Zen1,
Originally posted by zen1:where you can put an asset in a trust name but still get negative gearing benefits. I just got off the phone with my accountant, she said I can’t put say an IP under a trust and still get a negative gearing benefits.
You can use a hybrid discretionary trust, which is a discretionary trust that can also issue units. To negatively gear a property in the trust, the following scenario would be typical:
– High income earner borrows from bank in own name using property to be purchased as security.
– That person buys special income units in HDT.
– Trust buys property using funds obtained from special income units.
– Net income from property must be distributed to unit holder each year.
– Unit holder claims personal tax deduction for loss due to loan interest being more than net income.
If you search the forum you’ll find more information on hybrid trusts. And Dale Gatherum-Goss’s “Trust Magic” is worth buying:
http://www.gatherumgoss.com/shopping.htm
GP
Cata
I am no accountant but always thought there was no such thing as a ‘Family Trust’. Trusts that are commonly referred to as family trusts are in fact Discretionary Trusts. Discretioanry trusts maybe be classed by the ATO as family trusts later on if a family trust election needs to be declared (ie there are losses or dividends over $5000 pa).
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
Dear Terryw and Cata,
Thanks very much for the response. Actually thanks to all. I am pretty much impressed with the quality of knowledge in the forum.
I will study your answers and must probably come back with more questions.
Best regards,Eleven
Dear Terryw and Cata,
Thanks very much for the response. Actually thanks to all. I am pretty much impressed with the quality of knowledge in the forum.
I will study your answers and must probably come back with more questions.
Best regards,Eleven
Eleven – you welcome. We all love talking trusts!
I think a way to protect assets outside a trust would be for the trust to take a mortgage or 2nd mortgage over property. This could tie up all or most of any equity. As the value increases the mortgages can be increased.
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
Originally posted by Terryw:if a family trust election needs to be declared (ie there are losses or dividends over $5000 pa)
I believe the limit is $5000 of franking credits per beneficiary, not the actual dividend amount.
GP
Terryw
This is an all to common mistake. There is a difference.
Your idea of the trust taking a morgage over the house is good but if the trust so not making money how do you pay the loan.
CataCata
If a trust mortgages property, that may not necessarily mean a loan agreement.
If it did, and the individual was sued, that loan could possiblly be called it as it would be an asset to the individual. So the trust taking a mortgage over an individual’s property may not work if it was a loan.
I am not sure of the legalities of all this. A mortgage is really just a lien, or a security device over property (I think), and the loan agreement, if any, is separate.
A mortgage could be taken for a number of reasons. (I can’t think of any at the moment!)
Any comments?
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
Terryw
If a trust has a mortgage(loan agreement) over a property in my name(for example) and I was sued, the trust would recieve monies owing before any payment to a litigant. This means if anyone sues me, the trust would be payed first.
Maximising your loans reduce your risk but also limit you for future investments.
You can borrow from the trust but the trust has to have money or access to money to lend. These are all issues that must be tackled for this stratagies to work.
Not one to brag (well sometimes) but if someone is happy with the current financial position they are in, this has been a stratagie that I have used to great effect. APPEARING to be pennyless can have its advantages.CATA
Asset Protection Specialist
CATA Asset ProtectionCATA, your right! If the trust had a loan over your individual property, that would mean you owed the trust money. So if you were sued and someone bankrupted you, securred creditors (your trust) would be paid first.
I think I had it the otherway around for some reason.
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
Dear All,
I said on the 7/6/05 that I will be back…so I am with more questions.The last few weeks have been very interesting, as I have been gaining lots of knowledge.
My outcome is a follows:
For my specific circumstances i.e.:
-Married, 2 children 16 and 8,higher bracket taxpayerAnd my goal in this venture:
-To have 10 positive cash flow IP in the next 3 years.I beleive the best way to go is:
1-To set up a Unit Trust (UT)
2-To set up a Discretionary Hybrid Trust (DHT)
3-All the units from the UT are held in the DHT hence the HDT is acting as a Trustee of the UT.
4-The units from the DHT are distributed between my family members.
5-Set up a PTY LTD company that will act as a Trustee of the HDT.
5-The Pty Ltd Company will have 1 Director (me) and 1 Shareholder (me).
6-The Pty Ltd has to be in existence before the UT and the HDT are settled.This scheme will give me the following advantages:
a-In case the positive cash flow IP became negative cash flow IP, I would be able to use the negative gearing in my favour as a higher income tax bracket.
B-Non-deductible debts could become deductible.
c-Ability to transfer IP to another trust without paying Stamp Duty.
d-Ability to move the IP into my Super Fund trust if necessary without any problem.
e-ability to protect assets out of the trusts.
f-ability to loan money for the IP and deduct the interest in my personal income tax return.Please let me know if these make sense.
Best regardsEleven
Eleven,
From my understanding, you can do all of that with just an HDT, except for the bit about transferring to super. If that’s important, then the separate unit trust may be necessary.
Not sure about having a trust as trustee of another trust. I wouldn’t have thought a trust could be a trustee, since it’s just controlled by its own trustee. I believe you could have the same trustee company for both trusts, but I was told it’s probably better not to for some reason (possibly a reason particular to my circumstances).
And why would you want to issue HDT units to family members? Wouldn’t it be better to just leave them all as discretionary beneficiaries?
I think item (f) would only be of use if the properties became negatively geared. If you want to borrow money for positively geared property, then I think it would be better for the trust (HDT) to borrow itself so that surplus income could then be distributed to low-income beneficiaries (ie. no unit holders).
Also, if you do want to transfer UT units to a super fund later on, make sure you check out all the rules governing property in super funds. From my understanding, they can’t be mortgaged or used as loan security, and they can’t have come from family members.
Just some thoughts. Seek professional advice for your own circumstances.
GP
Thanks very much GP.
I beleive that if the HDT issues units, that will allow me to buy them and hence move the money sourced from the loan into the HDT, then the HDT could buy units into the UT and finally buy the property under the UT name instead of mine.
Make sense? Also, I think that if I am buying units from the HDT, that will allow me to deduct the interest from my personal income tax.
Tomorrow I have the apointment with my accountant so I will let you know the outcome.
Best regards,Eleven
Originally posted by Eleven:I think that if I am buying units from the HDT, that will allow me to deduct the interest from my personal income tax
It will, but it also means you will get all the income from the trust (or at least from the assets purchased with those funds).
So if the property is positively geared, where there is extra income after interest and other expenses, then your net position would be paying tax rather than getting some back. In that case, you want it going to a low-income earner. It’s only of benefit to you if the loan interest exceeds revenue from the trust.
Remember that special income units entitle the holder to all the income derived by the funds. If you try and distribute that income elsewhere, then you probably won’t be allowed the interest deduction as the loan would no longer be for income-producing purposes.
GP
Eleven
GP is on the right track. I have never seen a trust as a trustee, and am weary of this. Your idea seems very complicated. Just remember the more complicated a trust structure is, the more likely something could go wrong and you won’t know unless someone sues you. Possibly cost alot in accounting fees also.
Ask your accountant if they protect their personal assets and if so how. They should have no hesitation in answering this.
CATA
Asset Protection Specialist
[email protected]Dear CATA and GP, thanks for your e-mails! Much appreciated!
Today I went to see my accountant with the following outcome:1-The UT is required if I have the intention to move IP to my Super Fund. As GP said there are rules to comply like it is not permitted to mortgage the property.
2-Discretionary Trust (DT) will allow me to distribute the income among other beneficiaries with lower tax bracket.
3-It would be better to have a Pty Ltd as a trustee of the DT so in the worst scenario the tax bracket would be 30%.And franked dividends could be distributed to shareholders.
He assured me that I would be able to accomplish my goals, which are (in order of importance for me):
a-Tax Minimisation
b-Asset protection in case somebody sue me.
c-Flexibility in case the IP become negative geared.Re the cost, he quoted $600 for the trust and $1200 for the Pty Ltd. both prices include Order Dee and Tax Registration.
Best regards,Eleven
Originally posted by Eleven:It would be better to have a Pty Ltd as a trustee of the DT so in the worst scenario the tax bracket would be 30%.And franked dividends could be distributed to shareholders.
Are you sure this is what he said? A company as trustee is standard, but that “worst case scenario” would presumably be making distributions to the company, in which case the company would have to be a beneficiary. While I think the trustee company would be a beneficiary anyway, making distributions to the trustee company doesn’t sound like a good idea to me for asset protection reasons. The whole point of using a company as trustee is to have a disposable, worthless vehicle in that role. It seems to me the last thing you’d want to do is actually give that company some assets.
And if you have a beneficiary company (trustee or otherwise), you need to think carefully about who the shareholders are going to be. If it’s a high income earner, then taking even fully-franked dividends will still result in an overall tax rate of 48.5% (including Medicare levy). If you make it a low income earner (or multiple low income earners), then you’d better have a lot of trust in that person or those people, as they would then have total control over any funds distributed to that company. I think you could also make it a trust, but I’m not sure how favourably the ATO would view having a trust make distributions to a company it owns (you’d need to check on that).
my goals, which are (in order of importance for me):a-Tax Minimisation
b-Asset protection in case somebody sue me.It was mentioned in the thread on buying appreciating assets in a company structure that it might be better not to have these as primary goals (at least not official ones). See Coastymike’s message in that thread.
Cheers,
GPFrom my ‘basic’ understanding i agree with GP and suggest you get someone ‘familiar’ with trusts to set up your asset protection vehicle..getting it right now could save heartache later.
IMHO-I suggest you liaise with CATA, Coasty Mike or contact Chris Batten, Dale GG or someone.
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow Calculatorif you have a beneficiary company (trustee or otherwise), you need to think carefully about who the shareholders are going to be.
What about the company owned by a different discretionary trust?
A discretionary trust can distribute funds to any other legal entity that is a benificary.
CATA
Asset Protection Specialist
[email protected]Dear Cata and GP,
In my previous e-mail I should say HDT (Hybrid Discretionary Trust) rather than DT only. Apologies for the confusion. as I am new with all this jargon.[blush2]
Having corrected that, I would like to rephrase the whole thin:
Scenario One:
Goals
1-To move some properties into Superannuation Funds in the short term.
2-Flexibility to minimise tax.
3-Asset protection.Under this scenario, the structure would be a Unit Trust that will issue all its units to a HDT
a-When the IP are profitable, the HDT will NOT issue any units so it will behave as a DT. This will allow to minimise the income tax by redirecting the income into the beneficiary with the lowest tax bracket. Under this scenario, the asset is 100% protected.
b-When IP is negative geared, the HDT will issue units that I will buy as an investment and will allow me to use the losses generated by the HDT.
In this scenario the asset will NOT be 100% protected as the units will be issue by the HDT however the losses would be used to minimise Income tax rather than accumulate them until the IP become positive again.c-If the IP is owned by a UT and all the units are issued to the HDT this can be transferred to a Super Fund with minimal Stamp Duty Tax payment
Scenario Two
Similar to scenario ONE BUT properties will not be moved to a super fund in the short term.As goal number one is not applicable any longer, a HDT will be enough to handle the IPs when it is profitable or negative geared. (Please refer to abovementioned points “a” and “b”).
In my particular situation I am not looking to move any property into my Superfund in the near future therefore, i will go for scenario 2 ie. a HDT with a corporate trustee being the director and shareholder the one with less risk to be sue in the future.
I hope this clarify my previous e-mail and help other members of this forum.
I am not an expert on this issues therefore I would recommend to seek advise and ask many many questions.
best regards,
Eleven.[cap]
In both scenaqrios the Trustee of the HDT will be a PTY LTD with one shareholder and director that hold a reduced risk to be sued.
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