I had heard that the Vic. State Government were going to crack down on Trusts with Property on 1st Jan 2006. I did not expect them to put a 1% land tax on every dollar of UIP land value in a Trust (No $175,000 buffer here). Check this link that Foundation posted on another thread.
http://businessnetwork.smh.com.au/articles/2005/07/21/2672.html
So………….
2005 land tax for a $400,000 land value in Trust was $600
Next year the same property in Trust will incur $3,800 Bill.[wail]
So this at least answers the question for Victorian Investors as to whether to put property in Trust. ……Not until you have $900,000 of LAND value in your own name!
http://www.sro.vic.gov.au/sro/srowebsite.nsf/taxes%20rates.htm?OpenPage&charset=iso-8859-1#land
I have just paid for and set up a Trust to buy and was about to make an offer on a property, But I am rethinking my structure in a Hurry!!
Any thoughts? [blink]
!
Live, Learn and GrowLifexperience
There are lots of reasons for putting properties in a trust including asset protection and income splitting, so it not really as simple as you make out.
Most accountants still seem to recommend trusts to our clients.
By the way the new suggestions are not law yet and are likely to be ammended.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auMichael,
I know you are a reasonable person and have much experience with Real Estate over the years and would like to agree with you that Trusts are still go in Vic. As I have just set up a trust for purchasing property myself. I don’t have a total land component above $900,000 yet myself and I doubt many investors would.But are you telling me that you still recommend Trusts, even if these changes go through? [blink]
approx setup costs of Trust with corporate Trustee = $3000
Ongoing Yearly Accountant Fees for Trusts approx = $750 (surprise accountants still recommend them!)
Extra Yearly Stamp Duty Cost of (thanks Bracksy)= $3,200!!!You can still split incomes with Tenants In Common or Joint Ownership without Trusts.
And you know as well as I do that income from a trust must go to the guarantor of the Loan for that property anyway, so you don’t get this benefit to distribute to all family members until the property is neutrally geared and sits stand alone in the Trust.I didn’t think that Trust held Asset protection holds up in Family Courts or in Bankruptcy instances anyway?.
And I am pretty sure that you could get Liability Insurance cheaper than the new costs of holding property in a trust in Vic.
I love the trust idea too Michael, but the figures swing away from common sense. It’s not really an effective tax minimisation exercise for investors with smaller start-up portfolios less than $1.5 million or so.
I can’t see how to justify paying thousands of dollars more tax than I have to.Please, someone convince me otherwise.
Live, Learn and GrowLifexperience
Originally posted by lifeX:Michael,
I know you are a reasonable person and have much experience with Real Estate over the years and would like to agree with you that Trusts are still go in Vic. As I have just set up a trust for purchasing property myself. I don’t have a total land component above $900,000 yet myself and I doubt many investors would.But are you telling me that you still recommend Trusts, even if these changes go through? [blink]
Live, Learn and Grow
Lifexperience
Thanks for the kind words.
Would I recommend trusts?I am not licensed to recommend anything[biggrin] so no I wouldn’t
Would I still invest in trusts? Yes I would and I have. I have set up 2 new trusts in the last few months for new property purchases.
Do I like the new rules. NO WAY. not when I have a number of trusts. But it won’t stop me investing and using the most appropriate structure to own my properties.
I understand your point, it is very hard for a beginning investor, or someone with one or 2 investment properties to justify setting up and maintaining a trust.
But I suggest you begin with the end in mind. What will your proeprty portfolio look like in 5, 10, 15 years time?
When you buy your home it makes sense to put it in your own name, but when you buy an investment you must consider 4 taxes:
1. Stamp duty
2. Income Tax
3. Land Tax
4. Capital Gains taxand you should also consider asset protection.
If you are going to make a business out of property and build a sizeable portfolio, set up the structures to accomodate all of the above for the future. It is too expensive to change later.
Cuurently the “smart” accountants I speak with are still recommending using a trust structure for many (not all) of their clients.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.au“And you know as well as I do that income from a trust must go to the guarantor of the Loan for that property anyway, so you don’t get this benefit to distribute to all family members until the property is neutrally geared and sits stand alone in the Trust.”
Why must the income go to the guarantor of the loan ? If an individual has established a hybrid trust and they have purchased special income units then that individual is entitled to the deduction on the loan taken out to acquire the income producing units. This is no different to an individual purchasing an investment property using their high income for servicability but the parents going as guarantor with their main residence as security. Using this same logic are you therefore suggesting that an individual would not obtain a tax deduction for purchasing an investment property in their own name with their parents as guarantor ? The provision of security over a property does not determine interest deductibility. It is the purpose for which the borrowed funds are used. Refer Ure v FCT, FCT v Roberts and FCT v Smith.
An analysis of trusts also needs to taken into account estate planning issues, the refinancing principle (which can result in significant benefits), income distributions to beneficiaries, capital distributions to beneficiaries (which can also significantly impact on the CGT result) and possible stamp duty savings on asset transfers. So as Michael states just looking at land tax is but one component of a thorough analysis.
Agreed that trusts are not going to provide much protection in a family court which is why one should also be considering a binding financial agreement before entering into a defacto or marriage relationship.
With respect to asset protection what cases suggest that a trust with a corporate trustee does not provide adequate asset protection. The recent Hanel v Oneil case and the recent amendments to the Corporations Act would seem to suggest to the contrary. What court rulings are you referring to that would indicate otherwise ?
With respect to land tax in Vic the current “aggregation” rules are going to be repealed. These are replaced by a rule stating that aggregation of trust land will only occur where multiple properties are held in the same trust. Where a taxpayer is trustee of several different trusts, separate assessment will apply in respect of land held in each trust.
Trust property held under different trustees will not be aggregated. This is irrespective that they have similar beneficiaries. Beneficiaries also will not be taxed at that level. Further, trustees will continue to be separately assessed for land which they own beneficially. These rules apply equally to special trusts and excluded trusts.
Given that the proposed laws will still require a reassessment of current strategies. Certainly for holding commercial properties this may not be a major issue as the tenant is usually responsible for all outgoings, including land tax, so it will be interesting to see if this increase can be passed onto the commercial tenants.
Why must the income go to the guarantor of the loan ? If an individual has established a hybrid trust and they have purchased special income units then that individual is entitled to the deduction on the loan taken out to acquire the income producing units.Coasty Mike, sorry poor wording. My point was that rental income could not be distributed to other beneficiaries (ie: other family members in a lower tax bracket) while a loan for the property in trust was just in the one name (the individual who has their name on the loan documents). (usually the highest income earner for servicability and interest tax deductibility), so therefore a highly geared I.P. (as they often are) would not have the benefit initially of income splitting…….. and you are correct guarantor has no relevance on deductibility of interest.
An analysis of trusts also needs to taken into account estate planning issues, the refinancing principle (which can result in significant benefits), income distributions to beneficiaries, capital distributions to beneficiaries (which can also significantly impact on the CGT result) and possible stamp duty savings on asset transfers. So as Michael states just looking at land tax is but one component of a thorough analysisTrue, these are benefits. But a lot of these will only happen (if they do) down the track. My point was that this increased land tax makes it a damn sight harder for an investor to grow a portfolio using a TRUST structure for the first million dollars+ of property they buy.
With respect to asset protection what cases suggest that a trust with a corporate trustee does not provide adequate asset protection. The recent Hanel v Oneil case and the recent amendments to the Corporations Act would seem to suggest to the contrary. What court rulings are you referring to that would indicate otherwise ?I am saying that if you had property portfolio with a land component of less than $900,000 then you would be paying a very pricey premium (the extra thousands of dollars in land tax that you would not have to pay if the property was in your own name) for the privilige of the assett protection provided by corporate trustee. I am betting that the investor starting out with a small portfolio wouldn’t easily afford the legal costs of fighting such a case to the death nail if the need arose.
With respect to land tax in Vic the current “aggregation” rules are going to be repealed. These are replaced by a rule stating that aggregation of trust land will only occur where multiple properties are held in the same trust. Where a taxpayer is trustee of several different trusts, separate assessment will apply in respect of land held in each trust.Have you found a reference that the vic. state government are NOT going to tax every dollar of land value in trusts at 1% if there is only one property in the trust? this would be great news. !!
Trust property held under different trustees will not be aggregated. This is irrespective that they have similar beneficiaries. Beneficiaries also will not be taxed at that level. Further, trustees will continue to be separately assessed for land which they own beneficially. These rules apply equally to special trusts and excluded trusts.Property investors would not fall under the exemption of special trusts and excluded trusts as the proposed law stands.
Coasty Mike, I hear what you are saying about the benefits of trusts. I agree. But for a property investor trying to build up a Vic. portfolio, these new changes are adding thousands of dollars of extra cost that you would not have to pay if you had them in your own name.
What price are you prepared to pay extra to get benefits of trusts?
Michael,
I already have some property in my name and made an offer today for a property which will go into trust. Thanks for reassurance. I will take the gamble that trusts will work out better in the long run.Bracksy sux.
Live, Learn and GrowLifexperience
You must be logged in to reply to this topic. If you don't have an account, you can register here.
