Hi all,
first time post so please forgive the newbie quesitons, new to the website but have been reading the posts and have been impressed with people's willingness to help out.
My wife and I are at the point where we have rougly 75-80% equity in our PPOR. We both work and are both in the highest tax bracket. We have recently setup a Master Limit so we could restructure our loan to then take out an interest only loan for the purpose of PI. We are still a long way off from retirement so the idea (for now anyway) is to try and build a portfolio of CF +ve rentals to create income for the future.
We rushed through the process a bit under the impression that the best way to go is via a family trust. Fortunately (I think) we've realised that this is probably not the best option as we don't necessarily have to worry about asset protection, no more than others anyway, we don't work in what would be considered litigous jobs.
I realise that finding CF +ve properties is probably difficult enough without the benefit of tax deductions from our personal income (which of course we cannot use if the property is in the trusts name).
I've read this article, which was pretty enlighting but is also nearly 3 years old.
http://www.propertyupdate.com.au/articles/149/1/Trusting-Trusts/Page1.html
I realise it's important to have the right structure before plunging in because transferring from Trust to personal will be very expensive and arduous later. However we have the IO loan already setup in the Trust name.
I'm looking for input as to whether people think we should carry on as is or take the time to restructure a new loan in our own names, or possibly setup a unit trust to buy off the family trust (if you can even still do that!) ?
Too many questions at this stage.
All input is appreciated.
Cheers,
Kashe.
Hello Kashe
The article is still relevant on many aspects. It is hard to answer your question not knowing your reasoning for setting up a Trust. Also what type of a trust is it?
Things to consider, if you do acquire CF + rental then you will be paying a higher tax on the excess of Rent – Interest – Other Expenses.
As you are looking for long term cashflow for retirement and you are still young and on high salaries who may want to consider possibly a Self Managed Super Fund for your Property Investing.
I am happy to meet with you via a Online Go To Meeting session to go over your circumstances – 1st Consultant is complimentary.
Property investing is one of my personal hobbies and our firm specialises in effective property investing for long term wealth.
Kind regards
Anna KyriacouAKA Group Accountants Advisors Mentors
Creative ProActive Innovative
[email protected]Why do you think you have done the wrong thing by setting up a trust?
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
Hi Anna,
thanks for your reply; I'm in my mid thirties to the aim is to build up a portfolio of "passive income" for later years. It's a discretionary trust however my wife and I are on the highest tax bracket anyway so as far as I'm aware we would encur the same tax rate either way. Not really looking at the Self managed super fund at this stage. Thanks for the offer of the free consult, we have an existing accountant who we are currently working with but I might take you up on it at a later date depending on how I feel we're going with my current accountant.
Hi TerryW, I'm not convinced we've done the wrong thing by setting up the trust, that's what I'm hoping to ascertain here. But I wonder if it's a bit of overkill as I don't think asset protection is our biggest worry and from what I can gather the trust seems to have some disadvantages from a PI perspective as opposed to say a personal loan, e.g. higher land tax , extra accountancy fees and I cannot offset any possible losses against personal income tax or even CGT. I know the aim is to have CF +VE properties and that we're looking to build passive income rather than specifically looking for CG but I can't help but feel I'm limiting my options with the Trust.
Keen for your thoughts.
Cheers,
Kashe.
Hi Kashe
The biggest disadvantage maybe that losses are trapped in the trust, but think long term. Did you know your trust can distribute to a company and the company will only pay 30% tax. There is also may other things you can claim too.
I assume you are not self employed, but if you were you could probably divert income into the trust to offset the losses and reduce your personal tax. Even being an employee it may still be possible with a creative accountant.
Significant tax savings could be had down the track if you were to use a trust and your circumstances changed – eg one of you stops working.
Land tax is a bit of an issue, but after you have purchased a few properties in your own name you will have used the tax free threshold and will be paying the same tax anyway.
Asset protection is not an issue for you, but think of it as a bonus.
Anyway, before you buy the next property I would suggest you do the sums for buying using the trust and using your own names.
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
Thanks Terryw,
good advice, much appreciated.
Sorry to hijack your thread kashe, but this question may also help you with yours.
Terry – When you distribute from the trust to the company, the company pays only 30% tax rate, so this is great for people above 30 cents in the dollar marginal tax rate.
The question is…. then what? How can an individual distribute those funds for their own use without paying a marginal tax rate anyway ? (Even if the distribution is franked, the net effect is zero).
Now I can see that one benefit would be using the money in the company to continue investing in further assets, but at some point the end game is to take the money out to fund retirement right?
Unless distributing to a super fund or some other low tax vehicle, how can the individual eventually use the funds in the company having only paid 30% tax?
Thanks mate.
YEah getting it out can be a problem, but you can store it there, re-invest it, and maybe take it out in later years when your income is lower.
To be paying more than 30% tax you would have to be on a taxable income of $120,000+, so you should not need anymore, especially if you have a spouse on this income too and a few other relatives getting distibutions from the trust. Also a lot of the general expenses will be deductible anyway. eg pet dog is a guard dog, depreciated over x years, all food etc a company expense.
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
Thanks for the response Terry.
I thought next year's tax rates resulted in taxable income over $80k paying 38c in each $1 – Am I missing something here with the $120k you mention?
I think I just worked it out.
30c tax is on the ENTIRE profit, whereas individual tax rates are on a sliding scale.
Is this how you derived the $120k?
yep, thats it
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
Hello Kashe
If you are in your mid 30's I agree Super may not be best option, I would be looking at combining some cashflow positive and negative geared property in your personal names.
You may also wish to consider properties in individual names to access the Land Tax Thresholds around Aust.
Though things may change in the tax landscape in the coming months so make sure to get updates from your accountant and the media, as the Henry Review has been submitted to Treasury in late Dec and some of the recommendations in the Henry review deal with property and in particular capital gains tax.
Though it is important to remember that investing may be long term and as such there will always be tax changes impacting on those investments, what I ask my clients is what is the most important increasing wealth and minimising tax or paying zero tax.
I also agree discuss with your accountant before you do anything more, as they know your position better.
KR
Anna Kyriacou
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