Trust or my name for next IP? (given this situation)

I’m very much in the same situation as you mixedup and have been considering whether to get my next IP in my name or in a trust. While not married at this stage, I am investing with my parents to assist me in building a portfolio to assist both them and I. Will definately be doing my reading on trusts to get a better understanding.

With unit trusts the entitlements are fixed. The trust consists of unit holders who own fixed percentages. All profits go to the unit holders in proportion to their holdings. The units could be held by an individual, company or discretionary trust. Unit trusts are generally good for two or more separate parties to go into a venture together as they can have fixed shares of the profits.

Discretionary trusts are trusts where the trustee decides each year who to give the income of the trust to and what amounts. This makes things flexible as one year the trustee may give to a beneficiary who has a low income – each adult can earn up to $16,000 pa tax free. So if you had 2 kids at uni you may be able to have a trust income of $32,000 and pay no tax on it. This is also the best way for asset protection as no one beneficiary has an entitlement of income of the trust – only a mere expectancy. So if a beneficiary goes bankrupt, the trustee would just avoid giving them any income of the trust until they come out of bankruptcy (otherwise it would go to their creditors). This isn't the case with a unit trust as the entitlements are fixed.

No trust can distribute losses, but this was gotten around by a person borrowing to buy income producing units of a unit trust or a hybrid.

Hybrids are a mixed trust with a discretionary component and a discretionary component. The ATO has no problem with them if they are used in a proper commercial manner. The problem is some promotors seemed to be saying A could borrow to buy units but the trustee could give the income to B. the ATO's view is that why would A borrow to buy units if they had no or little chance of getting any income from the trust.

So if you set up the hybrid so that the unit holder has to get the income and captial gains in proportion to the units held then you could probably negative gear with the trust. The trouble with this is no asset protection and no flexibility. However, it still may be worth considering as the trust could redeem the units later on and the trust will become a full discreitonary trust without needing to change the ownership and paying stamp duty. But CGT would be applicable on the transfer of the units.

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

There is no structure where you can have asset protection, max tax flexibility and negative gear your personal income. (there is if you are self employed).

I personally would probably where the losses early on as the long term benefits will be great.

i think i should have said "wear the losses"

If you are serious about investing then use a trust, even if it may cost you a bit extra in taxes in the early stages as the long term benefits will out weight the short term costs.

yes. that is possible.

Scotts,

Not really. The company is a separate legal entity that doesn't allow distributions to beneficiaries. Any profits would be distributed to shareholders in accordance with the % of shares held. there is no flexibility in distributing money.

But there are ways to get money into the trust.

The first is for the trust to perform some sort of work for the company and for the company to pay the trust a fee for this. This may not be good for asset protection as the trust is engaging in business and could be sued – eg the company could go into liquidation and someone else, not so friendly, could control it and possibly sue for breaches of contract or mistakes made etc.

Another way is for the trust to own some or all of the shares of the company. This way the profit would flow into the trust. But if you have an existing business then there may be CGT and stamp duty on the transfer of shares.

A third way would be for the trust to run the actual business. There would be a company acting as trustee and legal owner, but it would be the trust that is the true owner in the tax sense. Any profits would go straight into the trust. This could be a separate trust than the property to make asset protection stronger or the same trust (if business fails you would very likely lose the property).

Hope that helps – but check the tax aspects with your accountant first as there are many other issues to consider.

Yes you can use a trust. But you will have to overcome the PSI rules – personal services income. Check with your tax advisor.