Hi,
I am new to the site and investing in property.
I have a few questions and will try to keep it simple.
My background is as follows:
My husband and I have recently set up a Family Trust structure with us both as Directors. The income flowing through the trust is generated via fees for services with very little expenses and a generous net income per year which our accountant will distribute to ourselves and our four children.We only have one property (which is too small for us) and want to purchase another PPoR and rent out our current PPoR (selling it within 6 years to avoid CGT).
I am looking at the Trust purchasing a property (that we intend on never selling) and renting from the Trust, however I still need some clarification on the following:1. At arms length – would we satisfy this ruling?
2. Carrying forward losses if the property is negative geared – does this mean that the losses from the property can be offset against the other trust income before distribution?I am looking to further reduce the Trusts taxable income and start investing in property.
I will be seeking my accountants advice, but would love to hear what anyone thinks or suggest.
I think you'll find that to avoid the CGT, you will have to be living in the house when you sell it. The 6 year rule merely means you have 6 years to move back in to do this tax dodge. However if you've moved to another house and declared it your PPOR, and turned the first house into an IP, then you will not be selling CGT free…
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi JacM,
The first house will remain an IP and I will be negative gearing it to reduce my personal income after Trust income distribution (it is in my name only).
I will definitely check the residing requirements on the 6 year ruling with my accountant – thanksJacM wrote:I think you'll find that to avoid the CGT, you will have to be living in the house when you sell it. The 6 year rule merely means you have 6 years to move back in to do this tax dodge. However if you've moved to another house and declared it your PPOR, and turned the first house into an IP, then you will not be selling CGT free…Don't think you need to be living in the property at the time of sale, from my understanding you will just not be able to claim the main residency CGT exemption for your current PPoR for any period that you claimed on your original PPoR under the 6 year rule.
Scenario is this thread:
https://www.propertyinvesting.com/forums/property-investing/help-needed/4333447
You won't be able to negative gear the 1st place. Not the loan interest anyway… because the original purpose of the loan was not for investment.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi cmason,
Thanks, I thought this may be the case after reading some of the other forums.
So this leads me to my next question.
If I keep my IP as my PPoR to satisfy the 6 year rule, what do I consider the home that the Trust purchases?Hi JacM,
I was aware that the interest is not a taxable deduction due to PPoR, however it is still a tax benefit as I can claim approx $5000 – $6000 in out of pocket expenses per year on loan repayments, rates & agent fees etc.
JacM wrote:You won't be able to negative gear the 1st place. Not the loan interest anyway… because the original purpose of the loan was not for investment.This is not really correct Jac. The original purpose of the loan was to purchase the house. If the house is rented out the loan would usually be deductible – assuming there were no subsequent redraws for personal expenses.
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
JacM wrote:I think you'll find that to avoid the CGT, you will have to be living in the house when you sell it. The 6 year rule merely means you have 6 years to move back in to do this tax dodge. However if you've moved to another house and declared it your PPOR, and turned the first house into an IP, then you will not be selling CGT free…Also not correct. see s118-145 ITAA 1936 for the 6 year rule. No need to be living in the house when you sell to claim the exemption.
If you claim another house as the main residence during this time then you can't get the exemption on both for the same period, but you could chose which one you wish to claim the exemption on. (note no exemption on trust owned)
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 Terryw,
I have read several of your posts and very glad you have have commented on my post.
What are your thoughts on the Trust purchasing our next property and my husband and I renting it. The Trust would purchase it as an IP and negative gear to reduce tax payable?
Does this makes sense?
Pootie Tang wrote:Hi,I am new to the site and investing in property.
I have a few questions and will try to keep it simple.
My background is as follows:
My husband and I have recently set up a Family Trust structure with us both as Directors. The income flowing through the trust is generated via fees for services with very little expenses and a generous net income per year which our accountant will distribute to ourselves and our four children.We only have one property (which is too small for us) and want to purchase another PPoR and rent out our current PPoR (selling it within 6 years to avoid CGT).
I am looking at the Trust purchasing a property (that we intend on never selling) and renting from the Trust, however I still need some clarification on the following:1. At arms length – would we satisfy this ruling?
2. Carrying forward losses if the property is negative geared – does this mean that the losses from the property can be offset against the other trust income before distribution?I am looking to further reduce the Trusts taxable income and start investing in property.
I will be seeking my accountants advice, but would love to hear what anyone thinks or suggest.
Hi Pootie
There are a few things you need to consider if renting from a trust.
1. The first is the ATO. They have issued rulings about renting from your own unit trust, but they seem to be ok in general when renting from a discretionary trust. Just make sure you discuss wtih your advisor as there is a chance they could claim it is a scheme.
2. The second is the legal implications. The trust assets are not your own and you should not treat them as your own. The trustee has duties towards the beneficiaries to act in their best interests etc etc. If you keep everything at market rates then you will probably be fine, but you had better check with your lawyer as you don't want a beneficairy making a claim years down the track.
3. It is generally not a good idea for a trust conducting a business to own property. If the business is sued then the property make be attacked by creditors. it would be much better to set up a new trust to own the property. The business trust would then be able to distribute income to the property trust to offset any losses first and then the left over to the individual beneficaires etc. But you will also need advice on this too, as it is a complex area that many don't understand – eg if a new trust has a vesting date after the old trust you may be infringing against the laws against perpetuities. This can be avoided by making the vesting date of the new trust before the old, but this will limit its life too with further consequences. This will also depend on which state you trust is governed by.
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 Terryw,
I has read similar elsewhere and will investigate further. In relation to the valid point points you have raised
1. Our Trust is a discretionary Family Trust, so I will discuss any concerns the ATO may have with our accountant.
2. We plan on ensuring we pay market rent and that everything is "above board" legally, to ensure the relevant government bodies are happy. My husband and I are the only Directors and our children are the only beneficiaries, so no concerns with any property claims at a later stage.
3. We have two entities from what I understand. The income is generated via a Pty Ltd Company and then we have the Discretionary Family Trust that the income will flow through at the end of the fin year. So essentially the two are separate……I will however check with our accountant as you have raised a valid concern.
Many thanks for your thoughts.
Wow – I never thought reading about property investment would be so interesting!
It sounds like you have a company as trustee. I am not sure but suspect this company is trading as trustee so the trust is the owner of the business. You would need a new one set up to protect the assets.
If your company is trading in its own right, and the trust is owner of the shares then the same trust could own property – as if it is just a shareholder it couldn't be held liable for the company's debt other than the value of the shares. Unless you have two companies, you are probably operating under the company as trustee model – which means although they are separate for tax reasons they are essentially one legal entity – the trustee company.
Are you sure your children are the only beneficairies? This would be unusual. Usually there are named beneficaries and non named. eg grand children, cousins, spouses of children etc. You yourself are also probably a beneficiary.
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
A Trustee Company sounds familiar, our accountant has tried to explain the structure but it is evident that I am still unsure.
I will clarify things with our accountant. And yes, sorry my understanding is that the nominated beneficiaries are my husband myself and our children…..something to check out also.Does my proposal sound crazy?
We need a bigger home and we really need to reduce our taxable income. I thought about our Trust acquiring property and renting from the Trust after reading about the tax benefits associated with renting your "dream home" for lifestyle purposes, and having a number of investment properties. This is considered a great way to accummulate assets and wealth, with interest only loans to increase cash flow.
I don't like the idea of someone else being my landlord, so I thought about the Trust, and it owning property and renting from it.I don't think it sounds crazy. It is a good idea that can save you money and give some asset protection. You just need to make sure you set it up well.
Also consider the trust may be able to provide furniture, get the lawns mowed, repairs etc.
There are some disadvantages such as:
– probably more land tax
– greater accounting fees
– eventually rents must rise and you could be paying tax on something you otherwise wouldn't
– greater complexity
– CGT on your own home which would normally not apply (but you are not losing this benefit as you can still claim the other house as the main residence).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
Terry,
Big thanks for your thoughts, I am just trying to get my head around things. Your advise is invaluable and I thankyou for your time.
I will look into the extra costs involved.N.B I was checking out the ATO rulings earlier to ensure legitimacy of a Director renting a property from a Trust they have an interest in. As we intend to purchase a few properties over the next several years, we may satisfy the ATO's requirements if we establish another trust for property investment purposes as you suggested.
You may want to look at these rulings
PBR 83291
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/83291.htmTR 2002/18
Income tax: home loan unit trust arrangement
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200218/NAT/ATO/00001Also, depending on the state your property is located in, property that is being used as your main residence may be exempt from land tax even if it is owned by a trust. I think this is the situation in QLD, but not sure.
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
I am in N.S.W and will look into land taxes.
Thanks for links Terry. So it would seem that the Trust can begin to acquire investment properties and we could rent one of them and it would be a legitimate transaction for taxation purposes provided.
1. The Trust acquires other properties at some stage.
2. We pay market rent.
3. We only stay in the property for a short period of time.The third point, tends to concern me a little as I don't like to move too often (We have lived in our PPoR for over 7 years).
I know what I am considering is a lot more complicated than the above points, but I just want to make sure that it is allowable under Aust taxation laws and would not be considered a "scheme".
Just remember was a private ruling so it only applies to the person that applied for the ruling. Your situation will be different and staying long term may or may not be an issue. If you want to be on the safe side you could apply for your own ruling.
In NSW I don't think there are any land tax exemptions for main residences held in trusts. You will pay 1.7% pa on the value of the land which is a considerable amount so you should make sure you factor this into your calculations.
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
I will look into private rulings….I hope it is easier than it sounds.
So long as the land tax is a deductable expense for the Trust, it works for us as it reduces our taxable income.
By "main residences", do you mean the one we intend to rent, or will the tax apply to all of the Trust properties?Thanks again for your time Terry and prompt responses.
Cheers
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