Hi all,
Just thought you might be interested in learning the results of our long (and somewhat costly) exploration into setting up an HDT.
Some background first.
PPOR – value $550,000 owing $170,000
IP 1 – value $410,000 owing about same
IP2 – value $175,000 owing $156,000
Both of us in f/t permanent salaried positions in 30% income bracket
No dependants
So off we (hubby and I) trot to see three different accountants. All are property investors, and one is also a developer.
All advised us to put future properties into joint names and forget about HDTs.
Copied below is one accountant’s advice (you’re getting this free, we had to pay some bucks for it!!!). He is commenting on our claim that HDTs are a good way to structure property ownership where the properties might start out negatively geared, but eventually will be positive –
“The negative gearing is actually outside the trust structure. This strategy can be adopted using any entity. With unit trusts, including hybrid trusts, you buy units; with discretionary trusts, the money can be lent to the trust, and for companies, you can buy shares, provided the Company actually pays a dividend. There is nothing special about a hybrid trust that restricts this strategy to that form of entity.
“If the trust later borrows to payout unit holders, it may go back into negative gearing territory, particularly, if interest rates increase. The subsequent loss can only be carried forward to be offset against subsequent profits, while the individuals’ cash flows are used to fund the shortfall.
“Note that the units can only be redeemed. If they are bought back at a price higher than their subscription price, the gains made by the individuals will be subject to capital gains tax.
“Banks, assessing the financial position of the individuals, will assess the units held as being of lesser value (ie. higher risk rate applied to their value) than the property they represent, and while holding the big debt, the individuals may appear insolvent, unless they individually hold significant assets personally to pledge against the borrowings. As a result, the Banks may require the roll in of the trust assets in any future borrowings, in any event. So what is the real gain in all this structuring?”
As I said, this has been quite an expensive and time-consuming exercise, but hopefully worthwhile. HDTs seems to get plugged all the time on this site, but we can’t see why anymore.
cheers,
CarlinI will come back to this later when I have more time. There is some questionable advice there, but I agree that HDT’s are not the only way to go.
CATA
Asset Protection Specialist
[email protected]The gain in all this structuring will be asset protection, income tax minimisation, CGT minimisation and estate planning. The accountant did not mention these issues which are the only puposes in which you would use a trust.
When banks look at lending, they are looking at the whole package. Having a trust should not change anything, but having a hybrid trust with a corporate trustee will make it a bit harder to get finance as the loan will be in a different name to the title holder.
Terryw
Discover Home Loans
Parramatta
[email protected]
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Is that how you have gotten so many posts Terry, just post it twice.
Why did you go to an accountant and ask about HDT’s. They have there place but I think the question that should have been asked is, “do I need structuring and if so what sort of structure?”
Then ask “Why?”.All trusts have there advantages. As Terry mentioned, Asset Protection and Estate Planning with tax minimisation advantages. If using a HDT with the -ve gearing effect, the -ve gear is in your personal name. So in theory the trust should be +ve gear as the only costs to the trust are IP related (no loans inside the trust).
As the HDT becomes more profitable, the special income units can be purchased back by the trust, reducing your personal debt.
By doing it this way there is no need to refinance and also having no need to manage a loan in your name to a dicsretionary trust. And the option to issue more units in the future if need be.The question people should start with is “Do I need structuring?”
But if you are unsure, speak to someone (insert shamless plug here) like myself who does it as a speciality.Remember that HDT’s are not the only structure to use.
The posts on this site (and others) are for free also.CATA
Asset Protection Specialist
[email protected]Just as an aside, how many HDT’s would that accountant maintain and how many have they set up..Curious as to the accountants knowledge level and practical experience on the subject matter..??
My accountant told me years ago they dont set up HDT’s and have no experience in them, though he knew a bit about them they mainly did DT’s..he did however say if it was set up they would assist in maintaining it if need be..
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