Hi,
I worked with someone who claimed that he had a trust fund that owned the house he lived in. By doing that, he could get the benefits from the tax deduction of the interests while also living in the property.
Is that even possible or legal to do? I find it hard to believe that this can be done legaly?
Could it be his wife that is registred as the tenant, while he is the registered trustee? Or is there no way of doing this, and he just told me a little white lie?Appreciate your help on this issue
Cheers,
Bisse2000
Yes it is possible with a discretionary trust. But the tenant would pay the rent to the trust, trust would then claim interest and other expenses. However, If there is a shortfall then the trust will incur a loss which cannot be used to offset personal income.
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
Yes, the arrangement is legal but there are two key issues:
1. As Terry pointed out, the trust must have enough income to utilise the negative gearing loss. Otherwise, any resulting tax loss will be trapped in the trust.
2. The future sale of the property will not be sheltered by the main residence exemption for CGT purposes. If an individual owns and lives in a property, it will be tax-free when sold. However, the exemption does not apply if a trust owns the property.
Eddie
[email protected]So what Trust would you use if you had to sell it to a Trust and needed negative gearing benefits because you were short each month.
Also what bank would lend to the Trust without issues. I understand you can use a Discretionary Trust but without negative gearing available because of the losses stuck in the Trust.
I am a little while away yet from selling my PPOR to purchase a new PPOR but reading all the problems about Trusts don't know what to do. As i really want to keep my old PPOR and borrow 100% against it and then purchase a new PPOR. Though the figures will be short each month I need the negative gearing benefits.
So any ideas?
Thanks for the comments.
Interesting, must say this has made me a bit interested. If I was to do this, would there be anything stopping me from charging myself a high rent in order to always have positive income in the trust so I can take advantage of all the deductions such as depreciation and interest rates? That way leftover profits can just be sent back to me as beneficiary?
As I can see it you can save a lot of money over the years doing this?Good point about the CGT exemption, but in an environment where the prices are predicted to stay stable or maybe fall the next couple of years, I guess the CGT rebate for main residence won't have as much value?
But is it worth the effort to buy through a trust? Or would I just be wasting a lot of time? Should I just buy in my own name?
Any comments are welcome.Cheers
Don't know about the merits of charging yourself a high rent. You should be charging yourself a market rent. Higher rent means higher profits which have to be distributed – but I guess you could save tax by distributing to the lower income earners of the family. You would have to justify the rent if audited.
Pos, you would need a unit trust to claim losses – but borrowing to buy the units. But the ATO has already put out a tax ruling many years go warning about this. TR 2002/18 http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00144668.htm&pc=001/001/001/001&mnu=45485&mfp=001/005&st=&cy=0
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
Don't recommend artificially inflating the rent – the Commissioner can apply the general anti-avoidance provisions in Part IVA to unravel the arrangement. On top of that, they can hit you with penalties up to almost double the tax shortfall. Definitely worth it in my view.
For future planning, you need to ask yourself: Am I doing this with the dominant purpose of obtaining a tax benefit? If so, Part IVA can arguably apply. There is of course of a lot of grey in many circumstances – that is why there are so many court cases between the Commissioner and taxpayers.
The CGT main residence exemption will be relevant if you intend to hold for the medium to long term. As a rule of thumb, if the expected future capital gain is material, I generally advise people to buy in their own name and use a separate strategy to protect the equity. If capital gain is not an issue, it is probably okay to buy in a trust and get the trust to rent you the property under market rates. But this will only provide a tax benefit if the trust derives other income to effectively negative gear against the property.
Eddie
[email protected]As a rule of thumb, if the expected future capital gain is material, I generally advise people to buy in their own name and use a separate strategy to protect the equity. If capital gain is not an issue, it is probably okay to buy in a trust and get the trust to rent you the property under market rates. But this will only provide a tax benefit if the trust derives other income to effectively
Hi Eddie i refer to above quote – How do you protect equity in buying in your own name without the use of a Trust for future estate planning. Also are there any problems if you have say a property portfolio here in Aus and you go travelling for a couple of years while getting your rental income etc. Are there any Capital gains tax implications?
There is a strategy I am aware of that protects the equity of a property in an individual's name. However, you will still need to use a trust on the side.
The property will be treated for income tax purposes as if it is owned by the individual, not the trust. If you go travelling, the potential tax implications will depend on whether you have ceased your Australian tax residency, whether you earn other income while you are overseas, etc, etc.
All these issues are starting to get quite complex and I encourage you to see your accountant to resolve.
Eddie
[email protected]
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