt even deal with someone who wanted to setup such a structure for $1,200.

Why would you want to hold property in a unit trust with all the units being held by the individual? It provides no flexibility with respect to distributions of profits when the investment becomes positively geared. It might be good while negative gearing but what if the person obtaining the negative gearing benefits looses their income and you want the partner to then gain the benefits. If you transfer the units then CGT will payable on the difference between the market value and cost base of the units. This can be effectively managed through the use of HDT and the issue of special income units. Also as CATA stated it provides poor asset protection. The units could be held by a discretionary trust but then the individual would loose the negative gearing benefits. If however the units were held by a hybrid discretionary trust then its a different matter.

Cata just one issue. A trust cannot be sued. It is the trustee of the trust that is sued in the case of litigation. That is why a corporate trustee is the preferred entity, with the company holding nothing more than issued capital (for two shareholders this would be $2 issued capital) and for greater security a sole director.