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Which state are you or your properties based in?
In NSW at least, discretionary trusts do not receive the land tax threshold. I believe the other states have similar rules.
The two commonly used strategies to minimise land tax are:
1. Use up the land tax thresholds you receive as an individual.
2. Spread your investments across different states the utilise the thresholds in each state.There is a good thread on somersoft that contains quite a lot of useful information:
There are a few issues to consider here. The main ones that spring to mind are:
1. Does the trust have any other assets or income? Discretionary trusts cannot negatively gear, they must carry forwards any losses until the trust makes a profit to offset against them. If you have other assets earning an income in the trust you can soak up the tax losses.
2. My understanding is that it is generally not a good idea to hold assets “in trust” for yourself (ie you are the trustee and beneficiary). It can cause tax issues in some cases. Also, trustees are required to act in good faith for the benefit of all beneficiaries, which may be a problem if you are also a beneficiary. Its usually recommended you set up a corporate trustee to avoid these problems.
3. Land tax – in NSW (and I assume most states have similar rules) discretionary trusts do not receive the land tax threshold meaning you are up for land tax (1.6% in NSW) on the full value of the land.
I would suggest speaking to an accountant who can sit down and discuss all these issues and your personal circumstances and objective s in detail before making a decision.
Hi Terry,
Could s115-30 (item 4) apply here or would it be overruled by s128-50?
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.30.html
Jerome I would say that in both cases it depends on how you structure your affairs.
For example, the US does not have a franking credit system. If you run through certain types of US entities you would be taxed at the corporate level, but then again at the individual level.
International tax can be a very complicated area – I would definitely see your accountant. I highly doubt the rental manager will take care of your tax obligations for you as that is your responsibility but I’m sure they would be happy to recommend an accountant in the US.
Residents of Australia are taxed on their worldwide income – so you will be up for tax in both the USA and Australia.
You will need to have an accountant in the US prepare your tax returns over there (I believe some areas in the US require you to lodge both a state and federal return – but I could be wrong). If you are late lodging I assume you could probably be up for interest and penalties on any outstanding liability.
Regarding the deductions you could claim in the US – I do not know but I’m guessing similar principles would apply.
In terms of Australia – I assume you are an Australian resident:
1. You must declare any foreign rental income in your Australian tax return (even you have have left the money in the US and not repatriated it).
2. You will receive a tax offset in your Australian tax return for any tax paid in the US.
3. Your deductions will be limited to the amount of any foreign income (ie – I don’t believe you can negatively gear foreign investments ?)You haven’t provided enough information to estimate your tax but I will give you an example assuming your taxable income in both the US and Australia is the $7,000 you mentioned.
US tax = $7,000 * x%
Australian tax = $7,000 * (your marginal tax rate – x% above)Read up on the concept of Net Present Value.
Hi Peter,
Companies are not recommended to hold investment properties, mainly because they do not receive the 50% CGT discount.
In terms of tax planning and asset protection trusts are a far more flexible option. Generally you should keep your business and investments separate to prevent them being exposed to litigation, so you may wish to consider setting up a separate trust.
The pros/cons of using a discretionary trust are:
1. Flexibility in terms of tax planning and minimisation when distributing profits from the trust.
2. Enhanced asset protection.
3. If the trust makes a loss, it is trapped in the trust and cannot be used to offset income until the trust makes a profit (unlike holding a property individually, for example, where you can offset the loss against your salary etc).To use a trust you would need the property to be positively geared (or expect it to be within the next few years) otherwise you will have tax losses accumulating within the trust and being wasted.
There is also the option of using a unit trust. However, you lose the flexibility of choosing where to distribute profits as the income of the trust must go to the unitholders, and the units are assets which could be exposed if you are sued. The benefit of a unit trust is it can allow you to negatively gear if you set it up correctly.
In the end it comes down to your personal circumstances and objectives – I would definitely recommend speaking to your accountant before making a decision.
I think there are generally three types of arrangement around living expenses:
1. Allowances included as part of your salary package. This will be included in your income and is taxable.
2. Living Away from Home Allowances (LAFHA). This is a type of fringe benefit, so would be tax free to you, and the employer would pay Fringe Benefits Tax.
3. Salary sacrifices, where the employer pays expenses on your behalf – another fringe benefit so tax free to you.Option 2 and 3 are only really viable if you are on the top marginal tax rate (46.5%) because it makes no difference in terms of cost to your employer.
Might be worth checking out how your remuneration package is structured and having a chat to an accountant to get the best outcome.
Hi amy,
You were on the right track, it should be a fairly simple calculation although we are missing a couple of bits of information:
IP Loss = 13,000 (given – im assuming this is the loss shown in your tax return? otherwise ignore depreciation)
add: depreciation (should be in your tax return if you have a copy, otherwise ask your accountant)
add: tax saving
= 13,000 x 50% x 0.37 (MRT of 37% and only one person working and able to claim the loss against income – both given)
= 2,405= Net Cash Profit (Loss)
Net Cash Profit (loss) / purchase cost = ROI
Are you looking to purchase the new property to live in?
Generally, its not recommended to purchase your house in a trust because:
1. You do not get the main residence CGT exemption and will have to pay CGT when you sell.
2. You will have to pay land tax (although some trusts do not).I know very little about family law, but I doubt having the property in a trust would help you avoid child support.
If you are buying as an investment, negative gearing will obviously reduce your income tax. Not sure about child support, but investment losses are added back for a lot of government income tests.
If you want to purchase alongside a family member or partner you should consider the implications in the event of a dispute or falling out.
In terms of salary sacrificing your mortgage payments, it doesn’t really work unless you’re in the 46.5% tax bracket. The reason being is that the employer will have to pay 46.5% Fringe Benefits Tax, whereas in your current situation they can pay you a cash wage and only pay 31.5-38.5% tax (being your marginal tax rate).
You could also consider moving in and renting out the spare rooms as:
1. You keep the main residence exemption for CGT.
2. You can deduct the property expenses and interest costs
3. You can later move out for up to 6 years and keep renting it out while keeping it exempt from CGT.
4. You save tax which you can put on your mortgage, and the renters help pay it off.The rules regarding the above are quite specific though so you would definitely need to seek advice before doing it.
Hi David,
Generally, if the property is not producing income you would capitalise the ownership costs. This means that you cannot claim any deductions for them in the year they are incurred, but they are added to the cost base of the property. When you sell, the cost base will be higher so you will make a smaller capital gain.
I think what’s been said above could be quite confusing. To clarify:
Basically, if you never sell the property (you mentioned renting it out or living in it), you will have to make an adjustment in your BAS to pay back the GST that was refunded to you. So you don’t get to keep it…
The next issue is claiming the GST back. If you lodge a BAS with a $20k refund, there is a very good chance the ATO will come back to you with a magnifying glass, or may limit the amount that you claim.
To answer your other question, if you bought the property when it’s finished you will NOT be able to claim any GST.
Tax is an very complex field especially if you’re not sure what you’re doing.
The big cost for a tax return is making your accountant sort through a mass of paperwork and calculate everything.
If you keep good records, file them properly and do a summary sheet of your income/expenses it will cost very little to have an accountant do it for you and get it right. All they have to do is plug in the numbers which takes 5-10 minutes.
If you do your own tax you have to do all the legwork anyway. The upside is for a small fee it is done correctly and you avoid any issues, plus you have access to your accountant’s knowledge which will probably save you tax in the long run.
I’m not sure it is possible…
The way you’re trying to structure the transaction is:
1. Build the home
2. Claim back $20,000 in GST that you paid to the builder.
3. Rent for over 5 years until it’s no longer a “new residential premises” and then sell GST free.If you rent it out for over 5 years, I think it ceases to be a “new residential premises”. This would most likely be considered a change in the creditable purpose. In this case, there would be a Div 129 GST adjustment required, and you would have to repay the input tax credits you claimed on the construction costs. Stumping up 20k+ to the ATO when you may not have any cash left isn’t a nice prospect!
It is still considered “new residential premises” if you rent and sell within 5 years. However, to avoid the above situation you have to show you are holding it for resale (and not as an investment). This could include actively marketing it for sale, etc. You will then have to pay GST when you sell so in either case I don’t think it will work.
I could be wrong though. Anyone else have similar thoughts?
Read:
GSTR 2009/4
GSTR 2000/24
http://www.ato.gov.au/government/content.aspx?menuid=0&doc=/content/00197808.htm&page=6&H6The best piece of advice would be to speak to a good accountant because there are a lot of things you need to take into account.
Do not use a DIY trust deed. It can cost up to a couple of thousand to have a lawyer set it up but if you want to be cheap now you may pay a heavy price later. The ATO has been paying a lot of attention to trusts recently (read Bamford’s case), so you need to make sure the deed is up to scratch and meets your requirements.
Apart from set-up costs, the only costs will be the annual $212 company fee for the trustee company and any accounting fees. If the trust only holds a property or two then it shouldn’t cost much to have your accountant look after the accounts and tax return.
The trust will claim any depreciation. As Terry mentioned its a good idea to use a corporate trustee because it can avoid a lot of mess.
A few things to think about though:
1. Are the properties negatively geared? A discretionary trust (DT) can’t use the losses (except in some circumstances) so the negative gearing benefits are lost. This is one reason to speak to an accountant for proper advice. Other structures (eg – unit trust) may be a better option for negative gearing.
2. DT’s also do not get the land tax threshhold (roughly 400k in NSW). Its common practice to buy a couple of properties in your own name first to use up the threshhold. Land tax on 400k is around $6,400 pa which adds up over the life of your investment! Obviously you lose the asset protection though.
Hi Kate,
My understanding is that it’s incorrect.
The reason is that the bank will require the trustee to guarantee any loans to the trust. If you have a corporate trustee, the director will be required to personally guarantee the loan. I believe this would still show up on your credit history.
The best piece of advice would be to speak to a good accountant because there are a lot of things you need to take into account, and you want to make sure you get it right now or you may pay a heavy price down the track.
A few things to think about though:
1. Are the properties negatively geared? A discretionary trust (DT) can’t use the losses (except in some circumstances) so the negative gearing benefits are lost. This is one reason to speak to an accountant for proper advice. Other structures (eg – unit trust) may be a better option for negative gearing.
2. DT’s also do not get the land tax threshhold (roughly 400k in NSW). Its common practice to buy a couple of properties in your own name first to use up the threshhold. Land tax on 400k is around $6,400 pa which adds up over the life of your investment!
3. You will be up for stamp duty and CGT when you transfer to the trust. Using the 400k example above, thats $13k stamp duty plus CGT.
4. Regarding the development – asset protection, liability, and tax planning would be important issues here. DT’s provide a great deal of flexiblility in this regard.
It’s worth noting that utilising a corporate beneficiary can be dangerous if not done correctly.
You’ll need to speak to an accountant to make sure you don’t get caught by Div 7A. Distributions made from a trust to a company beneficiary can be deemed an unfranked dividend. The company shareholder(s) can be assessed on the whole distribution, and will lose the benefit of any franking credits meaning you’ll have to pay the full 46.5%!
