Forum Replies Created
- Originally posted by rhysadams:
Could you let me know about running a Hybrid Discretionary Trust and distributing losses?
I’m no accountant, but from my understanding it’s not possible to distribute losses from any sort of trust.
What you can do with a hybrid trust though is borrow money external to the trust and use it to buy income units. That typically means that the trust would not incur a loss, since it wouldn’t have the interest expense, and thus could distribute a profit to the unit holder, who would then offset the loan interest against that profit.
I think this is only really useful if the trust holds negatively-geared investments.
GP
Originally posted by hellman:Pay 50% discount on CGT (so 15%)
Where do you get 15% from? The tax rate in this case is the beneficiary’s rate on half the gain. It would only be 15% if the beneficary was on a 30% tax rate.
Hybrid trusts can “transfer” (via ‘units’) the loss to personal incomeHybrid trusts cannot distribute losses. What they can do though is allow a high-earning individual to borrow in their own name and buy units in the trust, meaning the trust itself will distribute a profit.
GP
The primary reasons for using a trust are flexibility in distributing profits, which helps minimize tax, and asset protection.
GP
Originally posted by crgiron:If I set up a company … Novice investor
If you are planning to invest in property, as opposed to running a development business, then you may want to consider other investment structures in preference to a company.
Companies can’t get the 50% CGT discount that individuals and trust beneficiaries can, potentially requiring you to pay significantly more tax on sale (quite possibly 48.5% if the gain is large enough and the number of shareholders is small).
GP
Eleven,
Originally posted by Eleven:the asset is 100% protected
Small quibble: an asset is never 100% protected – especially not if you’re married!
And in that scenario it’s only protected against you being sued. It could still be taken if the trust itself (ie. the trustee) is sued.
Cata:
Make sure that you can change beneficiaries if you need to.Beneficiaries? Or do you mean trustees?
GP
I love those examples they always give: if you’d invested $X in XYZ shares in 1990, you’d now be a multi-squillionaire!
I notice they never give examples like: if you’d invested $X in AMP in 1999, you’d now have lost 2/3rds of your capital.
Or, if you’d invested $X in Air NZ in 1999, you’d now have lost over 90% of your capital!
Yes, it’s so easy. Just throw money at the stock market and grow rich.
GP
Originally posted by Eleven:It would be better to have a Pty Ltd as a trustee of the DT so in the worst scenario the tax bracket would be 30%.And franked dividends could be distributed to shareholders.
Are you sure this is what he said? A company as trustee is standard, but that “worst case scenario” would presumably be making distributions to the company, in which case the company would have to be a beneficiary. While I think the trustee company would be a beneficiary anyway, making distributions to the trustee company doesn’t sound like a good idea to me for asset protection reasons. The whole point of using a company as trustee is to have a disposable, worthless vehicle in that role. It seems to me the last thing you’d want to do is actually give that company some assets.
And if you have a beneficiary company (trustee or otherwise), you need to think carefully about who the shareholders are going to be. If it’s a high income earner, then taking even fully-franked dividends will still result in an overall tax rate of 48.5% (including Medicare levy). If you make it a low income earner (or multiple low income earners), then you’d better have a lot of trust in that person or those people, as they would then have total control over any funds distributed to that company. I think you could also make it a trust, but I’m not sure how favourably the ATO would view having a trust make distributions to a company it owns (you’d need to check on that).
my goals, which are (in order of importance for me):a-Tax Minimisation
b-Asset protection in case somebody sue me.It was mentioned in the thread on buying appreciating assets in a company structure that it might be better not to have these as primary goals (at least not official ones). See Coastymike’s message in that thread.
Cheers,
GPMunjy,
I’m only going from limited knowledge here, but…
Originally posted by munjy:the purchase of anything used by any business to be income producing is tax deductible
Not so. Only expenses can be claimed, where an expense is a non-recoverable outgoing. When an asset is purchased, all that’s happening is an amount of cash is being replaced with an equivalent valued asset. There is no expense (except possible transaction costs).
Most assets fall in value after purchase, which amounts to an unrecoverable expense, thus they can be depreciated to allow that loss of value to be claimed. However, land generally appreciates over time, and thus there is no loss that can be claimed.
If your business is setup up as a property investing business?Then I think the property held by the business might become trading stock. By my understanding, trading stock has to be valued at the end of each financial year and any loss or gain in value taken into account for tax purposes.
Not sure how that ties in with depreciation though. Perhaps in a property trading business depreciation doesn’t apply – but this is just a blind guess.
Cheers,
GPOriginally posted by Eleven:I think that if I am buying units from the HDT, that will allow me to deduct the interest from my personal income tax
It will, but it also means you will get all the income from the trust (or at least from the assets purchased with those funds).
So if the property is positively geared, where there is extra income after interest and other expenses, then your net position would be paying tax rather than getting some back. In that case, you want it going to a low-income earner. It’s only of benefit to you if the loan interest exceeds revenue from the trust.
Remember that special income units entitle the holder to all the income derived by the funds. If you try and distribute that income elsewhere, then you probably won’t be allowed the interest deduction as the loan would no longer be for income-producing purposes.
GP
Originally posted by coastymike:The main reason is that companies are not eligible for the 50% CGT discount.
I have personal experience with this restriction, and have had numerous headaches trying to live with it. To be a little fair to myself, I got into the situation before the 50% CGT discount was introduced, and a company structure otherwise seemed like the best idea at the time.
One thing I think that is often overlooked is the real tax rate when using a company structure if the shares are owned by a high income earner. It’s all well and good to say there’s only a few percent difference between the 30% company rate and the 24.25% top marginal rate with 50% discount (although those few percent can be a lot of money if the amount is high enough), but one also has to consider what they’re going to do with the money once it’s in the company tax-paid. The way I see it, there are only two real choices: take a dividend and use it, or use it within the company.
Taking a dividend when the shareholder is on the top marginal rate means the funds will ultimately have been taxed at 48.5% (including Medicare levy). That’s suddenly looking a lot worse than 24.25%. Having the company owned by a trust may be better (if you think of that in advance), but then why not just buy the asset in the trust in the first place?
Using the funds within the company, on the other-hand, can be quite a nightmare (assuming we’re talking investment rather than active business). To continue investing in the company structure leaves you stuck with the problem of no 50% CGT discount, and trying to invest through another structure using company funds can be something of a minefield. One foot wrong and it could all become a deemed dividend – and forget the franking credits. The rules are pretty tight.
As an illustrative example, consider some figures:
Say you have a $100,000 capital gain over a period of more than 12 months. In the hands of a high income earner, tax would come to $24,250 (ignoring any deductions). In a company, initial tax would be $30,000, but if a high income earner took it as a dividend, the final tax bill would be $48,500 (ie. the shareholder would pay an extra $18,500). If they tried to use it in the company but managed to get it deemed a dividend, I believe the tax would be the initial $30,000 then another 48.5% of the $70,000 dividend – or $63,950 in total. However, if it was in a trust and distributed equally to three beneficiaries with no other income, then each would get $33,333 and pay tax on $16,667 – by my calculation about $1,800 each or $5,400 odd in total (excluding Medicare levy). Even a single beneficiary with no other income would only pay about $11,000 in tax, plus Medicare levy.
I know which amount I’d prefer…
Cheers,
GPNote: these are only general comments based on my personal experience and should not be construed as any sort of advice.
Originally posted by munjy:is it possible for a company to use pretax dollars to purchase property
By this I gather you’re asking is it possible for a company to claim a tax deduction for the cost of property purchases.
While there may possibly be some special situations for certain types of businesses (although I can’t think what), I would say in general no.
Property is an asset and by my understanding, companies normally have to depreciate assets. For property, I would assume normal depreciation rules would apply (ie. on structure and fittings, but not on the land).
However, I’m really just guessing here based on my limited experience with companies. Coastymike or one of the other accountants would be able to give you a much more authorative answer.
GP
Eleven,
From my understanding, you can do all of that with just an HDT, except for the bit about transferring to super. If that’s important, then the separate unit trust may be necessary.
Not sure about having a trust as trustee of another trust. I wouldn’t have thought a trust could be a trustee, since it’s just controlled by its own trustee. I believe you could have the same trustee company for both trusts, but I was told it’s probably better not to for some reason (possibly a reason particular to my circumstances).
And why would you want to issue HDT units to family members? Wouldn’t it be better to just leave them all as discretionary beneficiaries?
I think item (f) would only be of use if the properties became negatively geared. If you want to borrow money for positively geared property, then I think it would be better for the trust (HDT) to borrow itself so that surplus income could then be distributed to low-income beneficiaries (ie. no unit holders).
Also, if you do want to transfer UT units to a super fund later on, make sure you check out all the rules governing property in super funds. From my understanding, they can’t be mortgaged or used as loan security, and they can’t have come from family members.
Just some thoughts. Seek professional advice for your own circumstances.
GP
I haven’t seen that resource, but I would imagine that if the directors act as guarantors, then the company would be able to borrow much the same as the directors could personally.
And one thing to consider regarding “investing” (as opposed to doing business) in a company is that you’ll lose the 50% CGT discount for investments held for more than 12 months. Other structures may be more suitable for investments.
These are just my personal opinions and should not be construed as advice.
GP
Originally posted by westan:if the entity is an australian one then you will need to pay CGT
And if the entity is a NZ one, with NZ trustees or directors, then you may still need to pay tax in Australia.
GP
Take a look at Leon Wilson’s “The Business of Share Trading”.
Don’t remember it having too much about tax and stuff, but it covers a lot about share trading and technical analysis. Nothing much about fundamental analysis though from memory.
GP
Originally posted by Cata:What is ISTM?
Shorthand [
]It Seems To Me …
GP
Cata,
So when you say your preference is for a discretionary trust, would you include a hybrid trust provided no units are on issue?
If so, then ISTM that a hybrid trust would be more flexible, being the same as a discretionary trust if no units are issued, but with units available if circumstances favour their issue (eg. negative gearing).
GP
Originally posted by Cata:Hybrid trusts are good but my preference is a Discertionary Trust.
My understanding is that a hybrid trust is the same as a discretionary trust if no units are issued.
GP
Originally posted by Terryw:if a family trust election needs to be declared (ie there are losses or dividends over $5000 pa)
I believe the limit is $5000 of franking credits per beneficiary, not the actual dividend amount.
GP
Zen1,
Originally posted by zen1:where you can put an asset in a trust name but still get negative gearing benefits. I just got off the phone with my accountant, she said I can’t put say an IP under a trust and still get a negative gearing benefits.
You can use a hybrid discretionary trust, which is a discretionary trust that can also issue units. To negatively gear a property in the trust, the following scenario would be typical:
– High income earner borrows from bank in own name using property to be purchased as security.
– That person buys special income units in HDT.
– Trust buys property using funds obtained from special income units.
– Net income from property must be distributed to unit holder each year.
– Unit holder claims personal tax deduction for loss due to loan interest being more than net income.
If you search the forum you’ll find more information on hybrid trusts. And Dale Gatherum-Goss’s “Trust Magic” is worth buying:
http://www.gatherumgoss.com/shopping.htm
GP
]
