Trusts, IP, & Profits

[troyid]

On advise from my accountant I have decided to setup a discretionary trust for the purpose of operating my business as well as investing in property.

The trust will have a $2 company as the trustee for asset protection.

To minimise tax the trusts profits will be distributed to myself and wife and lastly another company we are shareholders of.

This option presents us with the problem of profits being held in this company and not being able to invest with.

Can anyone suggest anything so we are able to achieve our goal of becoming financially independent by way of passive income generated through property investing.

[JamesGG]

Hiya Troyid, welcome to the forums :)

One thing I would suggest, is not to run your business from the same trust as the IP's. This can create unnecessary risk in terms of asset protection, which of course is the primary purpose of a trust ;)

Also, unless you already have many +ve geared IP's, chances are that, at least to begin with, you will be running at a loss after depreciation for the first few years. This isn't a big problem really, as those losses can be carried forward to counter any profits the trust might make in future years.

And keep in mind that distributing profits doesn't always mean distributing cash... There's no reason why having profits transferred out of a trust should mean that the trust is unable to reinvest any cash surplus.

Cheers,

James.

[troyid]

I thought that someone would point out the business/investment asset protection risk. My structure has already become complex without establishing another trust.

I will have cash surplus in the trust after I pay myself and wife so I'm not sure what I can do with it. Can I invest in -ve geared IP's and pay down the mortgages until they become +ve geared? When would the cash surplus be taxed in this scenario?

[Rickardo]

I thought that someone would point out the business/investment asset protection risk. My structure has already become complex without establishing another trust.

I will have cash surplus in the trust after I pay myself and wife so I'm not sure what I can do with it. Can I invest in -ve geared IP's and pay down the mortgages until they become +ve geared? When would the cash surplus be taxed in this scenario?

Hi troyid,

Any cash surplus from IP's will be taxed, that is where the benefits of a trust come into play because you are able to distribute the profits among many people thus minimising the tax payable. However it seems you've run out of family to distribute to and you don't seem to want to pay a high marginal rate of tax on the remainder.

If you don't need the cash surplus right now then yes you could invest in negative geared IP's like you said, however if you keep the LVR's low enough as to make them cashflow positive, then your original problem would still eventuate because the cash surplus would be taxed in the year it occured.

One way around this would be to invest in some negatively geared IP's with good growth prospects, to the amount that your overall portfolio is about neutrally geared. This way you wont need to pay any tax on your positively geared IP surplus and you will be benefiting from the capital growth on more properties. In this scenario you may have to look into using a hybrid disc trust instead.

This is just one suggestion and there are many more which could provide you with a solution.

[troyid]

Thanks JamesGG and Rick for your suggestions.

Would I be better off establishing a hybrid discretionary trust (IP vehicle) and then have the family trust distribute the surplus cash to it?