- Hi everyone
My husband and I are ready to buy another IP but want to be sure we get our structuring right. Our first IP (in NSW) was originally our PPOR and so is not well structured – it is jointly owned 50/50, negatively geared, but I have very little income and my husband is a high income earner (employee). We don't want to repeat this mistake.
We are primarily trying to balance the following criteria: access to negative gearing, asset protection (hubby is a senior project manager in the commercial building industry), and estate planning (we have 2 young children). We do not have a business and so a discretionary/family trust is out due to the losses being trapped. If we put the next IP in my husband's name we have no asset protection and estate planning is more difficult/costly, we can access all relevant tax deductions but would be slugged maximum CGT if we ever sold.
We are embarking on a plan to accumulate at least 10 properties in the next 10 years and hence the strong focus on getting it right from the start. One option we continue to investigate is the use of a hybrid trust (with a corporate trustee). We are well aware of the tax alerts of 2008 and the various commentary regarding these alerts. So far we believe a HT would satisfy most of our criteria assuming we use it with the correct intent – ie. my husband (as sole unit holder) would need to be 100% entiltled to both the income units and the capital units, wih any redemptions being made at market value. Our understanding is that a HT would meet our estate planning needs, allow access to negative gearing, although the jury is out as to whether we would achieve asset protection (units may be accessable to creditors?). There would also be greater costs involved in administering this structure.
So how do we decide? We have sought various professional opinions, but there seems to be a split between using our own names (most likely 100% hubby's – a 'dollar in the hand now' outweighs implications of future CGT argument); or investing via a trust arrangement. We have undertaken a huge amount of our own due diligence in learning about the implications of various structures, but are stuck between these options for the reasons outlined above. Short of finalising our structure, we are ready to buy, so any comments would be greatly appreciated.
Thanks
Angela
I would look again at using a DT. These days any losses will be small and future gains in income and capital should make up for this.
Using a HDT would be only slightly better than using your husbands name. It won't allow can tax savings later on, but I guess it would allow the trust to redeem units later on and convert to a DT without stamp duty – unless stamp duty would be payable on the unit redemption. But this would crystalise a capital gain in to your husband, who is on a high rate of tax.
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
Terryw wrote:I would look again at using a DT. These days any losses will be small and future gains in income and capital should make up for this.Using a HDT would be only slightly better than using your husbands name. It won't allow can tax savings later on, but I guess it would allow the trust to redeem units later on and convert to a DT without stamp duty – unless stamp duty would be payable on the unit redemption. But this would crystalise a capital gain in to your husband, who is on a high rate of tax.
Hi Terry. We have looked a fair bit at DT. Our main hurdle is that we are considered to be income rich but equity poor. This means that even in a climate of CF+ properties we are looking at financing 100%+ of our next IP (using equity in LOC + new loan of likely 90% LVR) thus giving rise to likely losses in the early years. Given my husband's high income, we have struggled with these losses being trapped in a DT and thus limiting our cashflow during that time period. It seems to be a no-win situation whichever way we go, so I guess we are trying to select the lesser of all evils. I am also unsure whether a unit redemption would trigger stamp duty – I thought it triggered CGT but not sure about stamp duty??
Any other comments people wish to make on the appropriateness of the various structures would be greatly appreciated.
Thanks
AngelaAngela
i would have been suprised that in the current low interest rate climate that too many cash flow properties would result in a considerable cash flow shortfall especially the older style properties with less Depreciation or BWO.
With rates expected to fall again over the coming months i like Terry would certainly recommend a DFT structure which is an excellent vehicle to protect assets as well as give you flexibility on income distribution when the cash flow becomes positive.
Personally i would avoid a HDT structure as away from the obvious ATO alerts the options for finance are getting less and less even on a full doc basis.
Remember what starts off as negatively geared today will not be forever with rents generally rising over the years.
Richard Taylor | Australia's leading private lender
Hi Richard
Thanks for the reply. It certainly seems that HDT's are falling out of favour and in particular with lenders. We have started to re-examine using a DT and are crunching some numbers on potential deals to see just what the financial implications would be regarding any losses being quarantined and for how long we would even have such losses.
I was wondering what BWO is?
As both you and Terry have mentioned DT's, I am assuming that using our own name(s) is the least preferable option in all the circumstances?
Cheers
AngelaThe Chaser wrote:Terryw wrote:I would look again at using a DT. These days any losses will be small and future gains in income and capital should make up for this.Using a HDT would be only slightly better than using your husbands name. It won't allow can tax savings later on, but I guess it would allow the trust to redeem units later on and convert to a DT without stamp duty – unless stamp duty would be payable on the unit redemption. But this would crystalise a capital gain in to your husband, who is on a high rate of tax.
Hi Terry. We have looked a fair bit at DT. Our main hurdle is that we are considered to be income rich but equity poor. This means that even in a climate of CF+ properties we are looking at financing 100%+ of our next IP (using equity in LOC + new loan of likely 90% LVR) thus giving rise to likely losses in the early years. Given my husband's high income, we have struggled with these losses being trapped in a DT and thus limiting our cashflow during that time period. It seems to be a no-win situation whichever way we go, so I guess we are trying to select the lesser of all evils. I am also unsure whether a unit redemption would trigger stamp duty – I thought it triggered CGT but not sure about stamp duty??
Any other comments people wish to make on the appropriateness of the various structures would be greatly appreciated.
Thanks
AngelaHi Angela
I just looked up the stamp duty issue.
Looks like units in a unit trust are dutiable property under s11 of the Duties Act 1997 (NSW)
http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/s11.htmlAs for the positive gearing issues, what if you bought a $450,000 property that rented for $450 pw. repayments would equal rent approx. You would still have slight loss due to other costs, but if rates drop again or if your rent increases after 12 months your property would be positively geared. And this income could go to the lowest income earner if you use a DT
If you buy in your husbands name you may save $1000 in tax in year 1 and then start having to pay tax at 46% in year 2.
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
Angela asked: I was wondering what BWO is?
Building Write Off – a depreciation allowance of the capital cost of the building itself and some prime-cost items (not related to furniture and fittings), and either 2.5% pa for 40 years, or 4.0% pa for 25 years, depending on the type of building it is. You need a Quantity Surveyor to complete a Depreciation Schedule for you. If the house cost was say $200,000 to build, that is a $5,000 deduction per annum.
Applicable to buildings built since 1987 (I think). Coupled with the high depreciation amounts on much else over the first five years, a new building makes cashflow much more in your favour over the year rather than an old one, assuming you have your S221D Variation in place.
Having said that, I am not clear as to what Qld007 means by this: i would have been suprised that in the current low interest rate climate that too many cash flow properties would result in a considerable cash flow shortfall especially the older style properties with less Depreciation or BWO.
Older builds have less depreciation, and possibly no BWO.
Hi Cargill
Older builds have less depreciation, and possibly no BWO.
Yes thats exactly what i was referring to. Most IP deals i have seen come across my desk have little or no BWO or Depreciation and are still cashflow neutral or positive.
In the old days (like last year) there was a huge reliance on non cash deductions to get you over the line however with an increasing rental market and reduction in interest rates this has fallen.
I see another major lender withdrew from accepting applications using a HDT this week so i think that means we are down to 3 mainstream lenders not exactly room for negotiation when it comes to costs, interest rates or conditions.
Richard Taylor | Australia's leading private lender
Last year I set up a HDT with some family members. We had a terrible problem getting finance. Most of the banks wouldn't lend against it. You may want to check with lenders whether they will accept a HDT. My broker tried about 8 banks before we finally found a non-bank lender. In the end, we deleted the word "hybrid" from the front of the document to enable us to get finance.
Just my two cents' worth.
K
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