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

I have been an accountant for 11 years I have never recommended any of my clients touch hybrid trusts – reasons being, they are complicated and expensive.
My recommendation would be the establishment of a discretionary trust. Not only is it my recommendation, I established a discretionary trust for each of the investment properties I have purchased i.e. 1 investment property per trust if you employ a "buy and hold" strategy.

Hi Daniel,

U think Individual Return Accounting fees of $150 + $100 per property is expensive?  As a barometer, Chan & Naylor charge $395-$905 for individuals with IP and other Accountants in the CBD charge around $400 each return……….how low do you want to go? 

But my point is "if you pay peanuts, you will get monkeys"

 
Trusts have always confused me, even since I first enquired about them on this forum ages ago. Conflicting advice from forumites and accountants = our IPs to date (just 3) have been bought in single or joint names.

One of the many things I don't get is – if you are a buy-and-hold investor who plans to sell some properties just before turning 60 and put the capital gains into a defined-benefits super fund, then withdraw that money after turning 60 and use the $$ to pay off the loans on the remaining properties, then why bother with having trusts?? All you'll have to pay is 15% tax on half your capital gain.

Am I right, is this a good strategy – or have I missed the mark again?

Carlin

Reason 1 – asset protection – if one trust is sued all assets owned by the trust are "up for grabs"
Reason 2 – when applying for finance, you don't have to include details of all your other properties which makes things a whole heap easier – this is a trick I learnt from a mortgage broker from Hervey Bay in QLD and another experienced property investor. It worked as recently as the week before Christmas when we purchased another investment property

Purchasing in an SMSF can be somewhat restrictive from the point of you that a SMSF can't borrow – I know some of you might say that the ATO have recently amended the rules to allow borrowing through a warrant structure, but commercially it rarely stacks up – look at the interest rates charged (over 10%) and the fees to establish (between $10k and $30k) – this is because it is a limited recourse loan.
I also know it is possible to purchase a property as tenants in common with another related entity – but the property can't be used as security.
However, the tax benefits can be substantial. If you are able to access your super (ie reach your preservation age – normally 55) and start to draw a pension (even as little as 4% each year) the income and capital gain of the SMSF is 0%. It gets better – if you are 60 years or older, whatever you draw from your SMSF is tax free too!

Ben

NAB Commercial loan goes to 70% LVR on residential property and the interest rate is 6.74% variable.
The set up costs including the Bear Trust and new Pty Ltd Company come to around $6000 with the right Solicitor.

I have done 7 of these deals to date and admitedly they are not straight forward I would certainly recommend it to a client looking to gear in to Super.

Hi Carlin

Some good points, but for me I would only ever buy in a trust.

Re low risk of being sued – you can get into trouble easily. eg. one of my clients has recently gotten into trouble because of credit cards. she is now bankrupt. This is because of stupidity, but it was unplanned (naturally) and is unable to be planned for.

If you wish to sell properties in the future, you may save a lot of CGT by using a trust. Along the way you may also save income tax.

When you die you can also pass the control of the trust to your children without any stamp duty or CGT payable. This can even be done before you die if you want to bring your kids into  your investments.

Another advantage is if  your get into some credit problems and can no longer get finance – you can just change the director of your trustee company to your brother (eg) who can then go on to get finance – and possibly access equity.

So why not use a trust if all you are up for is a bit of accounting fees and some more land tax?

Yes you can change the name of the company pretty easily by filling in the ASIC forms from http://www.asic.gov.au. If your trust already owns property, then it may be a bit complex as you will have title deeds issued in the current name.

Before you buy you should seek good tax advice. Your trust should still be able to function as a discretionary trust or you could still issue units, but it would depend on the wording of the deed. If it allows the trustee to give the income to someone other than the unit holder, it may not be a commercially viable transaction and the ATO may disallow the interest claim.