Hi Everyone,
My mate was telling me about this earlier today, and I was wondering what people’s experiences with it are (or if it can in fact be done)…
Scenario:
You have a corporate trustee for your discretionary trust. Your corporate trustee owns a house. You personally rent this house (fully furnished) from your corporate trustee.Apparent Benefits:
Taking a line of credit, your corporate trustee can buy new furniture, appliances, fittings etc to make the house fully furnished and can depreciate all of these items. From the same line of credit, your corporate trustee can also pay rates and utility costs. You personally pay rent to your corporate trustee, but you can deduct a portion of it if you can use the house for business. Your corporate trustee receives rental income, and pays tax at only 30%.This arrangement seems like it would be best suited to anyone who would pay tax at a marginal rate of more than 30%.
Also, as the discretionary trust cannot negatively gear, would this be better suited to an positive cashflow property that could distribute a profit to the corporate trustee?
Is my mate missing something here, or would this arrangement be an effective way for him to minimise his tax, whilst living is a new house with new contents?
Thoughts appreciated,
.
One misunderstanding there is tax. The corporate trustee is a trustee so it doesn't pay tax at all – unless a distribution isn't made. Any profit of the trust would be distributed to beneficiaries and they pay tax. If the beneficiaries income is low the tax paid may be less than 30% if the benefciaries income is higher then a company can be set up to act as a beneficiariary and the tax can be capped at 30%.
But to have a distribution the trust must first make a profit. You will probably find that if you set this up the trust would have a large loss. This loss can only be used to offset other trust income, not your personal income. So there will be little tax saved.
Even if your trust had a postively geared property it would probably turn negative with all the depreciation from the furniture and plasma TV etc.
If the trust income was positive even after all these deductiions then the profit must be distributed and depending on where it goes tax could be payable. As years pass the rents will increase and depreciationd decrease so you will end up paying tax on your own property – If you owned it in your own name you wouldn't!
Add to this the fact that there is no CGT exemption and more land tax will be payable too.
However it can still be good if your circumstances allow – eg.
-You have another property which you are claiming the main residence CGT exemption on
– You have reached the land tax threshold anyway
– You only intend to live in the place briefly before renting it out
– you own a business which you can use to divert income into the trust to offset any loss and save tax.You just have to plan ahead – years ahead.
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
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