What to trust?

It depends on your situation and which state you will buy in.

Some reasons NOT to use a trust:
– In NSW you may end up paying more land tax with a trust.
– Losses of a trust are not able to be distributed so if your trust negative gears it may have a loss which you can't offset. If you purchased in your own names this may have saved you a bit of tax.
– Higher running costs. Tax return would be needed for the company as well as the trust. The accountant may charge a fee for the company to register at his address and there will be annual ASIC fees of $212 for the company.
– Complexity. You may find it harder to get your head around things when talking about tax and trusts
– Legal issues. There are complex legal issues surrounding the use of a trust. The Trustee has to act in the best interests of the beneficiaries of the trust. Trust assets are not your own.
– ASIC issues. You will need to abide by the Corporations Act and other regulations if you use a company. minutes of meetings, notification of changes to your address, shareholders etc.
– If you use a company, Your personal information will be on a database which is searchable by the public too
– Potential disputes on how the profits are to be distributed between you are the brother – trustee has absolute discretion here, but if you both control the trustee how do you resolve disputes. What if you have a high income and he has a low income, do you distribute more to him to save tax etc?

hi Steve

1. Yes losses are trapped in the trust. Losses can be carried forward indefinitely until offset by gains.

2. Yes laws have changed in the last few years. Trusts no longer get the land tax free threshold. There are different rules for 'special trusts' – some unit trusts may be classed as special trusts, but this will depend on the terms of the deed I think.

3. no

4. Not sure, but I think QLD is good. I think each trust has its own threshold up there – but I could be wrong.

5. Its not good to transfer an asset you already own into a trust – stamp duty, CGT and loss of asset protection are all issues. But that doesn't mean you should set up a trust straight away. Some people have big ideas and spend thousands setting things up and then after they do one deal they decide it is not for them and not going to work – I have also seen some who have set up trusts and never done any deals.

6. Companies cannot get the 50% CGT discount only individuals can. With trusts the income is distributed so the tax is payable in the hands of the recipients. If the recipient is a company it can't claim the 50% discount, but an individual could.

hi Steve

Yes you could do the tax returns yourself if you understand it (and the deed allows it) but it is complex, especially if there are losses. You may need to consider things such as family trust elections.

I think you may be able to use accumulated income losses to offset capital gains – but this may depend on the wording of the trust deed concerning the classification of income. This is another complex area with a recent high court case, FCT v Bamford.

re Q6 – only individual beneficiaries would be entitled to the 50% CGT discount, not companies.

Hi Steve

You can't have your cake and eat it too I am afraid.

In NSW the office of state revenue classes trusts into 7 different categories. If one of the trusts falls under the definition of a special trust then the threshold doesn't apply. They would be taxed on land values at $1 up.

If your trust is classed as a fixed trust then the land tax threshold may apply. But to be a fixed trust the trustee must have no discretion at all in the variation of income or capital. It must be fixed. So if you have a unit trust each unit holder must be presently entitled to a share of the income and capital.

I am not sure about the units being owned by a trustee of a discretionary trust. I think the unit trust could still qualify as a fixed trust if the deed was worded properly. If a discretionary trust were to own the units, then you could not personally claim the interest to buy the units – the DT would be the one claiming interest.

If you set up the trust properly you may be able to do it by having income and capital units. Its still possible to claim the interest as this recent case shows, Forrest v Commissioner of Taxation [2010] FCAFC 6. You could have different classes holding the income units and the capital units. The deed could be worded in a way so as the trustee can determine whether any income of the trust falls in the class of income or capital and therefore the trustee could direct the income to each class at their discretion while each class has fixed entitlements. So you would have a fixed trust with a slight discretionary component.

So it may be possible.