Hi all,
I have been looking into how trusts work so I have some idea of what is going on when I meet with my accountant next month. Many thanks to Cata and TerryW in particular for their previous posts, these have been most helpful in getting some understanding of discretionary and Hybrid trusts.
I must confess however that despite this forum, the ATO site and my friend google I am missing a very basic piece of understanding with regards to a discretionary trust – where the money goes, what the trust claims and what I claim.
Allow me to paint the following scenario. I am the trustee of a discretionary trust and take a loan out for $XXXXXX and purchase a property in the name of the Trust (is that how it works?).
From a tax perspective the trust has the income from rent and can claim depreciation, rates and all those other expenses. Any profit can be distributed to my partner (she has the lower tax rate). However I am paying the loan. Is the interest on this tax deductible? (I don’t own the property the trust does)
I understand that discretionary trusts are unable to distribute a loss (this is why negative gearing doesn’t work the same in the trust) but you can use tax credits further down the track when you do make a profit.
If feel that my understanding of how a trust works is completely wrong at this point in time? Can someone please correct the hypothetical scenario above? or create another?
Do you fill out a tax return for the trust as well as your individual?Yeah I am confused. Sorry if I am not making much sense, any help would be appreciated.
Further background for my question: I believe I have a very good understanding of my own personal tax position and have recently completed a spreadsheet that can be used to access the basic financial return on a potential property deal and then apply those details to my own current tax position to the point of estimating my tax refund for 06/07. I am now trying to modify this spreadsheet to see how a trust would change things.
Why did I do this? I currently own one property in my name and am looking to buy two more in the next 9 – 18 months. I want to see what benefit a trust structure has.Many thanks in advance,
Originally posted by mcdeyess:Hi all,
I have been looking into how trusts work so I have some idea of what is going on when I meet with my accountant next month. Many thanks to Cata and TerryW in particular for their previous posts, these have been most helpful in getting some understanding of discretionary and Hybrid trusts.
NO PROBLEMS, THAT IS WHAT WE ARE HERE FOR.
Allow me to paint the following scenario. I am the trustee of a discretionary trust and take a loan out for $XXXXXX and purchase a property in the name of the Trust (is that how it works?).
YOU WILL NEED TO GET THE MONEY INTO THE TRUST SOMEHOW, EITHER GIFTING OR LOANING THE MONEY TO THE TRUST. IF USING A HYBRID DISCRETIONARY TRUST, YOU PURCHACE SPECIAL INCOME UNITS IN THE TRUST.
From a tax perspective the trust has the income from rent and can claim depreciation, rates and all those other expenses. Any profit can be distributed to my partner (she has the lower tax rate). However I am paying the loan. Is the interest on this tax deductible?
NO FOR GIFTING MONEY TO A DISCRETIONARY, YES FOR LOANING THE MONEY TO THE DISCRETIONARY TRUST, YES FOR A HYBRID DISCRETIONARY TRUST.
(I don’t own the property the trust does)
I understand that discretionary trusts are unable to distribute a loss (this is why negative gearing doesn’t work the same in the trust) but you can use tax credits further down the track when you do make a profit. YES THIS IS AN OPTION, BUT NOT THE BEST ONE IMOPAS IT REDUCES CASHFLOW.Do you fill out a tax return for the trust as well as your individual?
YES AS A TRUST IS A SEPERATE ENTITY.Hope this helps
CATA
Asset Protection Specialist
[email protected]When you get a loan as trustee for the trust, the trust simply claims the interest. It is a loan for the trust’s asset. No giving or onlending is necessary.
Go to the ATO site and download a copy of the trust return. Have a look at it. It is really easy to fill out, and you could probably just do it yourself.
Terryw
Discover Home Loans
Parramatta
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A trust will affect your Land Tax Rates too. It may cost you more or less depending on how much property you have in your name.
Trust Land Tax Rates start at a higher rate as of this year.
Live, Learn and GrowLifexperience
A bonus for Queensland investors as entities are not grouped (yet anyway) for land tax purposes.
CATA
Asset Protection Specialist
[email protected]Thank you all for your responses. You have made things that little bit clearer. I am printing out the ATO guide and will review it in more detail, I did look at it initially but found it confusing as it is combined with information for partnerships. I think it will make more sense now thanks to your assistance.
I am also looking to get one of the books recomended previously on this forum by Ed Chan or Dale GG.Thanks again all,
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