I’ve been exploring the possibility of setting up a trust or company and putting my house into this trust structure. I can then rent my own house from the trust. This way my trust (to which I will be a beneficiary) will earn the rent income and the trust will be taxed at 30% (less than for me becuase I’m on a higher tax bracket).
There are other more technical benefits making it a Win Win.Whilst it’s not a new thing, does anyone know more about it or done it themselves?
Also, must you pay stamp duty to transfer the house from me to the trust/company?Any thoughts would be appreciated.
Thanks
JamesStriker
Email MeLots of posts about this, try the search function.
Basically, if you sell to the trust, you have to pay stamp duty. You lose capital gains exemption on your PPOR, etc. You should charge yourself market rent. Is there a reason you want the house out of your name? Fear of losing it through legal action etc..
Try the search for more infoScott
Hi James. Yes, you will need to pay stamp duty on the current value of your home when you transfer it. This may or may not be sustantial.
If profits are retained in trust, they will be taxed at 48.5%.
If profits are distributed to the beneficiaries, assuming you’re one of them, you will be taxed at your marginal rate.
If one of the beneficiaries is a P/L then, yes, they will pay only 30% tax on distributed income. In that case you will have one P/L as trustee and another P/L as a beneficiary, along with yourself and whomever else you choose when the deed is written.
Between the stamp duty and two P/Ls, plus the trust deed, you may be up for considrable expenses to put this structure in place. If this cost is not prohibitive to you and the structure is suited to your long term goals, then that’s fine.
Michael
The idea of selling you PPR to a Company or Trust and then renting it back yourself is, I am dead certain, definitely not allowed by the ATO. I think it was a case Phillips v FCT, but I’m open to correction here.
You can sell or transfer any asset to a trust. The ATO has no power to stop this.
I am not familiar with that case, but it is likely a tax issue hinging on income and allowable deductions, not an ownership or transfer issue.
Just taking a stab in the dark, I’d say the case you’ve quoted probably had something like:
1. The owner transferring the asset at well below market or appraised value, thus paying less or no stamp duty.
2. Some type of creative accounting where deductions were made that should not have and income was not declared that should have been, both to the wrong party to minimise tax payable.
3. Had something to do with self-managed super funds (SMSF), borrowings, etc. A SMSF is a trust and you cannot transfer residential property into a trust that is not at arms lenght (ie the trustee/previous home owner can’t rent it).
This last restriction is from the Superannuation Act 1990, not from any tax law.
Of course, legally you are not renting it back to yourself. You, as an individual, are renting a property held in trust by a trustee for certain beneficiaries. It is a clearly defined legal structure.
Anyway, I’ve talked to both ATO and OSR staff regarding this issue in June and July this year and they have failed to tell me I cannot rent back a property I’ve transferred to another party, even if it’s a trust.
If the information you have is correct, it is critical you post the source of it here, because it would change how trusts may be used.
Michael
Have a look at TR 2002/18, Income tax: home loan unit trust arrangement.
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR200218/NAT/ATO(This is a Tax Ruling on renting you home from your Unit trust)
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Good one Terry. I had know idea of the ruling, but I came close in my point #2:
Some type of creative accounting where deductions were made that should not have and income was not declared that should have been, both to the wrong party to minimise tax payable.
The crux of it is in point #8 on that link:
In the situation under consideration in this Ruling, an individual taxpayer borrows money to acquire units in a unit trust and incurs the interest expense – not the trustee.
It applies to unit trusts where the individual is providing finance by purchasing units and claiming interest on the loan to buy the units as a tax deduction.
You CAN sell or transfer your home to your trust and rent it back, though.
Everythings fine if the trustee borrows the money and all the tax calculations remain internal to the trust.
That is, the occupant/beneficiary has not set up an “artificial” tax arrangements through unit trusts, but are just beneficiaries.
So it is clear: do not borrow money to buy units in a trust that will buy your own home so you can rent it back and claim the interest as a deduction.
What you can do is this: sell or transfer your home to the trust with the trustee securing the mortgage.
The obvious difference is in the second scenario there is no contrived tax arrangement nor is the beneficiary claiming tax deductions.
As I pointed out above, it is likely a tax issue hinging on income and allowable deductions, not an ownership or transfer issue.
And so it was.
Thanks to Kelly and Terry for the heads-up and information, respectively.
James, assuming you take the correct tax approach to the structure, you should be fine. So if you have a unit trust, don’t borrow money to buy units so your trust can buy your house. If an accountant is suggesting this, alarm bells should ring.
However, if they are suggesting the trustee secure funds to purchase (if not owned outright by yourself), you are talking to the righ person.
Michael
Can someone explain the reason why you would do what James Cameron has suggested.
From what I understand from his post, if he places the property in either a trust or company, he says that he will be taxed at a lower rate than his marginal tax. He seems to be suggesting that his property will be making a profit and paying some amount of tax. Why would you want to do this?? And on top of this he would have to pay capital gains tax on sale, plus if the property was put in a discretionary trust, he would have to pay land tax.
On the other hand if he were continue to own in his own name and not pay any tax and his property is capital gains tax free.
Seem to me all James is interested in is, paying extra tax!!
The only explaination I can come up with if that he is worried that he could lose his house because of his occupation it at risk due people sueing him. If that is the case, and he had a partner, wouldn’t it be better to transfer to his partner.
I would appreciate if someone could explain what I am missing about all this, to me his suggestion just doesn’t make sense.
I had a chat to the ATO about this topic….out of interest. They gave me three points to consider.
1. The purpose of the plan. The ATO said that if the idea was to claim deductions that you would not normally be able to claim, ie. rates, maintenance etc, they would consider it a tax avoidance scheme.
2. Capital Gains Tax – you loose the PPR exemption…..knew that one already.
3. Losses are quarantined in the trust.
The biggest thing the ATO had and they couldn’t drive this point home strongly enough was that they would consider this to be caught by Part IVA (Anti-avoidance section) as a scheme designed to avoid the payment of taxes.
I’m just throwing this out on the site for others to comment on. Perhaps Michael and Kaye have something to add.
Hi David. I can’t explain James strategy, you’ll have to ask him, but when you said:
Seem to me all James is interested in is, paying extra tax!!
I don’t think this is correct. You are right that James will pay extra tax, especially at set up, but I don’t think it is his only “interest” to pay more tax.
I understand that with the scenario he has put forward it seems that it is all outgoing to set it up, and the future benefits may seem dubious, at best.
However, there are benefits of having your own home in a trust:
1. Trusts are good for 80 years. This means that, provided the beneficiaries are identified in the deed, you could have the assets providing financial benefits to two, three or possibly four generations of the one family.
If you owned your home, when you sell at retirement to cash in, it is GCT exempt. That’s fine. But if you want your kids (now adults) or other relatives to benefit from the asset, they would have to buy it, pay stamp duty, etc, when you retired. If every generation did this the amount over time may be substaintial.
However, by keeping the asset in the trust, when you retire you can still receive the benefit of the income stream wihtout selling it. When you die, the income stream benefits will go to other beneficiaries, etc.
If you, as trustee wish to sell it when you are retiring, you still have that option, and depending on how you income split it (say between husband and wife, kids, grandkids, etc), you could still pay zero tax.
My point here is that few people are setting up their invesment structure for more than retirement age, or if they are, it is only up unitl they die.
Also, CGT is a boogeyman. It scares too many people into making the wrong decision.
2. Trustee can evolve over time. While the trustee may remain the same (say a P/L), over the years the directors can be added or altered so that it is progressively “handed over” to the next and subsequent generations.
The wealth and control of the wealth remains in the hands of the people it was intended to provide for.
To answer some of your specific questions, again, not knowing James intentions:
From what I understand from his post, if he places the property in either a trust or company, he says that he will be taxed at a lower rate than his marginal tax.This could be true. If James is earning good money, having a P/L beneficiary may be a better way of paying less tax.
If the company is the owner of the asset and not a trust, there are exemptions at 15 years for assets producing income. It works out no different to CGT exemption.
He seems to be suggesting that his property will be making a profit and paying some amount of tax. Why would you want to do this??
In a trust, any undistributed funds will be taxed at a flat rate of 48.5%. If this isn’t much more than James’ personal flat tax rate, it may make more sense to pay the extra tax and leave it in the trust for the trust to re-invest.In a company, profits will be taxed at 30%, and the same may apply. Horses for courses.
While minimising tax as much as possible, I would be pleased paying $50K of tax than paying $20K of tax, all things being equal. Generally, the more tax an entity pays, the more profit it is making.
And on top of this he would have to pay capital gains tax on sale, plus if the property was put in a discretionary trust, he would have to pay land tax.
The trust does not have to sell it for 80 years and the CGT is based on the beneficiaries income tax for that year, and so the tax payable may be quite low or nil, as mentioned above.The P/L could sell after 15 years and effectively have it CGT free.
Land tax may or may not be an issue. It depends on the property value.
The only explaination I can come up with if that he is worried that he could lose his house because of his occupation it at risk due people sueing him.
This could be true.If that is the case, and he had a partner, wouldn’t it be better to transfer to his partner.
What if his partner pays more tax than James? The situation would be worse. Also, all the trust benefits are lost, ie, the ability to distribute what income types and amounts to which beneficiaries; the 80 life; the asset protection; etc.It also may involve James’ partner applying for a loan, which they may not be eligible for, regarless of income. I don’t know their personal and financial situation, I’m just pointing out reasons why it may make less sense to transfer to a partner than transferring to a trust or P/L.
It all comes back to purpose, strategy and goals.
Michael
Hi Kelly.
I had a chat to the ATO about this topic
I know you know which this is, but I’d like to clarify for other readers:
The topic is:
Using unit trusts to borrow money personally to purchase units from the trust so it can buy your own home so you can rent it back and claim the interest on the money borrowed as a tax deduction.
The topic is not:
Renting back your own home after you have transferring or sold it to your trust.
It is ok to sell transfer your PPOR to your trust and rent it back. Just DON’T borrow money to buy units from the trust to buy your PPOR and then claim back the interest on money borrowed.
If you have a trust deed that does not allow units, then you can have no problems, because there are no units for you to buy and claim interest as a deduction.
If you have a unit trust, do not claim the interest relating the the units used to buy your PPOR as a deduction.
All other interest on money borrowed to purchase units for OTHER assets are deductible.
1. The purpose of the plan. The ATO said that if the idea was to claim deductions that you would not normally be able to claim, ie. rates, maintenance etc, they would consider it a tax avoidance scheme.
Exactly. Remember, the PPOR costs are now paid for by the trust, so this is not the issue. It’s not about the council rates, or anything, being claimed as a deduction by the owner, because they’re not claiming them! All this is internal to the trust.The issue is the tax deduction resulting from the interest on money borrowed to purchase the units from the trust.
was to claim deductions that you would not normally be able to claim
Remember, you’re not claiming them, the trust is. If “rate $1,300” show up in your personal tax return, you’re asking for trouble. Your not claiming a deduction for rates, maintenance, etc. It is an expense to the trust.2. Capital Gains Tax – you loose the PPR exemption…..knew that one already.
I pointed out some reasons above why you would prefer to “loose” the CGT exemption if it fits your strategy.3. Losses are quarantined in the trust.
Yes. No negative gearing benefits that I’m aware of, but will be offset against future income years, which is far better than nothing.Also, you get to choose when you’ll bring the loss forward, which works well when you want to retain profits inside the trust (and not pay 48.5% tax) and not distribute them.
they would consider this to be caught by Part IVA (Anti-avoidance section) as a scheme designed to avoid the payment of taxes.
Understandably so. If I were to claim someone else’s travelling expenses as my own, they would fine me, or worse.If I were to claim deductions myself in what is an otherwise personal financial matter, the same applies.
From Terry:
This is a Tax Ruling on renting you home from your Unit trustIt is not about the trust claiming council rates as a deduction on a propery you rent from the trust, whether you previously owned it or not.
It is about an individual claiming deductions they would otherwise not be allowed to claim.
That is, the ineterest on the money used to buy the units is not deductible for the property they occupy.
So if you want to borrow money to buy units in your trust to purchase your own home with so you can rent it back, DO NOT claim the interest as a deduction.
Michael
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