I’ve recently set up a hybrid trust and bought a 2 bedroom unit in QLD. The owner is the family trust and for FYE 2005, if the rental income does not cover the expenses, the trust will incur a loss, will the loss be distributable to me (being a director of the corporate trustee)?
Secondly, which type of expenses can i claim against my own income and which expenses belong to the trust:
1) travelling cost to research property
2) depreciation of property fixtures
3) repairs to the property because there was a fight just prior to settlement and it will not be able to attract tenants if otherwise.Thanks in advance
Cheers
johnWant to join financial independence before 31 years old, currently 25
Trusts cannot distribute losses. Even Hybrids can’t do this. Also none of the above expenses would be claimable against your own income. The trust would be able to claim them against its income. I don’t know about travelling costs though.
With a hyrbid, only the interest expenses would possibly be claimable against your peronal income.
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
jcls79,
Has the hybrid trust issued you with special income units ? Did you use the money from the purchase of these units to fund the property purchase ?
I don’t know about travelling costs thoughThe trust can provide a travel allowance
thanks everybody for their replies.
So I’ve heard about negative gearing and I thought the losses can be claimed against your own personal income. If the trust is not possible to distribute losses, why would anybody purchase investment properties via trust structure?
Thanks
johnWant to join financial independence before 31 years old, currently 25
jcls,
Maybe you don’t quite understand how the hybrid trust structure works but that’s ok because neither do most accountants. Anyway it works as follows:
1. You go to the bank and borrow say $500K
2. You then use the $500K to purchase special income units in the HDT.
3. The HDT uses the funds to purchase a property.At the end of the year lets say the following happens :
The HDT earns $20K in income from renting the property and expenses of say another $10K (note that INTEREST is not included because the interest is for purchasing the units by YOU.) SO you will have a net effect of $10K income.
This then gets distributed to you as the, lets assume, sole unit holder and so you have income of $10K. Then the $30K interest you are paying on the bank loan gets deducted from your $10K trust distribution to give you a net deduction of $20K. Remember you are claiming the interest deduction for purchasing income producing units. The hybrid trust is not claiming an interest deduction.
Does that make sense. This is the basics only and I would suggest you see an accountant.
Now if the income from the property is $20K and your expenses from running the property (excluding interest) are more than the rent then yes you can’t transfer anything because there is no income. On the converse however I would be looking at the actual property because such a property could be a highly poor investment (assuming you don’t have extremely high depreciation deductions which send it into negative territory) and maybe something you should divest of in such a situation (NOTE I am not recommending this at all – see your accountant).
Coastmike
What’s happening with this property is that the loan is taken out on the trust name and I am the guarantor of the loan. the numbers for the property are:
* 10K rent
* interest payments of 6K
* annual management cost (insurance, body corporates, rates) are 4K
* deductions are 4K
* repairs are 3KExcluding the interest payments, the trust incurred a loss of $1K, considering I am the sole unit holder for trust. When I buy units in the hybrid trust, I believe I also buy the trust income/loss. Thus, i am entitled to claim the 1K trust loss against my other income.
Assuming my salary is 40K, my taxable income (accordingly to theory), should be 33K (being 40K – 6K of interest – 1K of trust loss)??
Cheers
johnWant to join financial independence before 31 years old, currently 25
Just to correct myself, the numbers should be:
* 10K rent
* interest payments of 6K
* annual management cost (insurance, body corporates, rates) are 4K
* depreciations are 4K
* repairs are 3KCheers
johnWant to join financial independence before 31 years old, currently 25
jcls
Unfortunately you have financed the property purchase through the hybrid trust. Not quite sure whether you sought professional advice before undertaking the transaction but in this case the losses are trapped in the trust. You will need to seek professional advice about the ability to carry forward the losses.
Sorry I don’t have good news. It’s soo important to get things right at the beginning.
jcls,
To get the loan out of the trust, I don’t know if you could perhaps refinance the IP by getting the loan in your own name so you could buy units and then pay back the trust loan. Whether or not that would be worthwhile might depend on how much it would all cost to do (especially if you have fixed part of the loan).
And it wouldn’t cover that last $1K of loss. I think the only way to avoid that would be to either increase your rent or try and decrease your costs. Otherwise you’ll just have to carry it forward (which will also require professional advice due to the special trust loss provisions) until you make enough profit to cover it.
Cheers,
GPAs an aside, I have seen at least two clients who have hybrid trusts with the loan in the trustee’s name – a company. It appears that not everyone that has one understands how the work and how they should be used.
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 have a question about a non hybrid discretionary trust where unlike HDT I can’t buy a special income units. Can I still claim interest cost and how do I go about it?
Also can I use an equity in a trust name to purchase another property like if it were under my name?
I am reading a family trust book by N E Renton but still not clear with the mechanic of it.
Your answer is much appreciated.
Zen1,
I’m no accountant, but my understanding is that no, you can’t claim interest deductions yourself for an IP in a standard discretionary trust.
As far as I know, the only way you would be able to do so would be to lend the money to the trust at the same or higher interest rate as you borrowed it, which would normally be pointless.
I’ve seen other messages discussing the possibility of converting a standard trust to an HDT. You might like to enquire with a trust specialist about the possibility of doing that.
GP
hI ALL,
Maybe you don’t quite understand how the hybrid trust structure works but that’s ok because neither do most accountants. Anyway it works as follows:1. You go to the bank and borrow say $500K
2. You then use the $500K to purchase special income units in the HDT.
3. The HDT uses the funds to purchase a property.At the end of the year lets say the following happens :
The HDT earns $20K in income from renting the property and expenses of say another $10K (note that INTEREST is not included because the interest is for purchasing the units by YOU.) SO you will have a net effect of $10K income.
This then gets distributed to you as the, lets assume, sole unit holder and so you have income of $10K. Then the $30K interest you are paying on the bank loan gets deducted from your $10K trust distribution to give you a net deduction of $20K. Remember you are claiming the interest deduction for purchasing income producing units. The hybrid trust is not claiming an interest deduction.
Rito, if I plan to do this (or actually do it), the ownership of the IP would be in the HDT?! The mortgage would be in my name?! As in I take out the mortgage on the new Ip in my name to buy the shares in the HDT, and put the ownership of the title at the REAs office in the name of the HDT?! Correct???????[blink]
This is what I am looking for! This is the nuts and bolts that’ll get me going![cap]
Looking forward to your answers!
Cheers
C@34
I would very much like to see some more discussion in this thread also. The author has succinctly asked the right questions that are mulling about in my head also, and I look forward to seeing some answers.
Cheers
acOkay so I can’t claim interest deductions myself for an IP in a standard discretionary trust.
With HDT the non special unit ie income still can be distributed at the discretion of the trustee and the special unit(s) can be sold/transfer to my wife if we need to in the future for example when she gets more tax deduction than myself. Is this correct?
I still like to know if we can use the equity in HDT to purchase other properties. Will financial institution have a problem with this?
Can anyone tell me if this is how it works:
1.I buy a special units in HDT that in turn buy a property from the money.
2.The income from the rent can be ditributed to any beneficiaries at the discretion of the trustee while I can claim the interest deduction.
3.Further down the line I can buy another property and I can use the equity of the first property in the HDT.
4. And when we sell a property the capital gain can be disributed to a beneficiary at the discretion of the trustee like income distribution.
5. My wife and myself can keep buying special units that never earn income or capital gain.Calvin
You post has confused me a bit!
let me try to explain.
When the trust buys a property, the name on the title is the trustee’s name. If you are the trustee, it is your name. If a company is trustee, it is the company. Its the same whether a hybrid or discretionary trust etc.
With a Hybrid, you then apply to the bank for a loan, but you ask for the loan to be in the unit holder’s name. This may be or may not be the trustee – it depends how you have structure it.
If you, the unit holder, are the trustee, then no problems as everything is in the same name. ie the loan, and the title deed.
If a company is trustee, then this can confuse things a bit. This is where the title will be in the company name. ie the company owns the property as trustee. For the hybrid to work (with the losses being claimed against personal income) the unit holder has to ‘borrow’ the money to buy units in the trust. So the loan needs to be in the unit holder’s name so they can claim the deduction.
Some banks have a problem with the loan being in a different name to the title holder. This will involve third party guarrantees. ie someone not directly involved giving a guarrantee. The unit holder is usually director of the company and will be giving guarrantee’s anyway, so it is not such a major thing – to many banks anyway.
The banks will not necessarily even know about the funds being lent to buy units. To them they are lending funds to buy the property. The buying of the units will be documented in trustee minuites etc. The bank will be happy as they still get the same result, a mortgage over your property.
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
Hi Zen
I think with hybrids, some of the income must be distributed to the unit holder. If not, then there is no relationship to the interest being claimed. ie for interest to be claimed, the funds must have been used for income producing purposes. I don’t use hybrids myself, so am not actually sure.
If you own a property as trustee, then this could be used as security for a property you own outside the trust, but only if your trust deed allowed it. You would probably be better off just increasing your trust loan and lending yourself the money, or returing money you lent the trust. If you have a company as trustee, there are various rules about lending money though.
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
jcls,
You ask some very good questions but there are a lot of things to consider. I would suggest you seek the advice of an accountant with intimate knowledge of hybrid trusts and how they are used for investing purposes.
Terry, as usual, has explained the financing aspects very well.
Note that an accountant will also need to discuss with you the impact of any losses (even in a HDT) and the family trust election, the new Taxation Ruling which comes into effect from March 2005 regarding trust refinancing and deductibility of interest and implications if you don’t distribute all income to the special income unit holder.
Trusts are wonderful investment vehicles but it really is important to discuss all these issues with a competent accountant.
OK Now I am Confused Terry,
Coastymike indicated :
Anyway it works as follows:1. You go to the bank and borrow say $500K
2. You then use the $500K to purchase special income units in the HDT.
3. The HDT uses the funds to purchase a property.So I took that to mean: I take up a mortgage (pay the deposit, blabla), then buy the whole amount into a HDT, and the money is then used by the HDT to buy the IP. Therefore the HDTs’ (or its trustees) name will be on the Property Title! Right so far?
The HDT earns $20K in income from renting the property and expenses of say another $10K (note that INTEREST is not included because the interest is for purchasing the units by YOU.) SO you will have a net effect of $10K income.Here I understood: the costs of maintenance, advertising, blabla is deducted from the income (Rent) and any left over $$ is paid to me as, for want of a better word, dividends. The interest accrued for the loan (which I used to buy into the HDT) is then a Tax deduction for me. Right so far?
When you then tell me:
When the trust buys a property, the name on the title is the trustee’s name. If you are the trustee, it is your name. If a company is trustee, it is the company. Its the same whether a hybrid or discretionary trust etc.With a Hybrid, you then apply to the bank for a loan, but you ask for the loan to be in the unit holder’s name. This may be or may not be the trustee – it depends how you have structure it.
If you, the unit holder, are the trustee, then no problems as everything is in the same name. ie the loan, and the title deed.
This then leads me to believe that the HDT buys the IP and gets the loan! I had understood from Coastymikes’ post that I put up the money to buy shares in the HDT who ownes the IP (on the Title and all) and I can claim the whole interest against my personal and share income!Am I at all close or is my denseness stagering?
It looks like it is the optimal structure where you can protect your investments, claim the interest on the investments without actually owning anything and therefore protecting the assets from littigation. Help me understand please! As it isn’t quite clear to me as yet.
If I am correct in the above, what would protect my shares inthe HDT when some-body wants to come after me in the courts?Cheers
C@34
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