I spoke to my Acct today regarding setting up a trust structure. I am yet to buy my first IP but want to do it the right way from the start. My husband is a high income earner and I only work 1 day per week. I asked my Acct about a hybrid trust but he advised against this and is going to set up a trust with a company as the trustee with both my husband and myself as directors. My investing strategy is capital growth but initially a consequence of this will mean that the property is negatively geared. My understanding is that the trust will carry the loss until one year that it makes a profit and the loss will then be offset against it. How will this help reduce my husband’s tax in the early years?
Any advice on trust structures would be greatly appreciated.
ss2306,
There are a range of expenses which can be claimed by a trust that cannot be by individuals.
Negative gearing tax benefits still can exist in a hybrid trust, with the individual borrowing money from the bank in own name. The individual uses funds to buy units in hybrid trust (asset of individual). Hybrid uses cash paid by individual to buy IP without borrowing money.
Individual will claim interest and bank fees on the loan in their perosnal tax return. Trust shows rental income less property expenses. The trust will have a profit which is then distributed to the individual which is being offset by the expenses in loan interest and fees.
Why did your accountant advise against a hybrid trust?
It seems to me that a hybrid trust would be exactly what you want. It would allow you to negatively gear the investments with your husband offsetting the interest losses against his other income. Any capital gain could then be distributed to you.
I can’t see why you’d want to carry losses forward in a trust instead. That won’t help your husband reduce his tax at all.
It might be worth asking another accountant for a second opinion.
GP
You should probably get a second opinion. Most accountants know little about trusts.
Firstly having two directors of a company these days is not a good idea. Directors can go down with the company, so it is best to have one, just in case… No use both of you going bankrupt if sued.
Having one director will also mean having only one of you guarrantee the loans – another risk reducing strategy. It will also help you borrowing capacity later on. You don’t earn much ATM (assuming you only work one day) so it may not help much with servicing now.
So two directors is not good.
Having a discretionary trust will also not enable your husband to reduce his personal tax as per Woodsman’s post above.
You may be able to keep the losses to offset n the future, but that could be years away.
Talk to a different advisor!
Terryw
Discover Home Loans
Mortgage Broker
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
I agree with Terry. It sounds as though this accountant knows very little about hybrid trusts. The question I would be asking them is why should you carry forward the losses when you can utilise them through the use of a hybrid trusts. I would rather have the funds in my pocket for the years that it is negatively geared than to have them carried forward in a trust. Talk to your accountant about the ability of a hybrid trust to issue special income units and the impact of this for structuring purposes. If they look blank then go elsewhere.
Secondly Terry is correct. I would not be recommending two directors at all. The old adage woman of substance and man of straw applies here (well as I tell my clients in this day and age it can be vice versa) but anyway you should make sure things such as your family home and personal assets are in your name (you are less likely to be sued) – be careful of stamp duty implications of transfer of any existing assets. And your husband should be ensuring he has as little assets as possible. Most of my clients are happy that the husband is only worth $500 and the wife is worth hundreds of thousands. Go Girl Power !!
Thirdly if the accountant mentions CGT on the redemption of the units by the bybrid trust then you can discuss capital vs special income units with them. Care must be taken as to the rights attaching to units whose redemption constitutes a disposal by virtue of CGT event C2 under s.104-25.
In particular if income units (under which the unitholder has no rights to capital and/or capital growth) are redeemed, then it could be argued that no capital gain would accrue to the unitholder. Make sure your trust deed is drafted correctly.
I think it is time for a second opinion.
Please forgive my ignorance but why you need a company as the trustee? Can’t she or her husband be a trustee? Won’t setting up a company only add more running cost?
Originally posted by zen:why you need a company as the trustee?
You don’t need one, but it adds a layer of asset protection in case the trustee gets sued.
GP
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