To Trust or not to Trust: that is the question.

Firstly, the ATO are looking at the deductibility of interest for hybrid trusts. This taxpayer alert was released recently, citing the ATO's concern with the deductibility of interest in this area.

For depreciation, if the trust owns the IP, then any deductions for depreciation remain with the trust.

i would be very wary about setting up this type of arrangement at the moment. Get good written advice before you set up this type of structure. 

Dan

Hi Daniel

Hybrid trusts don't really work in any meaningful way.

1. Setup costs can be much cheaper. It costs $400 to set up a company with ASIC and a trust deed can be $600+ (+ stamp duty). Running costs: If a trust has just one property then the tax return for this trust should be very cheap. Many accountants charge you a fee per property, so it shouldn't really cost  you much more than owning the property in your own name. ASIC has a yearly fee of around $220 for the annual report – with some accountants charging you a fee of $200 just to post this in! So running costs need not be too much for a trust.

2. With a HDT you would borrow to purchase income producing units in the trust. The tax deductibility of these borrowings would depend on the commerial prospects of getting an income from these units. It seems the ATO will only allow the interest to be claimed if the unit holder must get all of the income and capital gain from the property. If there is any discretion, then full deductibility won't be possible. That means your HDT must act like a unit trust until the units are redeemed by the trustee.

Depreciation goes to the owner of the property which is the trust in this case. But since interest is the biggest expense your trust should be running at a profit if you can personally claim the interest. The profit can be offset by the depreciation.

3. There is little or no asset protection in a HDT as the units are property and could be taken by creditors if you were to go bankrupt. There have been deeds worded so that the units become worthless if the unit holder were to go into bankruptcy, but this may effect the deductibility of interest argument if the trustee has discretion here.

I agree with others above, you should look at avoiding HDTs or getting independent legal advice from a tax lawyer about using a HDT. Using a discretionary trust may be the way to go, as Richard mentioned. Low rates will mean less of a loss and with rising rents the property will be positive income soon.

HDTs have problems with finance because the owner of the property and the borrowers are usually different. If the trustee and the unit holder/borrower is the same it should be much easier.

Because they are Accountants and dont have a clue about how you would ever finance the acqusition.

In saying this more and more Property Accountants i know are steering their clients well away from HDT structures.

These days I don't think there are many accountants recommending HDTs – in fact most are saying to avoid them I think.

A testamentary trust is one which is established after you are dead. Great for future planning – just not your future. With income from a testamentary trust kids can earn income and be taxed at adult rates, not the penalty tax rates that normally apply to kids. Your assets don't actually pass to them, but remain in the trust and this can help asset protection if they go bankrupt or divorce etc

Thats interesting Richard because it seems that Chan & Naylor like to push the field of Trusts. So what structure are accountants recommending then for asset protection and interest deductiblity?

Any accountants care to give their thoughts. I am glad that their are finance brokers here saying that finance is the first field you look at before going out purchasing a property.

Thanks again Richard with your information.

sorry another question I forgot to ask is what about Privacy – What if you want your property portfolio kept private from people is there a way to protect your privacy if people do a search on your investments?

I have always steered clients away from hybrid trusts, long before the ATO expressed their view on these trusts. Never actively promoted them and when clients queried their use, I had not been comfortable.  There are just too many issues to worry about (eg, s51AAA), which fails the "sleep test" for me (ie, if you can't sleep at night because of a risk you have taken on, then it was not worth doing in the first place).  I do like discretionary trusts though because of:

1. Asset Protection – None of the beneficiaries have any present entitlement to the income and capital of the trust at any time until the trustee makes a resolution. This is arguably one of the most powerful asset protection device in my mind. 

2. Flexibility in Distributions – Coupled with a corporate beneficiary, high income family groups can cap the maximum tax rate to 30%, subject to any Division 7A issues. Again, very useful if discretionary trusts are used as an investment vehicle to build wealth.

3. Capital Gains Discount – A capital gain derived by a discretionary trust will qualify for the 50% CGT discount if the property has been held for at least 12 months and provided that the gain is distributed to individuals. 

Someone also mentioned privacy. You can achieve privacy by using a corporate trustee and a nominee company as shareholder.  The nominee company will merely hold the shares in the corporate trustee in trust for the "real" owner under a Declaration of Trust. Relatively simple to do.

Eddie
[email protected]

Wow sounds like a marathon meeting.

Firstly she is wrong about only 1 lender accepting applicationsfrom a HDT I can think of 4 off the top of my head who will go to 90% + if the application is full doc.

Secondly if the costs of running a DFT is equivalent to you have bought 6 IP's then i think i would be immediately looking for a new Accountant.

Totally disagree about not using a DFT as you intend to cut back your working hours and therefore the income distribution is irrelevant. I also disagree with the fact that not many landlords get sued. May she would like to check out the current cases in front of the bench and then advise again.

Funny in my Profession usually the only people who tell you not to bother about something are those who dont understand it.
Hate to say this also goes for a lot of Accountants.