My partner and I met with my accountant recently to discuss our situation. We currently have a corporate trustee to a hybrid unit trust with a JV to a SMSF as our main investment vehicle (as this is what we were advised at the time). We were told that this is was a good structure to tap into our super to buy our first IP. We bought an IP and got some decent cap growth and rental return. It’s covering the mortgage and will soon be positively geared.
However, our accountants have told us today that the ATO is heavily scrutinising the JV structure to an SMSF. A few years ago, it seemed it was all legal and fine – particularly well when you couldn’t own property in an SMSF. Now that they (the ATO) have changed their position on that, it seems the ATO is doing the reverse and cracking down on every person who tried to comply with that ruling and kept the transaction at arms length.
We’ve been told that at our accounting firm, all of their clients with the same structure with us (note: it is a LOT numerically) that have been assessed by the ATO and found to be non-compliant. While we have not been given this notice yet from the ATO (but we suspect it will come) we’ve been advised to wind it all up now and be proactive. Which we can and probably will do. However this is going to be around six figures with of equity going back into our SMSF, factoring in capital gain which was going to go towards buying our own PPOR. To say I am livid is an understatement.
That’s also to say nothing of the hassle we’ve had getting loans into the hybrid trust in the years since we established it.
The “solution” we’ve been told is a) to setup a discretionary trust instead and b) use their finance brokers to get mortgages for their trust structures. I feel like I’m just being upsold TBH.
But I’m wondering how long before the ATO starts examining them and cracking down on those. It seems so much more complicated than it needs to be. I’m almost ready to just start buying property in a company and dealing with some additional taxes. At least probate is easier (i.e. bequeath the shares). Also them telling us to use their broker’s is a bit of a sales pitch with no guarantee of outcome. They’re still dealing with the major banks and at the end of the day, if they don’t trust the structure then another person selling it to them isn’t going to change it. The asset protection I feel is a false economy. People suing and the courts can unwind trusts. Banks often have personal guarantees for the debt. Individuals can be sued and their shares can be targeted. The list goes on. Unless you’re looking at seriously fancy stuff like off shore companies, loans or second mortgages (which is hard to justify unless you have a significant asset base), you don’t really get the asset protection.
Anyway, I also seriously question now how many accountants have PERSONALLY been able to get loans using the structures they sell and how people with big portfolios ACTUALLY setup/manage their structures. I think a lot of these guys are glorified salesmen (sorry to anyone reading that’s an accountant).
I guess my questions are:
1) What structures do people ACTUALLY use to build portfolios
I don’t want to hear how this is tailored on my tax situation. I’m aware of my situation. I want practical answers on how folks do theirs so I can understand what they do, see if it is relevant or applies to our case and what we can do different.
2) Why not use a company over a discretionary trust?
Yes I get less deductions, losses are contained (same as a discretionary trust anyway), there’s CGT issues, but it’s easier to get loans and probate sounds easier (leaving shares to my kids). For full disclosure we are doing property development and plan on doing more in future.
3) For asset protection, wouldn’t a second mortgage be better than relying on a trust?
4) Can people make suggestions which accounting firms they use and would recommend?
I don’t want to publicly mention who I use for fear of staining them but let’s just say they’re well known in this industry and leave it at that.Thanks
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This topic was modified 10 years, 4 months ago by
JHardman.
Discretionary trusts have been around since feudal times in England. Hybrid trusts were not.
1. I have lots of discretionary trusts. In QLD each one gets its own land tax threshold.
2. Flexibility is a big thing for me. Property investments are (or should be) a long held illiquid asset. a DT gives you different options every year. 50% CGT discount is not a bad incentive if you are going to sell. Loans with a DT have never been an issue. In my law practice we have multiple DT purchases settle every day, a couple of unit trusts a week and no hybrids. DT’s are not a problem for wills. If you are investing and developing then different DT’s will allow the flexibility to distribute pre-tax income from the development trust to an investment trust that has some losses in it. I am not sure of the time frame for your development, but let’s say 2 years from site identification to the sale of the last unit. Can you be sure that you, your partner, your kid’s, income will be the same over those 2 years. A DT gives you the flexibility to distribute your income (there will be no CGT in development) from the development to the most tax effective people or entities each year.
3. Being a beneficiary of a discretionary trust is not an asset. I like 2nd mortgages and use them in my structures. But that is combined with dt’s. If you have an asset in your name then it is still an asset, if it has grown you may have some equity in it. Even if it has no equity in it your creditors can’t get to it (limited circumstances aside) if it is in your name then it is gone.
RPI | Certus Legal Group / PRO Town Planners
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Discretionary Trusts were used since the good old days to prevent the king or government .. who would try to get his hands on all your family assets if he could .. (and a lot of the time he did) from being able to attack the individual’s wealth.
They serve a larger purpose of making sure that the wealth vehicle is separate from the individual.
However because its seperate .. it has none of the tax advantages allocated to individual taxpayers for purchasing property. On the same note .. it may have a different tax level and deductions .. that may also be beneficial.
Most of the time .. a discretionary trust is a wealth vehicle for someone who already has a solid capital foundation. They have an ongoing expense to run and as mentioned above .. not as much of the tax benefits. So they are for solidifying wealth rather than capitalising on it.
That doesnt mean they dont have their place.
When Richard Pratt’s escort mistress went chasing him for a substantial amount of money in the Sydney Courts .. it was revealed that he only had about $10 million in direct ownership. This was for a man that was valued at a couple of billion when he died.
My advice to you would be to capitalise on the individual tax benefits and deductions until you reach a reasonable asset base (if you already have this .. ignore the above) and then take full advantage of this to extend to one or more discretionary trusts.
A good accountant with property investment experience should also be able to give you the appropriate advice.
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This topic was modified 10 years, 4 months ago by
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