Company’s and Tax

Alison,
Still learning here myself… but my understanding is that a trust is not a legal ‘entity’ for tax purposes and that tax benefits/liabilities flow through the structure to the beneficiaries who pay at their appropriate tax rate.

Any benefits retained by a trust are taxed at the top tax rate.

Places to start looking are Steve’s Wealth Guardian product and the book “Trust Magic” which has had numerous good reviews.

PS Folks, please jump in if I’ve just sent Alison in the wrong direction!!! [blush2]

Hi Glenn,

what’s the best vehicle for a single person?

Glenn – you talk about tenants suing but is that not why I have insurance? My public liability coverage runs to $12.5 million.

I would think that civil actions arising from other matters are really the only worry.

Even if you are single it is best to set up the structure to be as flexible as possible.

You may have the property for a long time and alot can happen in that time.

As previously suggested a corporate trustee is desirable to help in trying to keep your other assets protected.

As has been pointed out previously an insurance policy should help here.

This is true however, what if the wording of the policy means that the insurance company doesn’t have to pay? The company goes broke (HIH comes to mind). What if for some reason you are found criminally negligent? Or you have let the insurance policy lapse. These are some scenarios that come to mind.

Regards,

Glenn Wallace
http://www.businessadviser.com.au
These are just some general comments which should not be relied upon without getting professional advice in regard to your particular circumstances.

Alison,

I have recently set up a family trust with company trustee to hold our IP’s for asset protection purposes as others have described. Sought advice from the accountant, read Trust Magic and borrowed several books from the library.

I can’t see many taxation benefits because all the income from the trust has to be distributed to the beneficiaries so we’ll still pay 48.5% tax on that income anyway, although I’ll discuss strategies with the accountant further.

Lessons I have learnt so far:

If you use a LOC on your own house to fund the IP purchases you have to have a formal loan agreement b/w you and the trust, drawn up by a solicitor. Cost 1. The interest paid by the trust to you on the loan is income for you and an expense for the trust apparently.

You have to initiate the setting up of the trust BEFORE you sign a contract (in Vic check other states) to buy the IP in order to nominate the trust as the buyer for settlement otherwise the SRO might try to slug you double stamp duty.

If you as directors of the trustee company borrow funds to buy IP’s for the trust the bank will make you consult a solicitor about the director’s guarantee provisions of the mortgage. Cost 2

That’s if the bank is happy to lend to the trust at all, some don’t like company trustees so check first if you have a preferred lender. Our current bank is OK with company trustee but when I used a broker to compare what other lenders will offer us for 80% loans some said no to the company trustee.

The trust is seen as a completely different entity to us as individuals so the bank’s professionals discount package we were on as individuals wasn’t going to apply to the trust until I insisted and they relented, but the level of borrowings (which determine the level of discount) had to start at zero for the trust, not ALL our borrowings. So far the broker has found other lenders wouldn’t apply a prof discount package to the trust at all, so looks like we are sticking with our bank.

In NSW you pay land tax for any properties you buy for the trust.

I’m sure I’ll learn many more lessons….maybe others can post their own lessons and experience with trusts too,

skippygirl [biggrin]

In NZ I believe an ‘LAQC’ company is the best form of investment structure. It allows five share holders and any paper losses can be offset against the incomes of all of these people (eg children, non-earning spouses etc all become shareholders). Likewise any profits also, so the share given to your six year old son etc is likely to be entirely tax free.

Regards,
Si

Hi saskatoon,

Yes I’m going to work those magic trust tricks of Dale’s to death. I have already employed my daughter to help me print off letterbox flyers folding and deliver them, which she did on her scooter. Also, my travel costs etc in buying and re-marketing or managing the IP’s.

However, the learning I’ve gone thru about matters like the adverse effect on borrowing, and the solicitor’s cost to draw up a loan agreement – well, I wish someone had flagged those in a post beforehand! And Terryw’s recent post about the limit on Director guarantees for borrowing when you have two trustees well there’s another lesson. We should have used one director to max out our borrowing.

I think we should have a forum of lessons, tips and tricks from those who have lived them or come across them, what a great resource that would be and would reduce the need for people (like me) to post some indiv newbie questions.

Cheers
skippygirl[cap]

Terryw:
Anubus
What if your were at fault and the insurance didn’t cover you. eg you may have done some electrical repairs without being a licenced electrician – and the tenant is electricuted. Or any of a number of possiblities.
Terryw

Anubus:
If you do that you deserve to be sued and lose.
As for insurance companies going broke – the exception not the rule.
Ins Co. not paying – check the policy first.

Also insurance companies tend not too like paying out… So if they (not you or anyone else, but them) don’t think you have followed the rules, you aren’t protected.

Using Terryw example say if you need some electrical repairs done, and you ring up an electrican (but he has recently had his licence terminated, but lies to you, saying he does indeed have it), the insurance company will quite happily pay it out and then demand you pay them, since you used an unqualified electrican. You sue the guy, but he has no assets, so you can’t pay back the money. You lose ALL your assets – every single one – Period. So much for insurance, but hay check the insurance policy again, maybe they have a clause that protects you but not them, or perhaps they like dislike trying to recover money they have paid out….

So right now, you are basically entirely ‘naked’ or totally unprotected. Thats a great risk minimisation strategy….

Next time make sure you know your stuff, because you need to do a lot more learning on this topic, because the advice you have given out while better than absoultely nothing could be extremly dangerous.

Rgds.
Lucifer_au