- Can anyone help me in working through whether it is a good idea to buy a home through a trust and rent it back to ourselves (and is this legal in the ATO's eyes)?
By way of some background info… Our last PPOR is currently an IP, but we are highly likely to apply our main residence exemption for CGT to this property in the future. We currently rent but despite being aware of the rent vs buy arguments, we really want to have a home of our own again. Our aim is to find a way to achieve this outcome with the least financial detriment…hence the idea to look at buying an IP through a trust and renting the property back to ourselves (at fair market value). Hubby is a salaried employee with a high income, I am the low income earner by far. We do not have any businesses or other sources from which we could divert profits to offset the losses trapped in the trust. Any advice greatly appreciated.
Thanks
Angela
My understanding of trusts is that they are useful for disbursing profits but can't be used to disburse losses – and as such would not be useful to you in this situation, even if the ATO would regard it kindly which I rather doubt.
What about the property trust structures espoused by Ed Chan?
I only have an basic understanding of what he promotes but it's where you loan the purchase price to the trust & the trust buys the property. As the $ you have loaned are for investment purposes the interest component is deductible. Other expenses (i.e. rates, maintenance, etc.) remain within the trust helping to offset the income received via rent.
Hi Chaser
Funny you should ask this, as I am in the process of setting up a trust to do exactly the same thing and my personal circumstances almost mirror yours.
As I understand it, you can do as you say with the biggest disadvantage being that you can not get the capital gain deduction if you sell the place through the trust.
I will be interested to see any further comments.
Assuming from your comments that you want to sell your old PPOR within 6 years unless you are planning on moving back into it periodically, possibly a simpler solution is to buy your new propertyy in your names. As long as it is not being used to produce income any expenses such as interest, rates, insurance, repairs etc get added on to the cost base. It would save you a few thousand dollars in set up fees and save ongoing accounting fees. Julia Hartmann has written in Australian Property Investor on this to reduce CGT
Dear Chaser,
What a Great Idea !,
go and see the ATO site and look for a tax case called "Janmore Nominees". its about a guy who did this successfully in 1987, however he also had a business in the same trust, he was a medical practitioner. This allowed him to gear inside the trust and lease back the home to live in. he also had a business lease for a room as a surgery.
If you are a wage slave (PAYG) and an employee its hard to do it. There is one other way, use a pre 1999 unit trust and self mangaged super fund (SMSF). Its based on a 1991 tax case – Forli Pty Ltd and the ATO. It involved the Trevisan family in Qld, and the Trevisan Trust arrangement will still allow you to gear in 2 ways and rent the property to yourself as a fund member. See ID 2002/388 this is a tax office ID (Interpretive Detemination). Either (1) you borrow and buy units in the trust which will send net rental income back to you so you can deduct loan interest from your taxable income and dcepreciation stays in the unit trust. Each year the unit trust will distribute income to the unit holders, being you and/or spouse and the smsf . If the property is sold you pay CGT at super rates are 10% (15%-33% discount). If you have retired and are drawing a pension then you will pay 0%.
OR (2) if you have a business you can have the business in the unit trust (yes thats still legal too) and the residence and you borrow in the trust just like Janmore. I would actually put the business in a separate unit trust owned by the Trevisan Trust to separate the two assets, else you might have a business issue that would impact on your home. So guys you have to find a pre 1999 Trevisans Trust. Happy searching but they are out there somewhere !
Anthony at FGITWomma wrote:As I understand it, you can do as you say with the biggest disadvantage being that you can not get the capital gain deduction if you sell the place through the trust.
Trusts are entitled to the CGT 50% discount (from holding asset for 12 months or more) just the same as individuals. It's only companies not entitled to discounting (and of course SMSF's only 33.33% discount not 50%)
The main disadvantage of holding property in a trust is that you're not entitled to nominate it as your PPOR – ever.
If the property is negatively geared you'll be accruing losses in your trust which is useless unless you want to use the trust now or later for another business purpose to be able to soak them up.
If the property will be positively geared (or becomes positively geared), you will need to be careful because I think there's a possibility you may pay tax twice on your income. i.e. Hubby earns wage which is taxed in his name. Rent is paid from post tax dollars to the trust and then the net rental income i would presume would be distributed to wife who would then possibly pay tax on this portion of income again (if wife's Taxable Income is over $6,000). Effectively we're creating additional income without receiving any cash in the pocket!
Trusts are also used to help in asset protection (depending on who the trustee is), however if you're renting the property yourself there's no risk of being sued. And if you do purchase further investment properties in this trust, this property you're living in may be at risk.
Have a sit down with your accountant and they can thouroughly go through all the pros and cons for your current situation and come up with a solution also considering your future investment plans.
I was looking at this option in buying a PPOR, but it's no worth it unless the trust is making money aside from your PPOR, as you can't negatively gear in a trust. If the trust is making money, then it's probably from other assets and as mentioned before in this topic, you don't have the asset separation – you could pay rent to the trust to cover all the costs, but then you've got the catch 22 o having to pay CGT whn you sell.
Trusts can distribute to other trusts, so having a business in one discretionary trust and the house in another is a way to maintain separation of assets and offset losses.
The ATO doesn't seem to like people renting their house from a unit trust in which they are the unit holders.
see TR 2002/18 Income tax: home loan unit» «trust» arrangement
"Having regard to the eight factors in subsection 177D(b), a reasonable person would conclude that the sole or dominant purpose of a person or persons entering into or carrying out the scheme is to enable the taxpayer to obtain a tax benefit. Part IVA will therefore apply to deny the deductions claimed by the taxpayer. "
http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~unit~basic~exact:::AND~trust~basic~exact:::AND~main~basic~exact:::AND~residence~basic~exact&target=EA&style=html&sdocid=TXR/TR200218/NAT/ATO/00001&recStart=1&PiT=99991231235958&recnum=19&tot=72&pn=ALL:::ALL
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 Terry
That stuff from the ATO has been listed since 2001 in Agressive Tax Planning, its ATO propaganda, remember the ATO do not make the law the courts do. The ATO often loses just as they did with Janmore Nominees, that case still stands. So does ID 2002/388 AND I have written confirmation from ATO in addition to the ID 2002/388.
You just need a pre-1999 Trevisan Trust. This is where a unit is trust owned by a SMSF. the ATO treatment is thus changed. These are not my opinion they are facts, as Keynes the famous economist said:
" when the facts change, I change my mind, what do you do, Sir ?".
Go check out the ID 2002/388. Just tell me you wnat a copy of the correspondence and I'll email it to you.Regards
Anthony)Hi Anthony
Thanks for your comments. You make some good points. I will have a look at that ID you mention and would appreciate it if you could send me a copy of what you have from the ATO.
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
Very interesting, just don't understand how it works just yet …
We don't have a PPOR yet as we're overseas investors but this could be an interesting way for us to finance a PPOR and keep the interest tax deductible…??
Apparently these guys still offer pre-1999 Trevisan Trust, but not sure how much they cost
http://www.a4companies.com.au/trevisansupertrust.htm
http://www.a4companies.com.au/trevisan.pdfI rent my own "home" from our Family Trust. I don't have a PPOR at all. My accountant and the ATO have no problems with this arrangement. There are however very specific reasons that we do this. They are detailed in the post below:
https://www.propertyinvesting.com/forums/getting-technical/legal-accounting/4323748?highlight=trust
You should probably work out the pros and cons of doing this. Weigh up the cost of running the trust and the facts that you lost the CGT exemption and the inability to claim losses against the benefits of being able to negatively gear the property. For us it was a very obvious decision to have the property in the trust.
Cheers
K
Hi Angela
In your statement you have pretty much given yourself the answer – husband employee, no business income, therefore unless you have substantial other investments already in a trust there is no benefit. From the information provided you have no major "risk" eg professional indemnity risk like a doctor therefore the asset protection benefits of a trust are limited – they don't protect against family law claims. In your situation gross income can't be funnelled through to soak up net losses from a negatively geared property.
As a general rule PAYG employees don't benefit one way or the other – unless you take a long term view and build a positively geared portfolio in the trust by contributing after tax income into it and benefit from intergenerational wealth transfer in the most efficient manner including ability to stream different types of income to different beneficiaries in the future – it will take time to see the benefits though.
Just remember there will ALWAYS be a cost of accomodation, whether paying rent to someone else or having loads of capital tied up in a property you own outright – the opportunity cost of not having to pay rent. Of course there is the touchy feelly overlay of having your "home" and having more control – once you own it rather than the bank owning it.
Whilst negatively geared you will always need a positive income from somewhere to soak it up and pay the difference to the bank.
At some stage you need to accumulate net wealth to replace personal exertion income!
Best of lick with your endevours.
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