questions on tricky ‘salary sacrifice” techniques

Hi Coogee,

I think ATO will view  this as a tax avoidance behaviour. You should seek ATO's ruling before you undertake this strategy. Better be save than sorry.

Cheers Greg

yes, this 'loophole' has been closed.

Hi Coogee

I have also bought the same book a while ago and found it very interesting.  I still refer to it regularly.  The copy I bought had a white sticker/label inside the front cover with a '2008 Budget Update'.  As mentioned by others above, it advised that in the May 2008 budget the Government had effectively announced that it would change the law regarding the otherwise deductible rule in relation to jointly owned assets.   This in turn stopped people utilising the 'salary sacrifice strategy' outlined in the book effective from 13 May 2008 (or if you were already using this strategy you had until 31 March 2009 to rearrange your affairs).

The strategy would have been perfect for us as hubby is a high income earner whilst I am very low income and stay home mum.  We have since considered using a DT, but the lack of negative gearing gving rise to losses being trapped in the trust is a sticking point.  Asset protection is an issue for us though, so trusts are preferred.  A few people lately have suggested using a unit trust with a corporate trustee with hubby borrowing funds to purchase all units. This would enable negative gearing but I can't see how asset protection is any better than using hubby's own name.  Sounds like asset protection comes via the person suing you being given the run around until they give up!  Apparently you simply keep establishing a new corporate trustee to control the trust each time the current corporate trustee is named in the action.  Is this just when the action has come from the tenants – meaning they would be suing the trust as owner of the property?  If hubby is sued however  he could be forced to redeem his units – would this force the sale of the underlying asset to realise the capital component (as the forced sale of income units would simply pay back the loan)?  I think I have just confused myself further!

Angela

Hi Terry

Thanks for the reply.  It's refreshing to have someone say straight out the reality of each trust and not try to massage the situation to 'make it fit' our needs.  Our undertsanding matches with your explanation.  I've since found out that the main accountant who was recommending we consider a unit trust given our negative gearing dilemma, was actually still using hybrid trusts until about 6 weeks ago.  He promotes his unit trust  as having discretionary aspects – sounds a lot like a HDT but worded in reverse to satisfy lenders?!  Needless to say this made us a little nervous about the quality of his advice.    

In regards to offsetting losses, unfortunately we only have personal services income and so we have had to rule out the possibility of diverting other income into a DT at present.  The best we have come up with is if our next IP is negatively geared and held in a DT, our strategy then would be to purchase a postively geared IP in the same trust, so losses on one can offset gains on the other.  Our less preferred option is to buy in my husband's name (if a negatively geared IP) and leverage the property as highly as possible to achieve asset protection this way.  Downsides of course would be future CGT (if we sold) would be calculated at the top rate and could easily outstrip cumulative tax benefits to that date.  Plus we would have to regularly review our capital growth (equity) position and seek to increase our finance facility to maintain maximum leveraging and thus asset protection – of course we would need to have actually invested/spent the extra equity dollars to secure the higher leveraging.

I guess anyone who only has healthy personal services income and a potential asset protection issue would be in the same boat as us.  We just have so many people around us saying we should be aiming to get hubby's tax bill down to zero (big ask!).  Me – I think I prefer the comfort of knowing our assets are protected for the long term albeit with a tax tradeoff (and lower cash flow).    

Angela

Hi Angela

I think the main problems lenders have, or had, with HDTs was that the owner of the property would be the company whereas the loan needed to be in the unit holders name. Having a loan in someone other than the owners name can create legal problems down the track if things go wrong. I don't think tax issues were of any concern to lenders.

As for your accountant, HDTs have been known to be 'faulty' for about a year or more now. The ATO put out some alerts about them ages ago too.

With the PSI why not talk to a few different accountants to try to work out a way to get around the income being classified as PSI. Maybe your husband can sub-contract some of the work out to you as trustee of XX trust for example. This may help get some of the income into the trust to offset the losses.

VB i am not sure what a PSB is, but I know what PSI is and if your income is classed as PSI it cannot go through the trust so you cannot offset the loss.

There may be other ways of getting at least some of your income into the trust – such as leasing equipment owned by the trust. Sub-contracting to the trust etc.

You need a good tax advisor who can run thru it with you.