Hi all,
My accountant recently told me about some of the benefits of Hybrid Discretionary Trusts for investment properties with a company as trustee and myself & partner as the director, shareholder, beneficiary and appointer. The mortgages would be under our names, not the Trusts for the benefit of negative gearing if there is any.
I'm considering setting it up for my future properties, but wasn't entirely sure of all the benefits.
So far as I understood:
- beneficiaries can be changed at any time therefore tax is better distributed.
- there is more asset protection.
- you can pay into the trust which can then pay for expenses, entitling the usual tax deductions.
On the downside:
- Costs are high, around $3600 to set up and $218 to continue company rego/year.
- Higher accounting fees to do tax returns.
My question is, has anyone done this, or knows more? Are there further benefits, because they are not very strong for the costs incurred to me.
My other questions are:
- Does the Land Tax threshold still apply (NSW)? Or is it payable from the first property in the trust?
- Are there any CGT benefits when selling property that is in a trust?
- How do you get the equity out to purchase additional IPs?
I think your accountant may not have it all correct.
Hybrid trusts can work, but they must be set up in a way so as the trustee has no discretion whatsoever in distributing to beneficiaries while units are issued. This means to get the negative gearing benefits against personal income the trustee must be required to distribute all income to the unit holders including capital gains. So there would be no tax flexibility while units are issued.
Beneficiaries of a trust cannot be changed without adverse tax/stamp duty consequences. But with a discretionary trust the trustee can decide which of the class of beneficiaries to distribute to. (not in a hybrid).
There is little to no asset protection advantages in using a unit or a hybrid trust. This is because to get the negative gearing benefits the units must be held in the name of the person. The units are property of this person and would be available to creditors if that person went bankrupt. So the creditors would then get all the income of the trust.
Not sure what you mean by "you can pay into the trust which can then pay for expenses, entitling the usual tax deductions"
You should not have more than 1 director, usually, because it doubles the risk and decreases borrowing capacity.
The cost to set up quoted is very high.
There are other benefits with using a hybrid which you haven't mentioned:
– Units can be purchased back by the trustee of the trust and it can convert to a discretionary
– The trustee may be able to borrow to do this and claim a deduction
– Units may be able to be transfered to SMSF later without having to change legal ownership of the propertyIn NSW only fixed trusts can qualify for the land tax tax free threshold. A hybrid could be a fixed trust I think.
When a trust makes a CG the gain can be distributed as per the deed. If the trust is a hybrid with units issued then it would be similar to owning in your own name. If a discretionary then the gain could go to the lowest tax payers. Hybrids could also result in double CGT because the trust would pay CGT and the unit holder could also be required to pay CGT on the sale or redemption of their units.
Getting at the equity could be tricky if the hybrid is in the unit trust phase. I am not sure and would have to think about it. If it was a discretionary trust the trustee could simply borrow more money and buy more property or onlend etc (if deed allows).
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
Well, this is all food for thought. Hybrid Trusts are very complicated. There are a lot of things to consider. You need to see a good accountant and one that KNOWS about property. On running my meetings for 4 years, and investing in property for 18 years, I have come across many accountants and most dont understand properly about property. Find a good one. I know only a handful out of 1000s.
Terry has given you lots of useful information here.I agree – definitely lots of good info from Terry. Thanks for the lengthy response, I really appreciate the time you've take to do so.
I think I'll have to start doing some heavy reading of my own on this, following Warren Buffet's ideology of never investing in something that wasn't understood. To be fair, we (my accountant and I) covered a lot over a 90 min session and it was only afterwards that I had a million and one questions, and I could have easily misheard a few points. And the accountancy firm is well-known for specialising in property. It's quite a complex topic.
Perhaps a better question would be, does anyone know of any books on the subject that are easy and clear? That way I'd be better armed when I see the accountant next time!
My Favourite is Chan and Naylor- “How to Build Wealth for Life with Property” – its simple and easy to read. There have been some posts here about them with mixed responses but I read it in one weekend and it makes it all simple.
There are no good books on Hybrid trusts. Don't trust the commercially available ones aimed at a general market as there are many incorrect stuff in them.
You will need to read legal books and tax alerts etc from the ATO. Try searching for Chris Batten too as he has a private ruling with the ATO allowing for the deduction of interest on his deeds. A good book to get on trusts is the "Trust Structure Guide 2011" but it is about $300 – it is available at some libraries (maybe later versions).
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
Agree with Terry any commercially written book usually refers you to a Commercial written Trust which they have the patent on.
Course financing a HDT in the current climate can also be interesting.
If you thought most Accountants dont fully understand them wait until you mention it to a Banker
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Agree with Terry any commercially written book usually refers you to a Commercial written Trust which they have the patent on.Course financing a HDT in the current climate can also be interesting.
If you thought most Accountants dont fully understand them wait until you mention it to a Banker
Cheers
Yours in Finance
Richard
I think you will find there is no patent, but the name of a certain trust is trademarked. This makes it sound like a special trust with magical powers that only this firm has and many consumers have fallen into believing this.
Its like getting a trademark on the words "vendor finance". Anyone could do vendor finance but if the phrase is trademarked then others couldn't use the name.
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 sorry bad use of words.
Was referring to the particular Accounting firm who claims their Trusts are "Special" to them.
You are right about the magical powers you cant access them until you have paid over you $$$$.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Terryw wrote:I think your accountant may not have it all correct.Hybrid trusts can work, but they must be set up in a way so as the trustee has no discretion whatsoever in distributing to beneficiaries while units are issued. This means to get the negative gearing benefits against personal income the trustee must be required to distribute all income to the unit holders including capital gains. So there would be no tax flexibility while units are issued.
Beneficiaries of a trust cannot be changed without adverse tax/stamp duty consequences. But with a discretionary trust the trustee can decide which of the class of beneficiaries to distribute to. (not in a hybrid).
There is little to no asset protection advantages in using a unit or a hybrid trust. This is because to get the negative gearing benefits the units must be held in the name of the person. The units are property of this person and would be available to creditors if that person went bankrupt. So the creditors would then get all the income of the trust.
Not sure what you mean by "you can pay into the trust which can then pay for expenses, entitling the usual tax deductions"
You should not have more than 1 director, usually, because it doubles the risk and decreases borrowing capacity.
The cost to set up quoted is very high.
There are other benefits with using a hybrid which you haven't mentioned:
– Units can be purchased back by the trustee of the trust and it can convert to a discretionary
– The trustee may be able to borrow to do this and claim a deduction
– Units may be able to be transfered to SMSF later without having to change legal ownership of the propertyIn NSW only fixed trusts can qualify for the land tax tax free threshold. A hybrid could be a fixed trust I think.
When a trust makes a CG the gain can be distributed as per the deed. If the trust is a hybrid with units issued then it would be similar to owning in your own name. If a discretionary then the gain could go to the lowest tax payers. Hybrids could also result in double CGT because the trust would pay CGT and the unit holder could also be required to pay CGT on the sale or redemption of their units.
Getting at the equity could be tricky if the hybrid is in the unit trust phase. I am not sure and would have to think about it. If it was a discretionary trust the trustee could simply borrow more money and buy more property or onlend etc (if deed allows).
G'day Terry
I understand that units of a hybrid trust don't offer much asset protection but what about this scenario:
Property is bought in a hyrbid trust, the units are owned by an individual but the beneficary of the trust is a company structure. That company is then the structure used to rent out the property and it collects the rent money, if the tenants took out legal action against the company (as they rent the property from that structure) are the units owned by the individual for the rented property up for grabs if the compnay is sued?
I hope this makes sense.
Regards
Andrew
The company would be merely a beneficiary and any acts it does would be separate to the trust so it being sued shouldn't effect the trust – the units would be held by the individuals and at risk if they are sued.
But, what are you trying to achieve? getting money into the trust with asset protection probably?
To do that in this scenario you would have to have the shares of the company owned by the trust or to have the trustee of the trust being the company.
If a trustee of a trust is sued in relation to their role as trustee (such as a tenant suing the landlord) the the assets of the trust would be at risk because the trustee would be indemnified out of the trust assets.
If you had the company acting in its own right then this could work – but then you wouldn't get all the benefits of the trust such as income retaining its character and the 50% CGT discount.
You could do it with a separate trust and then have the income distributed to the hybrid trust. But this may not work as you expect as the unit holders would need to borrow to buy income producing property – which the empty trust structure probbaly woudn't allow.
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
What I've taken from all this and my own research is:
– Appropriate landlord insurance will take care of your risk of being sued by the tenant.
– The HDT doesn't offer any legal tax benefits over and above having the properties under your own name.
– There is a high cost of setting up and maintaining trusts with little personal benefit.
– There may be a benefit for avoiding family disputes over inheritence (but who cares if you're dead?).Leaves me wondering why anyone would do it!
u36ma wrote:What I've taken from all this and my own research is:
– Appropriate landlord insurance will take care of your risk of being sued by the tenant.
– The HDT doesn't offer any legal tax benefits over and above having the properties under your own name.
– There is a high cost of setting up and maintaining trusts with little personal benefit.
– There may be a benefit for avoiding family disputes over inheritence (but who cares if you're dead?).Leaves me wondering why anyone would do it!
Let me respond in order
1. Yes, insure for all risks
2. There are some tax benefits – see below – and general structuring benefits
3. Yes
4. Depends who owns the units – units are property so would be dealt with under a will whereas the trustee owned assets such as hte house wouldn't.I think that hyrbids can still be useful even if it wouldn't seem to give any benefits initially.
Imagine a HDT buys a property. X borrows to buy units. 10 years down the track the property has double in value. X thinks it is time that this property was placed into a discretionary trust. If the property was in his own name he would have to sell it to the trust – title deeds would change.
But as this is in a HDT – which is essentially a unit trust at this stage – he has 2 options:
1. Transfer the units to a discretionary trust – stamp duty and CGT would apply. But not change in trustee or legal owner – ie no change in title.
2. The trustee could buy back the units from X. CGT and stamp duty would apply.Stamp duty would generally be cheaper to transfer units than the transfer land. CGT could be reduced by selling the units in stages over a few years. And with 2 the trustee could borrow to buy the units and to claim the interest on this as a deduction.
It may also be possible to transfer teh units to a SMSF near retirement – many issues involved here.
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 Terry,
You’re insights are great – thanks for sharing. I’m still trying to understand when a hybrid trust becomes the “best of both worlds”. For tax deductibility of the interest on the units I understand that the unit holder must have a set interest in relation to the amount of units purchased. Does that mean that once the assets grow the discretionary beneficiaries have access to that portion of the income?
E.g. if 300,000 units are bought at $1 and the trust purchases $300,000 worth of property, all income (100%) must be distributed to the unit holder in order to receive full deductibility of the loan interest. If the property then increases to say $450,000 does that mean that only 66% of the income needs to be distributed to the unit holder now (cashflow and CG) and the other 33% can be distributed to beneficiaries?
I could see this being powerful for those who want to take advantage of negative gearing in the initial stages of controlling a property but then wanting to transfer earnings to a non-working spouse or family member when the property begins to turn a profit. This is basically my scenario.
In that example the unit holder wouldn't be entitled to the 100% of the deductions on the interest because they are not entitled to 100% of hte income and CG of the trust.
There is a good thread about htis topic on somersoft – started by Chris Batten.
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
Found it – thanks Terryw
You must be logged in to reply to this topic. If you don't have an account, you can register here.
