Hi guys,
Just get a bit confused under following condition:
I want use family trust buy a property for live, so I can rent from the family trust and the family trust get negative gearing.
(I have had a PPOR-principal place of residence but too far from where I living.)
Here is my questions:
1, Current my parents live in my PPOR for free, If I rent outside a long time like 10 year, will the ATO still treat my property as PPOR?
Or they will consider it's a investment(even no income!) and I have to pay CGT when I want sell?2,Like I pay rent to my trust(company trustee) to get negative gearing, If one day the trust pay off the mortgage, so no Negative gear anymore, Can the Trust said to ATO "The home is not rent any more, it just provide free accomodation for xxx?"
Is this possible? or Fringe Tax Benefit will apply?Thanks a lot
I do not know anything about this scenario or how the tax office treats this setup
but the link below may be useful
but I recommend you seek professional accounting advice before committing to any tax minimisation scheme.Tax ruling I found on the subject
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/83291.htm
rulings can change so check with an accountant !Not sure but I think the negative losses stay in the family trust and capital gain tax and land tax will be a possible downside.
check with an accountant !You are able to rent back a property from a trust that you are a beneficary to. However, the rent must be market rent (not a discounted rent) as you must show the ATO that it is a legitamite lease and not just a tax evasion scheme. Furthermore, you can rent out the property as 'Fully Furnished', which means you will be able to claim everything from depreciation on your furniture to the cost of buying toilet rolls and pots and pans.
In regards to negative gearing, you can not transfer losses from a trust to an individual. So negative gearing does not work with trusts, as the loss is 'trapped' inside the trust and can only offset future income of the trust. You had best speak to a good accountant about this, as there may be ways of getting around it (such as transferring money from a profit making trust into the loss making property trust).
Cheers,
LukeHi duckster, thanks for the reply and Link, much appreciated:)
Hi luke86, thanks for the explain.
The trust runs a business so it has an income stream, and much thanks for the idea about "'Fully Furnished'"also found 2 links:
1.Rent as market value
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/83291.htmIf the property is rented at market price, the trust can claim all expense like intertest,land tax,council rates and I think if it's rented as 'Fully Furnished', the depreciation of the furniture also can be included to offset the Trust's income.
(But the expense or loss can't take out of the trust to NG personal income.)2. If the rent is lower than market rate, all you can offset is what you got.
http://www.ato.gov.au/individuals/content.asp?doc=/content/00191817.htm&page=7Ato example:
Renting to a family memberATO Web wrote:Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent – $180 per week. They allowed their son, Tim, to live in the property at a nominal rent of $40 per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants.Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement.
Assuming that during the four weeks of Tim’s residence the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total – that is, $40 x 4 weeks.
If Tim had been living in the house rent free, the Hitchmans would not have been able to claim any deductions for the time he was living in the property.
Hi poweregg and All,
I have been working in this area for over15 years doing planning for investors, mostly business owners,
Q1. You can move out of your PPOR for up to 6 years without losing the CGT exemption, and provided you move back in for a while – say six months you can repeat that process without detriment,
In you current situation – rent free parental accomodation, you cannot claim any expenses as the "investment" has not beeen made to produce assessable income.Q2
Is a bit more complex.
First – if the loan is repaid then you have no interest expenses – but you still have all the other items: maintenance & repairs, depreciation, or you may borrow to add a room or extend etc. but it is still an investment property. However the golden rule is still what is the purpose of the expense: IE is it "an expense NECESSARILY INCURRED by the taxpayer,TO PRODUCE ASSESSABLE INCOME, if the answer is NO then no deductions will apply.
While you are all mulling over this very interesting idea go and read the case:Janmor Nominees Pty Ltd 87 ATC 4813.
This involved a SERVICE TRUST and was a case the ATO lost.
The other more iteresting case involves the ATO Ruling ID 2002/388. This is an ATO Interpretive Determination issued in 2002, and says this: A SMSF can hold an investment interest in a unit trust which owns an investment property and the trustee of the unit trust can lease that property to member/s of the SMSF and provided they pay a full, arms length commercial rent to the trustee then all expenses are fully deductible. This is supported by the 1991 appeal case Forli Pty Ltd V ATO which the ATO also lost after declaring the relationship as a breach of super. laws.However before you all get too excited understand that the SMSF and Unit Trust must have been linked < Aug 12 1999 so its now history. Also read the ATO "Agreessive Tax Planning Alert list which includes "Home Loan Unit Trust Arrangement" as the ATO has identified this as a NO GO area. The ATO Alert is not law – but unless you have the resources to fight a case it may bring you much anguish.
However given the great benefits involved it may be worth considering. Because Q? Does it mean that to because you get all the deductions – will you lose the PPOR benefits ? – No not necessarily because under the CGT PPOR exemptions it is not necessary to own a FREEHOLD interest in the property – it can arise from a LEASEHOLD entitlement.
Detailed personal property planning – before you buy can bring much greater benefit and certainty than just listeneing to "property gurus".
All contributions to debate in this area are invited.
Regards to AllAnthony @ A4Companies
There are a number of issues to consider.
1. You can rent out your main residence for u to 6 years and still claim it as your main residence. However, if you are not earning an income from it then it can remain as your main residence indefinitely.
see s118-145(3) ITAA 1997:
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.145.html2. The trust bit involves a lot of issues – legal and tax.
Firstly the trustee, or directors of the trustee, have a duty to look after the property of the trust in the best interests of the beneficiaries and not to personally benefit themselves. So you need to take great care in how you do this. You must first check the trust deed and make sure you are allowed to rent the property from the trust. If so does it have to be a market rates? If your deed doesn't allow this then another beneficiary could possibly sue you down the track.As for the tax side, you seem to want the trust to claim a deduction until the property becomes positively geared and then live there rent free. This sounds like a scheme with the main purpose being a tax deduction – but it could possibly work if you structure it correctly. There is no requirement to pay market rent, but there would be if you want to claim a deduction for expenses or the ATO would reduce the amount claimable.
Any loss generated will be trapped in the trust so unless the trust has other income there will not be any tax savings in the short term.
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 and All,
Yes the 6 years CGT treatmewnt is correct.
Trustee duties can be found in 2 places, in the specific trust deed or any amendments and where that is silent or ambiguous. in the Trustee Act for each State or Territory.There are provisions and rulings in the ATO legal database regarding rent and expenses and related persons or entities.
Trust losses can be reduced or avoided fairly easily by the way you set them up. Since each persons case wil vary so will the way the arrangements are established.Never enter into any investment or arrangement unless you have a planned and documented startegy which will establish your intentions as to the results for which you are aiming.
Anthony @ A4Companies
This is great place for discussion – very worthwhile.Anthony K wrote:Hi TerryW and All,
Yes the 6 years CGT treatmewnt is correct.
Trustee duties can be found in 2 places, in the specific trust deed or any amendments and where that is silent or ambiguous. in the Trustee Act for each State or Territory.Hi Anthony
And don't forget the common law duties and also the Corporations Act if the trustee is a company.
I think not many people understand or realise the potential legal issues when it comes to trusts.
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 Anthony K,
Really Thanks for the decent answers.
Especially for the case:Janmor Nominees Pty Ltd 87 ATC 4813 which ATO LOST.
They used a unit trust so can take the loss out to Negative their person income.
My discretionary trust with a business to generate income, so it don't need transfer the loss out.One thing I forgot to explain is the reason I have to buy the property is because the business required so.(like need you onsite 24 hours)
So today I talked to my accountant he said I even don't need pay rent and can deduct all expense(interest,land tax,council rates…) because this property is required by run the business(I just feel a bit crazy but I will do further research…)Hi Terryw,
Much thanks for the info "if you are not earning an income from it then it can remain as your main residence indefinitely."
Base on these issue, as I already have PPOR,the only benefit for buying the new property under my name is save the stamp duty.
(I have to pay CGT when sell anyway because I already have one PPOR)
So put under the trust, and live there because the business required so….
(Hope ATO can accept my explaination)However, Like company provide free accomodation, it may trigger Fringe Benefit Tax….this is my new anxious question….
(I will ask accountant and update if any got news)Poweregg
You shouldn't be buying property in the same trust as your business. Your chances of the business failing are high and therefore a high chance that creditors to the business getting their hands on trust assets.
Don't forget the extra land tax for trusts too.
And, as long as you are not an employee of the trust then I don't think there would be any FBT issues – check tho.
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 and All
You are right Terry however I use a special kind of trust which has compartments that can segregate assets used in a business.
This allows the trust to keep real estate apart from the trading activities. We use a specially designed trust and strategies with
high cash flow businesses like Child Care or hospitality related activities.
Ther is no extra land tax for discretionary trusts, they just dont egt the threshhold releif about $380,000 this year in NSW. The problem now is taht to get the threshhold in NSW you have to expose the holders of units in the trust to external creditors, its not an easy or a good choice. The govt. here is screwiing the public – as usual. You get the bad choice of having some better asset protection or saving some land tax.
Ah !! its a cruel world out there, take care all.
AnthonyAnthony/Terry-
Can you set up two trusts- one business trust and one porpoerty trust, and then distribute the profit from the business trust into the propety trust too offset any losses incurred in the first few years of operating the property trust?? Will this have any asset protection implications i.e. can any creditors of the company recover money from the property trust because the profit districbution may make it look like they are linked??
Luke
luke86 wrote:Anthony/Terry-Can you set up two trusts- one business trust and one porpoerty trust, and then distribute the profit from the business trust into the propety trust too offset any losses incurred in the first few years of operating the property trust?? Will this have any asset protection implications i.e. can any creditors of the company recover money from the property trust because the profit districbution may make it look like they are linked??
Luke
Yes, this is how I would do it. As long as the two trusts are separate then it should be fairly safe. Best to have separate trustees.
There is a possibility of clawback, but that would depend on the circumstances.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
Anthony K wrote:Hi TerryW and All
You are right Terry however I use a special kind of trust which has compartments that can segregate assets used in a business.
This allows the trust to keep real estate apart from the trading activities. We use a specially designed trust and strategies with
high cash flow businesses like Child Care or hospitality related activities.
Ther is no extra land tax for discretionary trusts, they just dont egt the threshhold releif about $380,000 this year in NSW. The problem now is taht to get the threshhold in NSW you have to expose the holders of units in the trust to external creditors, its not an easy or a good choice. The govt. here is screwiing the public – as usual. You get the bad choice of having some better asset protection or saving some land tax.
Ah !! its a cruel world out there, take care all.
AnthonyHi Anthony
I am interested to hear more about your comparmentalised trust. I can't see how it would work from an asset protection point of view. You would need 2 separate legal entities to achieve separation.
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 Luke, Terry and All
Yes
This is one of the strategies we use in our TEBL Trust arrangement.
Also please note that some people have been referring to "distributiing" or "transfer" of losses – it's not legal and its a breach of tax regulations.
In all cases – persons, companies and trusts, losses (revenue or capital) can only be used by the entity which generated them. There are also rules and test about continuity of ownership of the entity and continuity of the activity which generated the losses.
However you can distribute from one – trust1 to another trust2 if the recipient trust2 via its trustee is a beneficiary, or transfer if there is an obligation to repay a debt in which case it is not a distribution but a capital payment and will not reduce the income of trust 1. A business entity can also charge a management fee from one to another – bvut treat this with care as it must be able to be substantiated as to value and will also incur GST when it is invoiced.Interesting stuff playing with business trusts
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