Forum Replies Created
“And you know as well as I do that income from a trust must go to the guarantor of the Loan for that property anyway, so you don’t get this benefit to distribute to all family members until the property is neutrally geared and sits stand alone in the Trust.”
Why must the income go to the guarantor of the loan ? If an individual has established a hybrid trust and they have purchased special income units then that individual is entitled to the deduction on the loan taken out to acquire the income producing units. This is no different to an individual purchasing an investment property using their high income for servicability but the parents going as guarantor with their main residence as security. Using this same logic are you therefore suggesting that an individual would not obtain a tax deduction for purchasing an investment property in their own name with their parents as guarantor ? The provision of security over a property does not determine interest deductibility. It is the purpose for which the borrowed funds are used. Refer Ure v FCT, FCT v Roberts and FCT v Smith.
An analysis of trusts also needs to taken into account estate planning issues, the refinancing principle (which can result in significant benefits), income distributions to beneficiaries, capital distributions to beneficiaries (which can also significantly impact on the CGT result) and possible stamp duty savings on asset transfers. So as Michael states just looking at land tax is but one component of a thorough analysis.
Agreed that trusts are not going to provide much protection in a family court which is why one should also be considering a binding financial agreement before entering into a defacto or marriage relationship.
With respect to asset protection what cases suggest that a trust with a corporate trustee does not provide adequate asset protection. The recent Hanel v Oneil case and the recent amendments to the Corporations Act would seem to suggest to the contrary. What court rulings are you referring to that would indicate otherwise ?
With respect to land tax in Vic the current “aggregation” rules are going to be repealed. These are replaced by a rule stating that aggregation of trust land will only occur where multiple properties are held in the same trust. Where a taxpayer is trustee of several different trusts, separate assessment will apply in respect of land held in each trust.
Trust property held under different trustees will not be aggregated. This is irrespective that they have similar beneficiaries. Beneficiaries also will not be taxed at that level. Further, trustees will continue to be separately assessed for land which they own beneficially. These rules apply equally to special trusts and excluded trusts.
Given that the proposed laws will still require a reassessment of current strategies. Certainly for holding commercial properties this may not be a major issue as the tenant is usually responsible for all outgoings, including land tax, so it will be interesting to see if this increase can be passed onto the commercial tenants.
Not deductible under Section 8(1) of ITAA or Section 25-25 as a borrowing cost. Refer to Ronpibon v FCT and Maddalena cases. Would ordinarly form part of the capital cost of the asset.
Where you use your main residence for income producing purposes and have claimed a portion of rates, interest, etc. you will be entitled to a partial CGT exemption.
CGT is calculated by total CGT multiplied by percentage of floor area not used as main residence multiplied by percentage of period of ownership, where that part of the home was not used as main residence equals taxable portion.
The problem with claiming that asset protection is the main reason for restructuring or structuring could lead to a lawyer arguing in court that the only reason you did so was to defeat the creditors and therefore the structure would be ineffective as the courts could apply the claw-back provisions. The 2 year limit would no longer apply. Asset protection should never be the primary objective.
Actually to make both the ATO and bankruptcy courts happy you should be saying number 1 Estate and Retirement Planning
Another good reason why assets should never be purchased by individuals, except for the main residence.
Ive been advised by tax lawyers that the word asset protection should be used in conjunction with the word ESTATE PLANNING. Why ?
Because if the reason you transfer your assets into a trust is to protect them then the question might be to protect them from whom. Creditors ? Well then the bankruptcy laws of 24 months do not apply where the sole purpose was to defeat the creditors. So be careful otherwise even those assets you thought were protected might be clawed back.
Remember there are three major reasons for structuring 1. estate and retirement planning 2. asset protection 3. taxation planning.
The real question should be why should you never hold appreciating tangible assets in a company. The main reason is that companies are not eligible for the 50% CGT discount. This is an enormous loss of tax savings by purchasing appreciating assets through a company.
There are various strategies if one does want to operate the business itself through a company and have a trust holding the appreciating assets and licensing these back to the company.
However companies are required for some concessions such as the R&D concession. This 125% tax concessions is only available for company structures and no other structure.
Contributed Capital to a non fixed trust includes amounts settled on or contributed to the trust.
To the extent that the distribution exceeds the the amount of available profits the distribution is treated as being a return of contributed capital.
A return of contributed capital is treated under the capital gains tax rules. The amount of returned capital will reduce the cost base of the members interest in the trust. If there is no cost base or the cost base is reduced to zero, a taxable capital gain will arise.
A return of contributed capital will result in CGT Event E4 ocurring. You will need to discuss any return of contributed capital with your advisor as it will possible result in a CGT event.
Once you have contributed capital (e.g. gifted money to a non fixed trust) any return of such capital to any of the beneficiaries will result in a CGT Event E4. Proceed with caution.
Cata,
In this instance you are technically incorrect. Greatpig is correct. Under Div6AA of Part III of the ITAA “unearned” taxable income of a minor for 2004/05 will be taxed as follows:
– $0 – $416 taxed as normal (if no other income, then tax is NIL)
– between $416 and $1,446 greater of (1) 66% of excess over $416 and (2) the difference between tax on the whole of the taxable income and tax on the taxable income other than the unearned txable income.
– more than $1,445 – 47% on the whole eligible income.The rules apply to income, including capital gains, derived by the minor directly or through a trust. Where the minor is a resident, the special rules do not apply if the relevant income is $416 or less. However, the availability of the low income earner’s rebate effectively increases this threshold to $772 if the minor has no other income.
Cata,
Don’t disagree that strategies can be developed for protecting your family home, etc through the use of a discretionary trust, without the stamp duty and CGT implications. Agreed that these strategies are best discussed with an advisor and not in the forum and is why I didnt want to make any comment on them.
Would be interested to hear your strategies on negative gearing through a standard discretionary trust. Not quite sure how you get around the test in Ure’ case re purposes for borrowings but always willing to discuss these issues. Ill take this one offline.
I’ll also qualify that with any structure I recommend to my clients I always instruct them to seek the advice from a solicitor/lawyer as there may be many factors that impact on their decision. From my perspective I am purely concerned about tax but they also need to consider insurance issues, legal issues, family court issues, etc. which are all outside of my area of expertise. Personally I wish more accountants and lawyers would work hand in hand regarding structuring because it would save a lot of pain later on for those clients.
Didnt realise you are a new member but welcome.
GreatPig,
Capital losses are treated differently to revenue losses. The trust loss provisions do not relate to capital losses. These capital losses should be able to be carried forward and offset against any future capital gains made by the trust. The capital losses can not however be distributed to the beneficiaries to be offset against any of their personal capital gains.
With respect to a related company and revenue losses you will need to discuss with your accountant whether a FTE needs to be made for the trust and whether an interposed entity election needs to be made for the company.
Cata,
Asset protection is not the only reason that people are using hybrid discretionary trusts. Unless a trust can issue special income units (neither a unit trust or discretionary trust can) then how can you negative gear through these entities. Most of my clients have hybrid discretionary trusts to obtain the asset protection benefits of a trust AND to obtain the negative gearing benefits associated by having a hybrid trust. What about the refinancing principle ? Another fantastic tax planning opportunity only available through the proper use of a hybrid discretionary trust.
For those who want to transfer residential property to a superannuation fund at a later stage may also want to have a more flexible/yet more complex structure where a unit trust holds the property and all the units are owned by a HDT. If the residential property was purchased in a HDT however this could not be transferred to the Super Fund. This cannot be done with residential property held in a discretionary trust. It is a breach of the SIS Act.
I agree that they are complex vehicles but if managed by a competent accountant then it is not overly complex. The flexibility from a tax perspective is considerable. The other structures have their benefits but also their disadvantages. That is why a one size fits all will never work for everyone. For some people a HDT will be useful for others a Discetionary Trust may provide sufficient advantages whilst for someone else a Unit trust or combination of one or two of these may be appropriate.
The setup and ongoing costs are no more expensive than a standard unit or discretionary trust. As far as the deeds are concerned all my trusts are prepared by Chris Batten and his team in Macquarie Street, Sydney. Considered by most to be one of the finest tax specialists when it comes to structures. His team includes some of the finest lawyers in Sydney so I have no concerns regarding their deeds. For the more intricate matters they are also available to answer questions for us practitioners.
Blue,
TerryW has given a pretty good breakdown of how the hybrid trust operates. You also need to be sure
1. The trust deeds are in place before the exchange of contracts;
2. Appropriate resolutions will need to be made with respect to the issue of special income units, purchase of the property, etc.Income will need to be distributed to the special income unit holders based on their holdings. If you have issued all the special income units to the highest income earner then they will need to receive all the income from the rental property otherwise you will have an issue with respect to deductibility of interest on the loan.
Obviously you can issue special income units and redeem them and reissue as you and your accountant so desire but you need to be aware of the implications of doing so. Sit down with your accountant on this one.
Trust losses will need to be carried forward but this is subject to a number of rules regarding the carrying forward of trust losses. If the trust has made a family trust election then the rules are a bit more relaxed but again their are pros and cons associated with a FTE. Again discuss with accountant.
With respect to your third questions you can redeem the units and then reissue them to another beneficiary. Again another chat with the accountant.
You will also need to discuss with your accountant whether you want to purchase the property in a hybrid trust or in a unit trust where all the units are owned by a hybrid trusts. There are some fantastic planning opportunities if you purchase the property using this structure as opposed to purchasing the property directly into the hybrid trust. Extra costs involved but you need to be aware of the future benefits.
Hope this helps.
Terry,
I agree the information available on lawcentral in particular is fantastic. Sorry if it came across that you shouldnt refer people to these sites..lol..didnt intend that. I think it is great that you are giving people the power to increase their knowledge.
I just know that LawCentral and ClearDocs does not allow you to establish a Hybrid Trust online and some people may think that they can purchase a discretionary trust and purchase the property in that trust and then negative gear. As you know this is not the case and I know you have warned people about this before.
Just wanted to make sure Collie didnt waste $137 for no reason.
Keep up the good work Terry.
Be very careful. For $137 I would think that what you are purchasing is a discretionary trust. If you want to obtain the benefits of negative gearing, ability to refinance and convert non deductible debt to deductible debt, ability to transfer property to another trust without incurring stamp duty, transfer the property to your super fund at a later stage, etc. you will need a unit trust that holds the property with all the units issued to a discretionary hybrid trust and all the income units in that hybrid trust being issued as appropriate. Depending on whether you have a corporate trustee or not (remember this structure requires two trustees) then the cost will be between $2,000 – $3,500. You might be thinking gee that is a lot of money. But remember that purchasing an investment property through a trust and later purchasing a private holiday home, boat, holiday, etc (usually non deductible but with the above structure it can become deductible) you can save over $100K.
I respect TerryW and he is probably one of the most helpful people on this site but I would be careful referring people to cleardocs or lawcentral as they may act on your advice, setup a discretionary trust, purchase the property in the trust and then wonder why all the losses are trapped for years to come. I like you and don’t want to see a potential law act against you mate.
Do not try to do this on your own collie. Leave it to the experts. You might save money now trying to do it yourself but you will in all likelihood get it wrong and you have wasted your money. I have seen many other accountants get it wrong and they are meant to know this stuff.
The fee for ongoing work would depend on the number of properties, etc but if it was just one property in the trust we charge our clients around $1,000 per annum to prepare the financial statements, complete the tax returns, prepare appropriate resolutions, etc. Not sure what others are charging but im sure others can give an indication as well.
Please seek professional advice.
Jon,
A seperate structure for undertaking developments were the income will be treated as revenue rather than capital is wise.
However a trust will provide a higher degree of flexibility with respect to distributions. Although the company will pay a tax rate of 30% on profits it may be possible to in fact pay a much lower rate by using a trust. You may decide to distribute to children (if under 18 penal rates will apply but still some benefit), wife, brother, sister, mother, father, etc. Sure you could setup all these people as shareholders but what if you leave someone out or you want to remove a shareholder and transfer their shareholding to other people (the General Value Shifting Provisions may come into play).
Similarly what if you want to transfer the renovated property to a related party or even yourself and minimise your stamp duty obligations on the transfer. This is very difficult with a company but very easy with a unit trust.
Have a chat to your accountant but generally a trust will provide a higher degree of flexibility that other structures.
Jon,
A seperate structure for undertaking developments were the income will be treated as revenue rather than capital is wise.
However a trust will provide a higher degree of flexibility with respect to distributions. Although the company will pay a tax rate of 30% on profits it may be possible to in fact pay a much lower rate by using a trust. You may decide to distribute to children (if under 18 penal rates will apply but still some benefit), wife, brother, sister, mother, father, etc. Sure you could setup all these people as shareholders but what if you leave someone out or you want to remove a shareholder and transfer their shareholding to other people (the General Value Shifting Provisions may come into play).
Similarly what if you want to transfer the renovated property to a related party or even yourself and minimise your stamp duty obligations on the transfer. This is very difficult with a company but very easy with a unit trust.
Terry,
I am located on the NSW Central Coast so more than willing to assist those up this way. I usually refer people from the Sydney region to Nick at Strategic Wealth Management as I understand that a lot of people like to make face-to-face contact and Nick is well placed in Bligh Street. I also work in conjunction with Chris Batten and he has a lot of respect for Nick so I feel comfortable referring him. At the same time if you are located in Northwest Sydney (Baulkham Hills District) or on the Central Coast then we can certainly assist.
Nick from Strategic Wealth Management is based in Bligh Street Sydney. I know that he deals with Chris Batten from Macquarie Group Services who is probably one of the most knowledgable individuals with respect to structuring.
Ive also heard good things re Edward Chan from Chan & Naylor but not sure who he deals with in respect to trusts.
Either of these individuals im sure will serve you well.
