Purchasing property – Trusts – Discretionary vs Hybrid vs Own name

I'm also interested in what you have asked so looking forward to getting some feedback!

No Linar you are bang on.

I am only aware of 3 lenders who will openly and knowingly accept an application in a HDT and not of these lenders are particularly competitive.

I remember clients who borrowed in such a structure with Seiza mortgages just prior to the GFC who when everyones else interest rate fell theirs went up. They had no choice as you could not refinance a HDT loan.

Doesn't sound correct to me.

If you borrow in your name and lend to a trust, you will not be able to claim the interest.

If you are referring to the hybrid trust method, then you would be buying the property in the name of the trustee and you the individual personally borrowing to buy income producing units in the trust. To be able to claim the interest on this then you will need to be able to show you have a good chance of receiving an income on your investment. Therefore the trustee should have no discretion in deciding whether to distribute to the unit holder or not. But if the trust is set up this way, most of the benefits are lost.

Another problem is the loan as the others have mentioned. The company will own the property, so you getting a loan using the property as security won't be easy.

As for the ATO, I don't see them as having a problem with hybrid trusts if they are set up commercially.

And there has been a court case involving hybrids – with the tax payer winning. The taxpayer had a fixed entitlement to income of the trust, but not capital gains and the trustee was able to change income to capital to enable some tax savings (seems ATO stuffed up a bit here).
see Forrest v Commissioner of Taxation [2010] FCAFC 6
http://www.austlii.edu.au/au/cases/cth/FCAFC/2010/6.rtf

Try IT 2385
http://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2385/NAT/ATO/00001&PiT=99991231235958

for staters – Beneficiaries of a DT cannot claim expenses.

Also try thinking it through logically. X is a beneficiary of a DT.
-a)  If X borrows money and gifts it to the trust – Its a gift so interest won't be deductible.
-b) If X borrows and onlends the money to the trust. X could only claim the interest if X was charging the trust interest, otherwise it wouldn't be a commercial transaction.
-c) 'investing' into a trust (??) – there is no connection between borrowing and any income earning capacity or potential. X would be one of hundreds of potential beneficiaries and there is no guarantee if that X will ever get a distribution. Even if X controls the trustee there is still no guarantee X would distirbute to himself.

Hi all,

it is very interesting topic,

Jacqui , i have very similar situation to yours. I got one under my own name and another one is joint name with my partner.

But I wanted to start some property development ( such us subdividing, build a granny flat…)

so next property I am thinking to put into company or trust , just in case if there is any thing go wrong I have my asset protection. I won't be personally liable.

but I am not sure if this is a correct thinking ?
my accountant also told me it's too early  or not necessary to purchase under company or trust……

I am not sure.

any comment anyone  ?

please help

Hi Scha

I don't think its a matter of being too early – its a matter of how 'big' you want to be. If you want to be buying several properties, doing developments or running a business then you should seriously be looking at trusts (separate ones for each too!).

You cannot get much benefit from transferring existing properties or assets into trusts so you need to decide before you buy.

Also I think you misunderstand the basic principles of asset protection. Just buying something in a trust doesn't mean you are protected.

There are 3 ways, at least, that you are potentially at risk:
1) you will need to provide personal guarantees to get credit
2) you could get sued personally
3) you could find the trust is sued.

Doing a development would mean all  3 could happen at the same time!

Where you could get some protection is if you had one/several trusts and were sued personally and ended up bankrupt. The assets held in trust would generally be safe (depending on how it is set up etc)

Ideally I would suggest buying at least one property in personal names as you get the CGT exemption – which will be huge as values increase over time. But this one I would suggest should be in the name of the spouse with the lower risk so as to increase asset protection.

There after, ideally, in a trust, but again it would depend on the numbers. I just worked out buying the first IP in a trust in NSW may cost an extra $5,600 pa just in land tax. This and the inability to save personal tax on negative gearing could cost you an extra $10,000 pa in the early years. This is a huge amount.

But after you buy a few in your own name you will be paying land tax on future properties (once you have used up the threshold) and as rents rise you will not have a loss – from then on it is smooth sailing, unless the government changes the rules again.

Maybe it is easier just to invest in shares – no land tax, stamp duty or negative gearing issues (usually).