discretionary familoy trust to buy property before paying income tax?

I'm no expert either but I think you want a discretionary trust. Its then at your discretion as to where the funds go.

Hi Terryw ,
  Myself n hubby live in Perth, own a villa. We are building a new property and want to use the existing one as an investment. Both of us earn ard same income 80K (permanent position) & 90K (contract job). We have a 3yo.

Is it worth setting up a Family trust to hold the existing property as investment?
Is it better to have Unit trust instead of family trust in our case

Thanks

Fantastic ideas from Terry as always.

However with the new laws coming in if you lend money from a Company to a Trust  that is seen as a Div7a loan which means you have to have a loan agreement in place and you would have tto pay repayments with interest to the company.

If you do not, it will be seen as a deemed dividend, what this means is that the company will be 'forced' to pay out the loan amount back to the trust as a dividend which is unfranked (this means you won't get a credit for the tax paid in the company).

Hope that helps.

Hi Banker

Yes this was the case previously.

However in the eyes of the ATO, a Trust which has distributed money to a Company but the money maintains in the Trust is seen as a Unpaid Beneficiary Entitlement. Previously, this would have only caused an issue if a beneficiary other than the company (say an individual) owed money to the Trust – this would result in a Div7a Loan.

They are cracking down hard on this, and now loans of the sort between Trusts and Companies are going to cause the same issue, albeit not under Div7a. Note this hasn't been implemented yet.

If I recall correctly though, you might be able to get away with it, if you specifically make a bank account in the trust and keep those funds which the company has 'lent back to you' completely seperate. You must ensure the funds are not mingled with other moneys.

Either way it's becoming harder and harder to pull money out tax free, unfortunately this is having consequences to people who are genuinly reinvesting the money.

Hi Benm84

Yes you can lend money back from a company to the trust but like I said earlier there will be consequences in doing so.

Your best bet is going to your accountant with this situation and specifically ask him what are the Div7a and Subdivision EA consequences of lending distributions from the trust to the company back to the trust.

You will receive a positive tax benefit by distributing to the company only if your current income levels including the distribution to the company exceeds the 30% threshold.
If it is under or the same then personally I can't see the benefit of distributing to the company. Some of the others may be able to point out advantages.

In terms of the PPOR being held in a trust I hav eonly read in other threads that as long as you're not trying to claim the FHOG you can claim a property as a PPOR regardless where it's being held – don't quote me on this one though, as I have never dealth with this certain situation before.

Hope that helps

Best of luck

Scab

Hi,

My understanding is that any profit at all left in the trust at end of financial year will be taxed at the highest rate. This includes any stock you may have or any monies you paid off the principle of the property loan if you have a P&I loan. I recommend you get a interest only loan if the property is for investing purpose.
 
All profit should be dispersed to beneficiaries before 30th June, else you will cop a massive tax bill on your profit that you have left in the trust.

You can disperse to all of your family members and all related business including a bucket company, if all your family members have a 80K income + 25K super each.
 
The bucket company could than soak up any extra profit at a tax rate of 30%, i also recommend the bucket company has a "family trust" as the shareholder of the company thus it gives you somewhere to park your monies until you can find a family member to disperse to, if for example your son/daughter wants to go to university once they are over 18, you can disperse to then with full franking credits or they may be only earning 30-40K per year when they first start their job, you could top up their wage, thus pulling money out of the company via the "family trust" shareholder.

I notice you said you are selfemployed, I would setup another trust as a working family trust to do business with the public, separate to your property trust. Then to stop loses in the property trust with neg gear property, the property trust could do the books and paperwork  for all your business structure thus giving it some income to soak up loses from the first few years neg gear  in property trust.

The problem now lies in the fact if you want to keep assets in the trust, like "stock" for a retail shop, come to the end of the year you will be hit with a high tax bill 47.5% on any profit (asset = stock = profit) left. You used to be able to leave the money in the trust as working capital and just pay the 30% company tax for the trustee company and it's written up as a UPE on the trust books. The ATO no longer let you do this.
 
I think businesses that are in accumulation phase of business growth, will have to set up a subtrust held on the books of the main trust and held for the primary benefit of the trustee company. Once the sub trust is setup you can journal entry that the profit from the family trust was dispersed to the trustee company and then loaned back with a interest only loan for 7 or 10 year period. The ATO has indicated this is OK. The interest is tax deductible to the family trust, but income for the trustee company, but at least you still can have some working capital in your business family trust account.

This arrangement is much better than Div7A loan with 1/7 of the principle has to paid each year as well as the interest.

You could live in the property no worries as long as you were paying market rent and keep everything at arms length. However you will be liable for Land Tax from the first dollar though.

Regards

Stacey

Hi Terry,

You are confusing income with corpus. Any income of a trust that is not distributed at the end of the financial year will be taxed in the hands of the trustee at the top rate. So it pays to distribute!

I dont know the correct terminology but I did say any profit left in the trust and not distributed will be taxed a highest rate.

But any assets of the trust – such as real property, cash in the bank, shares, stock (eg. items of a shop) would not need to be distributed. Paying PI on a loan should not matter – it just means less interest and therefore higher profits.

Yes I agree they dont need to be distributed , however look at it from this point of view, from a business that is growing, this example:-

Trust starting stock 1st July : $200,000
Cash in bank 1St July:             $50,000

Position end 30th June:

Trust Ending year stock 30 June: $600,000
Cash in bank 30th June:                $50,000
Expenses for the year                   $100,00
Income for the year                       $500000

From the above example you can quickly tell that the Trust made $300K for the year, but you only have 50K cash, however your assets have increased 3 times, this is where the problem arises if you don’t have physical money to lend to the trust to cover the profit payout to benefactors.

 Assett doesn't equal stock and this doesn't equal profit. Just think if you had a cup shop and had $20,000 worth of cups sitting there unsold. This is not profit.  

I agree, however if you increased your cups to value of 100K from 20K from the start of the year, then you have made a profit of 80K, that increase of stock level is a asset that is now profit that has to be paid out. 

Not sure about the ATo allowing journal entries now without the actual movement of cash. I think it is better to have the distribution paid and then lent back to the trust.

 Again that is good for a business that is not growing and not increasing its assets inside of the trust every year. You can see from the above example that you can’t physically payout something you have not got, so the only way to do it is with either a subtrust or Div7A and journal entry. 

 Regards, Stacey

Hi Terry and Ben

Yep, "property and shares" are very different (generally go up in value) than "stock for a merchant" (generally gos down once it is purchased).

Yes from a property asset point of view, the single item value can increase with no tax to pay until you sell it, however Ben asked the question of what would be the recourse of living in a property which is owned by a family trust of which you are a benefactor.

I see it like this:- Issues

Cons:-

1)you will have to pay landtax from first dollar, where as in a personal name you get a threshold.
2)you will have to pay rent for the house at market value.
3)the loss from the negative gearing/ Depreciation will be traped in the trust, unless you give the trust some-other income from another business. ie book keeping. If you dont you may have to borrow your trust some money until it breaks even.
4)Unless you get PIT trust, then it will vest in 80 years.
5)Have to pay CGT tax once it is sold, where as a PPOR you dont pay any
6)Good for a investment property but if you are planning to live in it, better off having it in your wife name, thus you sill get asset protection if you are self employed, so you dont pay landtax and get no CGT.

Pro.

1)Asset protection
2)Ability to distribute to low income earners once the property starts to make a profit.
3)With a company trustee, its easy to change directors thus very easy to change control of the trust.
4)Get a 50% CGT rebate for trust and another 50% for small business.
5)With a PIT trust it does not VEST, perfect for passing on wealth to generations. (no need to use the hybrid part IMHO)

I dont particularly like hybrid property trusts, if you push the boundaries you will get a ATO audit, when there is other ways to do it which the ATO wont blink at, especially if you are self employed with another business.

Hope this helps ya mate.

Regards Stacey