Fellow Investors,
My strategy is buy multiple cashflow +ve properties using a trust structure of some sort.
In Steves latest book on page 154, he says that he uses a trust structure to purchase the property.
The trust borrows the funds required and he signs on as guarantor of the loan (as the trust has no income).
Therefore the debt is in the name of the trust and not the individual.Then in this months (Feb) latest API magazine on page 78, trust accountant Dale Gatherum Goss says the Trust purchases
The property but the debt goes in the name of the individual for tax purposes. The individual then uses this debt/funds
To buy units in the trust which then purchases the property.These 2 ideas seem very different!!![confused2]
1. who is right and who is wrong?? Are both of them right??
2. If you go steves way…what happens in terms of tax advantages/gearing?? do they disappear??
3. I just want to know which way is better structure to purchase multiple cashflow +ve properties over a few years.
I want to mimimise the hurdles when securing finance.I want to hear from your experience only and wont take your comments as legal, financial or taxation advice.
Baldy
Must admit i havent read Steve’s book so can’t comment on the contents of Page 154.
What i would say is that i think they maybe both talking about different types of Trusts.
Dale refers to a HDT where the property is held in the name of the HDT and the unit holders borrow the funds to purchase units within the Trust.
There is much murmuring in the ATO over this type of structure and we have seen many ruling which have gone against the Unit holders as the Trust have not been establish correctly.
With a DT then the negative gearing benefits are held within the Trust and cannot be claimed by the Trustees where as the Unit holders in an HDT have the benefot of being able to claim the interest as a deduction.
Many lenders still have a problem with HDT’s however a good MB should find a way through the maze for you.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Hi Baldy,
Trust ownership is probably the most flexible way to own an investment property. The most common Trusts are:
Discretionary Trust
A discretionary trust is often referred to as a “Family Trust”. It provides flexibility in sharing income within a family and can operate for up to 80 years. (Nb. This is what Steve refers to in his book.)Income is distributed according to the trustees’ discretion, by allowing the income to be distributed to lower tax earners and relatives, including children (conditions apply).
Some advantages are low establishment costs and asset protection, as only the trustees can be sued. Disadvantages include the fact that if there are losses, these will be quarantined within the trust and cannot be distributed to beneficiaries. Therefore a discretionary trust may not be suitable for investors who practice negative gearing – unless the trust receives income from other sources. Also, land tax thresholds are lower than for individuals.
Unit Trust
In a unit trust, the trustee holds assets on trust for the unit holders. A unit in a unit trust is like a share in a company, as it reflects your wealth in the unit trust. A trustee can be either a company or an individual. Advantages of unit trusts are that they are cheaper and more flexible than a company setup, non family members can own units, and also the fact that they can borrow money and carry on business. The main disadvantage is that the trustee has no discretion in the distribution of income, as the distribution is determined by the unit entitlement which was agreed when the trust was established.Hybrid Trust
There are many types of hybrid trusts, but essentially they all have many of the common features of unit trusts and discretionary trusts.However, a Hybrid Trust has a number of beneficiary classes equal to the number of unit holders. The trustee, at its discretion, may make both income and capital distributions to beneficiaries in proportion to the number of units they own. Therefore, as the beneficiaries are entitled to a fixed distribution of income, they can claim tax deductions in earning that income (ie.interest on borrowing) This effectively allows negative gearing.
Advantages of hybrid trusts are that they provide asset protection, offer the 50% capital gains tax relief and also have estate planning benefits. However, a disadvantage is that if they are not correctly established or run, they are at risk of being challenged by the Tax Office and may not protect the assets of the trust.
You can read about other Tax Structures http://www.propertydivas.com.au/3TaxMang/TaxMan.aspx
Hope this helps a bit.
AmandaBS
http://www.propertydivas.com.au
FREE online Property Resources“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”
Thank you for your reponses,
However I think I am more confused than before!!!
So If my strategy is to buy multiple positive cashflow properties
over a 2-3 year period…Should the trust borrow the money or should the individual??Hi baldy
These are referring to two different types of trusts. Hybrid and discretionary. Hybrids are best used when the property is running at a loss, as the individual can offset the loss against their personal incomes.
If you are going to be buying cashflow positive, then you will not usually have a lossso will not have to worry about this so much. But there are other advantages to having a hybrid trust. Also there are various expenses you can claim such as non cash expenses including borrowing costs, depreciation of building and fittings, and this may actually result in a cashflow +ve property with a tax loss. If you have a loss within the trust, then it cannot be offset against personal income. It can be rolled forward and offset against future income in the trust though.
The number of lenders lending to individuals with the property owned by a company as in the case of a hybrid is restricted. So this will restrict overall borrowings too.
So, in summary, who should borrow the money would depend on what sort of trust you have.
Terryw
Discover Home Loans
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Terry,
Thanks for your help!!
I thought that it works like this:
step 1: determine investing strategy
step 2: setup appropriate trust structure
step 3: determine what name funds will be borrowed in..i.e. that is
trust or individual.
step 4: purchase suitable property.So if the properties within your trust are cashflow positive…are
you able to pull the profits out / distribute income???
Or are cashflow profits quarantined within the trust just like negatively geared losses??Thanks heaps guys!!
No, profit such as income and capital gains can be distributed at the discretion of the trustee, in a discretionary trust anyway.
With a hybrid, all profits should probably go to the unit holder to justify them claiming a deduction on interest used to buy the units.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.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
You are a legend Terry!!
So profits are not quarantined in a trust and can be distributed but
losses are quarantined??Do you mind me asking what sort of trust structure you use for
your investments and why??Thanks
Baldy
I use a discretionary trust. These are best for asset protection. Hybrids can be good but I think there is a risk of ATO disallowing interest deductions down the track, and they are also more complex and costly.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.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
Thanks Terry,
Hypothetical Scenario:
Lets just say you (Terry) want to buy a cashflow positive property upto $150k to add to your discretionary trust. Would the potential lender look at:
1. the serviceability/cashflow of the trust only?
2. the serviceability/cashflow of you personally?
3. Or a combination of the two??You are really helpful!!! [specool]
Baldy
Assuming you are the Trustee and beneficiary then both.
Unikely the DT is going to have much income though so it more likely down to you.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New 100% Shared Equity scheme coming soon – Email us for details.Richard Taylor | Australia's leading private lender
Just to quantify it is unlikely with the removal of the Super Fund Surcharge that your Trust will have any income as it will distribute this to the beneficiaries at the end of each year.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New 100% Shared Equity scheme coming soon – Email us for details.Richard Taylor | Australia's leading private lender
Baldy, the lender will look at all income you get as well as the trust’s income, as Richard has mentioned.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.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
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