Hi,
Im about to invest in a couple of properties and im thinking about forming a family trust to it.
My main aim is asset protection.
My understanding is that if I was ever sued or went through a divorce the properties would be safe in the trust ?I have the following questions …
I have some pre approved finance ready to go in my name. Can I use it in the trust ?
I see trusts can be set up with a DIY kit online. What are the on going costs of keeping the trust ?
Can I claim depreciation benefits from the properties in the trust under my own name?
How do I structure the trust ? Do I appoint myself as the beneficiary and my father as the trustee ?
My father is old what if he dies in a few years ?Thanks,
Mark.
Mate a lot of questions that you should direct to your accountant, since your new to this as well- i would avoid DIY trust it can cost you thousands if set up incorrectly….
About the depreciation not all trust allows you to claim the depreciation personally, and im pretty sure Family trust is one of them that doesn’t allow you to do that.
Regarding pre-approval not all banks will allow trust purchase + some will charge you more in fees etc…
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
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hi Mark
Assets in a discretionary trust may be safe if you go bankrupt. But this will depend on how the trust is set up and how it is used.
If you get divorced then generally having a trust will not assist.
You will probably need to re-jig the finance, but if you have been approved before then you should be approved with the trust.
Trusts can be set up online, but I suggest you don’t do this as I have seen a few people stuff things up. You will be holding an expensive property after all.
Trusts cost nothing to run. If you have a company as trustee then the cost will be about $212 per year for ASIC fees.
The trust will claim any depreciation.
If your father has any role in the trust then this may effect his centrelink payments (if he gets any).
If a trustee dies then the appointor will generally appoint a new trustee but title deeds will have to be changed and loans reapplied for. Best to use a company as trustee for these reasons.
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
The best piece of advice would be to speak to a good accountant because there are a lot of things you need to take into account.
Do not use a DIY trust deed. It can cost up to a couple of thousand to have a lawyer set it up but if you want to be cheap now you may pay a heavy price later. The ATO has been paying a lot of attention to trusts recently (read Bamford’s case), so you need to make sure the deed is up to scratch and meets your requirements.
Apart from set-up costs, the only costs will be the annual $212 company fee for the trustee company and any accounting fees. If the trust only holds a property or two then it shouldn’t cost much to have your accountant look after the accounts and tax return.
The trust will claim any depreciation. As Terry mentioned its a good idea to use a corporate trustee because it can avoid a lot of mess.
A few things to think about though:
1. Are the properties negatively geared? A discretionary trust (DT) can’t use the losses (except in some circumstances) so the negative gearing benefits are lost. This is one reason to speak to an accountant for proper advice. Other structures (eg – unit trust) may be a better option for negative gearing.
2. DT’s also do not get the land tax threshhold (roughly 400k in NSW). Its common practice to buy a couple of properties in your own name first to use up the threshhold. Land tax on 400k is around $6,400 pa which adds up over the life of your investment! Obviously you lose the asset protection though.
Thanks for the advice .
Im still a bit confused.
The two properties im buying are positively geared but the depreciation and other write offs should still add up to more than the net
profit from the rent at the end of the year.I could form a unit trust with a corporate trustee to hold the properties but it sounds like the only real benefit I will gain is bankruptcy protection. I dont really have anybody else I want to distribute the income to.
Mabey im better off just buying in my own name. What are the main reasons people use the trust structure ?
No bankruptcy protection with a unit trust as the units are considered property under the bankruptcy act. You would have to hold the units via a discretionary trust to get any protection.
But certain unit trusts could enable the land tax threshold to be obtained, but only if an individual were to hold the units.
Bascially, you cannot have one structure with all the benefits. You have to give up someone to get something else. eg. give up asset protection and you can save more tax.
I should also point out that hopelfully your rental income will rise so that your trust may be positive taxable income very soon. From then on the discretionary trust would be the way to go. You cannot change without great cost so giving up some deductions now may result in greater savings and other benefits in the future.
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,
Negatively geared IPs work best when held by a high income earner. Using a trust presents a problem for this.
As noted above, a trust will not assist in a divorce. Also, if you are tipping money into the trust to cover the purchase deposit, etc and ongoing expenses, a loan will build up and this will be an asset of yours. As such, asset protection is effectively reduced.
If the IP starts to produce taxable income in future you will use up the losses then what? Do you have beneficiaries who can be taxed on the income at an effective rate?
Lastly, you should really get it set up professionally if asset protection is your motivation. 1 small cock up and it can all come undone. They can also explain trusts in more detail. You should never set up a structure you don't understand!
Mark, we have a couple of different Trusts and they work really well for us. Before you get too far into it realise that in NSW and Victoria Trusts don’t have any Land Tax thresholds so IP’s owned by Trusts automatically incur land tax bills unless it is a Corporate Trust. Yhis is something we discovered after receiving our first $2.5k land tax bill. Thankfully the property performs so well that the Land Tax doesn’t affect the property too badly but I’d much rather have the now close to $3k in my pocket! QLD and WA do have thresholds for Trusts.
Annual costs are basically tax preparation associated only unless it is a Corporate Trust with the small $212 ASIC fee.
Definitely speak to your accountant to get things set up correctly if you go down the Trust path.
MickMick – think you mean only fixed trusts get the land tax threshold.
Getting the land tax bill must have been a bot of a shock to you. But hopefully the income tax advantages make it worthwhile
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’ve heard this strategy before in a seminar which said that the Cashflow from some of the IP can be pooled into Trust and then we buy the dream home with Trust account and then one of the Trust member “rent” the Dream home so that it can be tax deductible
Hi Henry, be very careful of that sort of strategy. The ATO certainly does not like this sort of thing and have even published a "taxpayer alert" on one such scheme.
http://law.ato.gov.au/atolaw/view.htm?docid=TPA/TA20011/NAT/ATO/00001
The other factor to consider is that if using a trust to purchase a ppor then the CGT main residence exemption is not available. This would generally be worth way more than the tax deductions.
I agree that you have to be careful. You would need advice and possibly a private ruling
Here is a a link to a private ruling where someone rented from a trust which they controlled
PBR Authorisation Number: 1011415913206
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/1011415913206.htmTerryw | 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
The direct link doesn't seem to be working atm, try http://www.ato.gov.au/rba/disclaimer.aspx and use the ruling number to search
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
Ashley C wrote:Hi Henry, be very careful of that sort of strategy. The ATO certainly does not like this sort of thing and have even published a "taxpayer alert" on one such scheme.
http://law.ato.gov.au/atolaw/view.htm?docid=TPA/TA20011/NAT/ATO/00001
The other factor to consider is that if using a trust to purchase a ppor then the CGT main residence exemption is not available. This would generally be worth way more than the tax deductions.
This one is the ruling, more in depth
TR 2002/18
Income tax: home loan unit trust arrangement
http://law.ato.gov.au/atolaw/view.htm?locid=%27TXR/TR200218/NAT/ATO%27&PiT=99991231235958Terryw | 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, thanks for the advice that was just the advice from the seminar that I’ve attend.
It seems that it is possible but with strict ruling.Ashley C wrote:Hi Henry, be very careful of that sort of strategy. The ATO certainly does not like this sort of thing and have even published a "taxpayer alert" on one such scheme.
http://law.ato.gov.au/atolaw/view.htm?docid=TPA/TA20011/NAT/ATO/00001
The other factor to consider is that if using a trust to purchase a ppor then the CGT main residence exemption is not available. This would generally be worth way more than the tax deductions.
“CGT main residence exemption” –> yes That does make sense because ATO knows that if someone can form a trust then they’re considered investor so no more CGT Exemptions
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