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1. Yes, feel free to email me.
2. Upon becoming an Australian tax resident, there are various tax implications, eg, the market value of any CGT assets you own will become their cost base for Australian tax purposes. It is usually unlikely that double tax will apply because of the Double Tax Agreement between Australia and the UK. The DTA usually grant exclusive taxing right to one country or if both countries can tax the income, one country will usually provide foreign tax credits for the tax already paid in the other jurisdiction.
Eddie
[email protected]I think you've got the idea.
1. P&L gets closed off to the beneficiary accounts as "share of profit", based on how the amounts have been distributed to each beneficiary.
2. When real cash is paid, the payment will simply be coded to the beneficiary accounts as "drawings".
Each beneficiary will pay tax on their share of the taxable income of the trust. Be careful because the taxable income of the trust may not always be the accounting profit of the trust.
Eddie
[email protected]Terryw wrote:Dan42 wrote:Terryw wrote:Hi Daniel
$8,000 per year is a big loss!
Did you know that CG cannot be offset by income losses? I have never had an income loss so am not too sure how it works, but this is something you should discuss with an accountant.
What I think it means is, using your above example, you will have to distribute the $120k capital gain and still keep rolling over the income loss in the trust until other income can be used to offset it. The 50% CGT discount can apply to the CG if it is distributed to an individual.
Hi Daniel,
This is not correct. Capital Gains CAN be offset against income losses. It is only Capital Losses that must be offset against capital income.
You mentioned that your accountant quoted you $1000 for a trust tax return / financials. This seems high to me. For one rental property in a trust, you should be able to get it done for about half of that.
Dan
Dan,
You sure? I am not an accountant and have no losses to offset so I am not sure – though I will have to deal with Capital losses from shares next year.
My understanding is If it was a person, then the capital gain would be added to the person's income, so a low or negative income would mean the CG would be offset.
But with a trust, I thought the income retains its character and is passed on through to beneficiaries. So if a trust has a income loss and a capital gain they are treated separately. The capital gain is distributed. I don't think it can offset the loss before being distributed.
Any accountants out there who can confirm? Eddie? It may work out better if I am wrong.
Sorry guys, been on holidays!
The rules are :
1. A capital loss can only offset a capital gain.
2. A revenue loss can offset both income and capital gain.Now the tricky bit – can a revenue loss in a trust offset a capital gain derived by the trust?
The law defines the "net income" of the trust to mean "the total assessable income of the trust estate … as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions".
It is the "net income" of the trust that will then be assessed in the beneficiary's hands when distributed, albeit the character of each type of income is generally retained (recent cases have started to cast doubt on this long held principle).
Therefore, in my view, to determine the net income of the trust, any revenue loss will be offset against the net capital gain and the reduced net capital gain is then distributed to and assessed in the beneficiary's hands.
Obviously, for the losses to be available, the trust will need to make a Family Trust Election.
One thing though – I am surprised by various reports that accountants were not familiar with trusts. Trusts are one of the most fundamental aspects of our tax system (and will continue be so, unless the Henry Review does something drastic with them) and accountants are repeatedly trained on the subject. Having said that, be aware that in Australia, anyone can call themselves an accountant. In my view, always go with a Chartered Accountant or CPA because these are accredited professional bodies.
Eddie
[email protected]Terryw wrote:CRJI think CGT would be payable on the value of the shares transfered – but you raise an interesting point. What happens if the company sells one property?
Yes, CGT will apply to the sale of the shares, in which case, provided that the shares have been held for at least 12 months, the 50% discount may apply.
If the company sells one of the properties directly, the company pays CGT without discount. The gain will become part of the retained profits of the company but because the company has paid tax on the gain, the underlying shareholder will get a franked dividend when the gain is eventually distributed out of the company.
I don't think there are any unusual tax implications to the purchaser. Whatever they pay will become the tax cost base of the shares.
Eddie
[email protected]jxuereb wrote:Hey guys,Getting my head around trust structures. In the Accounting books what are the entries for the distribution at the end of the financial year? I know they are paper entries but I'd like to see what the double entries look like. Can't seem to find an example in my books or online.
When its a company the profit gets closed off to owners equity right via a general journal entry?
Thanks
Instead of going to owners equity, the distribution goes against the respective beneficiary accounts to which the distribution is made. However, you have to be careful that the accounting and tax distributions are made in accordance with the trust distribution resolution and the trust deed. Case law supports a "proportionate approach" when there is a difference between taxable and accounting income. Hope that help!
Eddie
[email protected]The main residence exemption applies to a "dwelling", which is defined to include "any land immediately under the unit of accommodation". However, generally speaking, a "unit of accommodation" must be a building, a caravan, houseboat, or other mobile home. Therefore, unless your partner had lived on the vacant land in a dwelling as described, my view is that he will have difficulty applying the main residence exemption, ie, any capital gain derived will be subject to CGT. If he has held the land for at least 12 months, the 50% CGT discount will apply.
When you calculate the CGT, you can include incidental costs on purchase AND sale as part of the cost base of the property, which includes stamp duty, legals, valuation, etc. The interest may also be added to the cost base as a holding cost (including items such as land tax, rates, etc), provided that a tax deduction has never been claimed on the particular expense.
Eddie
[email protected]I agree with Terry – a trust probably provides the best asset protection outcome for rental properties but be careful with the tax residency status of the trust – generally, if the trustee is not an Australian tax resident, the trust will be a non-resident for Australian tax purposes and that will pose Australian, as well as NZ tax issues. Also, there might be attribution issues in NZ. You will definitely need advice on this one.
Eddie
[email protected]PosEnterprises wrote:Thats interesting Richard because it seems that Chan & Naylor like to push the field of Trusts. So what structure are accountants recommending then for asset protection and interest deductiblity?Any accountants care to give their thoughts. I am glad that their are finance brokers here saying that finance is the first field you look at before going out purchasing a property.
Thanks again Richard with your information.
I have always steered clients away from hybrid trusts, long before the ATO expressed their view on these trusts. Never actively promoted them and when clients queried their use, I had not been comfortable. There are just too many issues to worry about (eg, s51AAA), which fails the "sleep test" for me (ie, if you can't sleep at night because of a risk you have taken on, then it was not worth doing in the first place). I do like discretionary trusts though because of:
1. Asset Protection – None of the beneficiaries have any present entitlement to the income and capital of the trust at any time until the trustee makes a resolution. This is arguably one of the most powerful asset protection device in my mind.
2. Flexibility in Distributions – Coupled with a corporate beneficiary, high income family groups can cap the maximum tax rate to 30%, subject to any Division 7A issues. Again, very useful if discretionary trusts are used as an investment vehicle to build wealth.
3. Capital Gains Discount – A capital gain derived by a discretionary trust will qualify for the 50% CGT discount if the property has been held for at least 12 months and provided that the gain is distributed to individuals.
Someone also mentioned privacy. You can achieve privacy by using a corporate trustee and a nominee company as shareholder. The nominee company will merely hold the shares in the corporate trustee in trust for the "real" owner under a Declaration of Trust. Relatively simple to do.
Eddie
[email protected]grasshopperinvestor
Just a brief caveat – be careful with what you are doing with that letter saying you went into the arrangement solely for tax purposes – the tax law contains a general anti-avoidance provision (Part IVA) which empowers the Commissioner of Taxation to unravel an arrangement where the dominant purpose of entering into the arrangement is for one to obtain a tax benefit.
Let me put it this way, if I were the tax man, I would love to get hold of that letter!
Eddie
[email protected]It's also quite expensive, as I gather, because the "instalment warrant" (code for borrowing by super funds to buy property) rules are reasonably new and exotic. The last time I look, the lawyers were charging something like $8K to set one up.
Eddie
[email protected]Terryw wrote:Trusts can negative gear – losses from an investment property can be offset by other trust income, but you cannot offset personal income. This shouldn't be a problem with being self employed.I would urge you not to buy in the same entity as your business. If you do, then you will be exposing the house to creditors if your business fails. Set up a new trust – there is no stamp duty on trusts in QLD so it will be pretty cheap. Your business can then distribute income to the new trust to offset any losses.
I agree with Terry. I certainly would try not to put the property into your existing trading trust (subject to what I'm going to say further below), ie, I would set up a new trust to own the property. Given the non-arm's length relationship of the trusts, however, you will need to ensure that the lease must be at market value rent (ie, yes, the trading trust can lease the property off the new trust). Otherwise, the tax man wouldn't be very happy. If there is still a net loss in the new trust, you will need to see if you could put income into the trust to soak up the negative gearing loss.
This might sound contradictory but if the business in your existing trust is very low risk and the trust carries on a "personal services income business" or a non-personal service business, it might be more beneficial to buy the property in the existing trust. That way, the negative gearing loss will directly reduce your business profit in the trading trust. Your accountant should be able to give you more guidance on this.
The finance side shouldn't be too different or difficult. The only thing the bank is interested in is security and your ability to make repayments. Using the trust could possibly include your personal guarantee but that's essentially the same position as owning the property in your own name. There will be one more piece of paper to sign but not too much more expensive (if at all).
Let me know if you need an accountant specialised in property in Brisbane.
Eddie
[email protected]Hi Dave
LOL, fortunately or unfortunately, depending on how one sees it, no. That wasn't me but I do know who you are referring to though.
If I have time to publish books, I would have preferred to write anything other than tax since I am immersed in it every day!
Eddie
[email protected]Need to see a lawyer, M, and if the lawyer is not tax savvy, need to get the lawyer to do this in conjunction with a tax accountant. A change in the terms of a trust may potentially give rise to a trust resettlement, which may, in taxation terms, cause the deemed disposal of all assets of the trust and give rise to capital gains tax, stamp duty, etc. I don't necessarily think an addition of an appointor would do that but having said that, I am not sure if trust law allows you to nominate an appointor subsequent to the formation of the trust. Best to seek advice on this one.
Eddie
[email protected]Bamdam
I am relaying info here. Don't quote me. Heard the arrangement from a lawyers' presentation. The general idea is – you gift cash equating the equity you have in the property to the trust. No CGT or duty because it is only cash (not property). The trust then loans you back the funds by taking a second mortgages over the property – again, no duty (mortgage duty has been abolished in QLD). You get the benefit of negative gearing because the property is in your name. If a creditor sues you, the bank and your trust have first and second mortgage over the property, thus providing you with the asset protection.
I haven't looked at the fine prints of how the legal documentation would flow and cannot obviously guarantee it would work but this is the general concept.
Eddie
[email protected]Probably not worth the paperwork shuffle. However, as an idea, if you have kids, get them to mow the lawn, clean the properties, etc, so you could soak up their low tax brackets. Not a lot of dollars here but may still be worthwhile.
Eddie
[email protected]Hi Grace
The term "adjustment period" refers to, very broadly, the time period one needs to monitor the change of use of an asset to make adjustments for the GST previously claimed (or not claimed) when it was originally purchased. For properties, the general time period you have to monitor the use of the property is 10 years.
Therefore, if you claimed all the GST on the construction costs on your property on the basis that you were planning to develop and sell but instead rent the property out as residential premises for a period within 10 years, you will need to pay back some of the GST claimed. The tax office provides that you need to make an adjustment on a reasonable basis. While there is no hard and fast rule on what is "reasonable", the ruling provides the example where you use the total return on the property (rental income and ultimate sale price) to apportion the GST claim. On this basis, the longer you rent out the property and therefore derive more rental income, the bigger the GST claw back. On the other hand, the higher the amount you can sell the property for, the smaller the GST claw back. I suggest that you speak to your accountant to work out the amount.
Yes, I think confirmation from the real estate agent proving that you have been actively marketing the property will suffice.
Eddie
[email protected]Grace
The previous view adopted by the tax office was that you had to pay back the GST on the construction costs.
However, there has been a recent change – The ATO now accepts that where the developer continues to actively market the property as being available for sale, at the same time that it leases the premises, the developer is only required to make a partial adjustment.
Check out ATO ID 2008/114 at http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~ATO%20ID%202008%2F114~basic~exact&target=JA&style=html&sdocid=AID/AID2008114/00001&recStart=1&PiT=99991231235958&recnum=1&tot=1&pn=J:::J.
Eddie
[email protected]Shoot me an email, Dave. I can give you some referrals.
Eddie
[email protected]Dave
Your accountant is probably right. To get the negative gearing benefit, the property needs to be held by a high income earning individual, unless you can get income into a trust to utilise the negative gearing loss.
The issue with holding the property in an individual's name is the lack of asset protection, which would have been safer if the property is held by a discretionary trust instead. Have you considered protecting the equity in the properties via a discretionary trust through a gift and mortgage back arrangement? That way, the equity in the properties are protected in the trust via a second mortgage while the individual owner of the property (presumably you) will still enjoy the negative gearing benefits.
Eddie
[email protected]SteveMcKnight wrote:There are definitely benefits of further education, and both the CA and CPA programs offer the opportunity to sharpen your accounting skills.
I'm a CA, and even though I don't work in the industry as such any more, the ability to think through a financial issue in a logical and probelm solving manner is of great help.
Gaining a professional qualification is not a walk in the park though. It requires a lot of hard work, especially if you want to learn and benefit as opposed to simply trying to pass.
Perhaps I'm bias, but if you plan to work in a large accounting firm, or work in big business, then I think CA is the better qualification. Afterall, the ICAA claims to be #1 in numbers
Cheers,
I have been brainwashed enough as Steve to recommend a CA qualification.
It really does open a lot of doors.Eddie
[email protected]
