How to choose the right structure????

[The Chaser]

Hi everyone

My husband and I are ready to buy another IP but want to be sure we get our structuring right. Our first IP (in NSW) was originally our PPOR and so is not well structured - it is jointly owned 50/50, negatively geared, but I have very little income and my husband is a high income earner (employee). We don't want to repeat this mistake.

We are primarily trying to balance the following criteria: access to negative gearing, asset protection (hubby is a senior project manager in the commercial building industry), and estate planning (we have 2 young children). We do not have a business and so a discretionary/family trust is out due to the losses being trapped. If we put the next IP in my husband's name we have no asset protection and estate planning is more difficult/costly, we can access all relevant tax deductions but would be slugged maximum CGT if we ever sold.

We are embarking on a plan to accumulate at least 10 properties in the next 10 years and hence the strong focus on getting it right from the start. One option we continue to investigate is the use of a hybrid trust (with a corporate trustee). We are well aware of the tax alerts of 2008 and the various commentary regarding these alerts. So far we believe a HT would satisfy most of our criteria assuming we use it with the correct intent - ie. my husband (as sole unit holder) would need to be 100% entiltled to both the income units and the capital units, wih any redemptions being made at market value. Our understanding is that a HT would meet our estate planning needs, allow access to negative gearing, although the jury is out as to whether we would achieve asset protection (units may be accessable to creditors?). There would also be greater costs involved in administering this structure.

So how do we decide? We have sought various professional opinions, but there seems to be a split between using our own names (most likely 100% hubby's - a 'dollar in the hand now' outweighs implications of future CGT argument); or investing via a trust arrangement. We have undertaken a huge amount of our own due diligence in learning about the implications of various structures, but are stuck between these options for the reasons outlined above. Short of finalising our structure, we are ready to buy, so any comments would be greatly appreciated.

Thanks
Angela :)

[Rolf Latham]

Hiya Angela

On the finance side, the number of lenders taking on HDTs has shrunk a little of late.

So youd want to address that side of your planning as well,so you dont end up with a Rolls Royce Structure, but cant afford to put fuel in it

ta
rolf

[AVD]

I agree with Rolf, you sound like you have researched your options well, but do remember that the asset protection you are looking for won't be totally achieved in a hybrid trust because you intend to buy units.

Perhaps a good idea would be to speak to a decent lender and try to find a lender that would lend to you in a trust given your personal circumstances, and then at least you know you can obtain finance with a rate and product you are satisfied with and can make a more informed choice.

Alysha

www.gatherumgoss.com

[The Chaser]

Hi Rolf, Alysha - thanks for the feedback. I will certainly follow-up both your suggestions that I check the lending side of the HDT option, especially given the tightening credit market at present. :)

Any other comments people can make on the appropriateness of the structures we are considering would be most appreciated.

Thanks
Angela :)

[lizzie]

hi - having attempted several different structures, with terrible results over the years, we're back to moving everything into the simplist structures we can think of.

a few questions spring to mind. are you going to hold these properties long term or sell for profit short term? how far off retirement age is hubby?

because hubby is 49 this years (only 7 years til he's 55) we are getting rid of all our hdt's and dt's - either by selling or sucking up the stamp duty and transferring them into hubby's name. we will put our negative "paper" cashflow keeper properties in his name (depreciation is wonderful), and will keep adding to them to keep him in the red until he reaches 55 - and then we'll look at our options.

if we buy anything this will be positive from day one, then it goes in my name.

if we buy something with great reno and sell for megabucks potential then it will be our ppor (which we will live in while renoing).

never will we buy anything joint as it slashes your land tax threshold in half.

[LynnH]

Our understanding is that a HT would meet our estate planning needs, allow access to negative gearing, although the jury is out as to whether we would achieve asset protection (units may be accessable to creditors?). There would also be greater costs involved in administering this structure.

There are other ways of achieving asset protection, one being to have a high LVR on IPs in your hubby's name ..... your accountant will be able to advise whether this is appropriate, taking into account all aspects of your individual situation.

Also, your estate planning needs can be achieved quite simply by having provision for the establishment of a Testamentary Trust in your wills.

Hubby and I are basically doing what Lizzie and her hubby are doing - NG IPs in hubby's name (high income earner), CF+ IPs in my name, other income-earning investments in my name ('retired' with investment income only) - and we will juggle things around (after taking into account SMSF and other superannuation income, rather than selling IPs) to more-or-less even up the income in the period leading up to hubby's retirement.

Cheers
LynnH

[austini]

Hi,

Like some previous posters we are also simplifying things having gotten rid of the HDT and one of our 2 Disc Trusts. I would never use a HDT again. We now have only a SMSF (love it) and a single Disc Trust containg mostly cashflow positive investments. There are 2 IPs in the last remaining DT along with substantial share holdings but one of the IPs will be sold in a couple of years. Only shares will be added to the DT going forward.

Any "negatively geared" investments (shares again) going forward are being purchased directly in my wife's name.

In hindsight the last remaining Disc Trust wasn't really needed given our circumstances. These investments could have been in my name as a retired investor. However it is not worth the cost of CGT etc to close it down. Also a Disc Trust does work quite well for shares as there is no legal liability associated with owning them unlike investment property.

My main concern with Trusts is legislative risk going forward. There is a strong possibility that the Henry tax review may target Trusts. Hence I'm still in the process of deciding whether to make future share purchases in my name going forward as a partial hedge against legislative risk associated with Trusts.

Other issues to consider with Trusts is unfavourable land tax treatment in some states and greater difficulty in obtaining finance. Banks are getting tougher by the day.

Of course everyone's circumtances are unique and for some Trusts are certainly suitable. However like a few others here who have used trusts over the years the message seems to be "keep it simple".

Cheers - Gordon

[The Chaser]

Based on all the responses above, it seems clear that HDT's are certainly going out of favour. Financial advice I have received so far is that lending in this structure is getting very very difficult also. Are DT's still ok with lenders?

Many people have suggested DT's to us. However, we are still stuck on the part where losses get quarantined (and we have nothing to offset these losses). Upside to DT's appears to be the level of asset protection (if set up correctly) and good for succession / estate planning.

In answer to questions put forth - my hubby is 38 and thus retirement is still some way off. We would most likely be keeping IP's for the longer term. Does this influence the use of our own name(s) vs trusts? I thought this pushed us more towards using a trust for the longer term security??

Thanks for all the replies.

Angela :)

[The Chaser]

My main concern with Trusts is legislative risk going forward. There is a strong possibility that the Henry tax review may target Trusts. Hence I'm still in the process of deciding whether to make future share purchases in my name going forward as a partial hedge against legislative risk associated with Trusts.

Gordon - pardon my ignorance, but what is the Henry tax review? I thought that the legislative risk in relation to trusts revolved around hybrid trusts (in light of the ATO tax alerts in 2008). Are DT's implicated as well?

Angela

[redwing]

There seems to be a number of variations on the HDT about nowadays as well (not sure how much you can vary it though in reality, wording, vesting dates, state, etc).

Anyhows, C&N Finance are offering Trust Loans at 5.13% for full docs and 5.88% for low docs

They have obviously found a solution for their clients

[austini]

Gordon - pardon my ignorance, but what is the Henry tax review? I thought that the legislative risk in relation to trusts revolved around hybrid trusts (in light of the ATO tax alerts in 2008). Are DT's implicated as well?

Angela

http://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm

The outcome of this review will likely result in massive changes to our tax system. Trusts may or may not be effected. However it would be naive to think that all types of Trusts won't be very carefully looked at as part of this review especially with a Labor Government in power. There appears to have been numerous submissions pushing for a crackdown on various trust structures.

We do have substantial assets in a Disc Trust. But given that the structure doesn't really add that much value in our situation and with much increased potential legislative risk than any time in the past with the tax review under way I'm considering hedging my risk and spreading some investments back into personal names. Bear in mind that we are not in high risk occupations. Tax should not always be the key consideration in decision making.

I'm not an expert in this area and none of this is meant to be advice.

No doubt accountants and trust providers etc may have a very different view.

Cheers - Gordon

[AVD]

Hi

If you have an existing trust and are concerned about an ATO crackdown, you should be looking closely also at your deed and the ATO scrutiny of the deed.

Perhaps ask the provider of the deed if there has been any ATO conjecture of those particular deeds and their reassurance may lay to rest any extra concerns you have at the moment.

Alysha

www.gatherumgoss.com

[klublok]

Why don't you consider buying the IP in super? With the borrowing provisions this makes it possible.

I guess there are pros and cons with every structure, and that you will not find anyone that will give you the best of all worlds.

So let me address each one:

access to negative gearing

You won't get that in super. You will need to salary sacrifice the shortfall between rent and interest expense, but if you do the sums you will find that you are better off with salary sacrifice than tax deduction.

Further you can salary sacrifice additional amount (either now or later) and make TAX DEDUCTIBLE principal repayments off your debt.

As you know CGT is 10% inside super which is far less than any other structure (besides offshore tax havens) available. Property expenses are tax deductions for the super fund, any shortfall you can salary sacrifice to make up.

There is an argument that your growth would be “trapped” inside super and that you cannot access it. That is not correct if you structure your lending arrangements correctly.

Most people think that you should have your super fund borrow and that the current products available are not that attractive.

What you should be doing is taking a line of credit against your home. You then onlend that money to your super fund. This way there are two loans – one between you and the bank and the other one is between you and the super fund. They are not connected so that if you have more money outside of super one year (ie: husband got a bonus) then you can repay the loan between you and the bank whilst the loan between you and the super fund remains on “normal schedule”. So that if you need to sell off your IP in case of emergency, you can do that. You can do that in reverse as well.

, asset protection (hubby is a senior project manager in the commercial building industry),

Asset protection is always a grey area. For absolute bullet proof asset protection, you will need to release all control of the asset. If you want to retain control, then the asset will be on the line for creditors to some degree.
Currently bankruptcy trustees cannot touch your super if your super contributions follow a pattern. So if you contribute $100k each year to super, then it is more than likely that they cannot touch that. However if you put in $20k each year and then $200k one year and then go bankrupt a few months later, then they will be able to argue that $200k payment is abnormal and claw that back. So if you bought the IP in your super fund, and you are consistently making contributions to your super (which are then used to maintain the IP) you should be fine.

How does that compare to a family trust (or discretionary trust)? There have been recent cases stating that assets inside family trusts can be attacked by trustees in bankruptcy. The court stated that if you are "in control" of the trust (and that the trust is a mere puppet - much like the family court reasoning for attacking trusts in divorce cases) then the asset can be liquidated to satisfy creditors.

Another avenue of attack in a family trust situation is taking control of the trusteeship. A trust usually has an "appointor". The appointor has the power to hire and/or fire trustees. If you do not set up your trust properly, and you make your husband the appointor then there is a possibility that the trustee in bankruptcy can seize your husband’s role as appointor and remove the current trustee(s) and appoint new ones. Whether they can do this depends on the trust deed.

So super is much better as an asset protection vehicle than any trust structure.

Estate planning (we have 2 young children).

How your estate planning would work will depend on what structure your IP is in. For a trust, then your wills need to specify who is going to be the APPOINTOR of the trust. Technically assets inside a trust is not your asset, so you cannot pass those assets to anyone when you die. The only thing you can pass then is the CONTROL of that asset. Make sure you see an estate planning specialist if you have trusts, super funds etc because I find that most solicitors miss all these little things that could cause nightmares later on.

If you buy the assets in personal names, then it depends whether you purchase the IP as joint tenants or tenants in common. You can pass on your shares to beneficiaries if you are a tenant in common. For joint tenants, the suriviving joint tenants get your share by “right of survivorship”. Best if you are buying assets personally to have tenants in common because then you can leave the assets in a testamentary trust (which have special tax advantages – like minors being treated like they are over 18 when they receive income from a testamentary trust, asset protection etc)

With a super fund, estate planning is far easier and more tax effective. As you may be aware, tax dependents (spouse and financially dependent children) can take a (concessionally taxed) pension from a deceased member. There are binding nominations and you can also use testamentary trusts if you want to.

So hopefully that’s helpful

[mjinwa]

klublok

Interesting post.
I am 51 and have ppor and 3 IPs and looking to buy more. I am currently assessing the options I have to determine the right structures for my next purchases. Like Angela I have done (and am still doing) alot of research into trust structures and while I understand them, am struggling to see the benefit for my situation apart from risk mitigation.
I had not considered super as an option so your post has opened up a new avenue for research. Given my age, are there other options and benefits open to me in buying IPs in an SMSF? Can you provide some links to further information on this aspect of investing through super.

regards
Mike

[Harriet]

klublok

Interesting post.
I am 51 and have ppor and 3 IPs and looking to buy more. I am currently assessing the options I have to determine the right structures for my next purchases. Like Angela I have done (and am still doing) alot of research into trust structures and while I understand them, am struggling to see the benefit for my situation apart from risk mitigation.
I had not considered super as an option so your post has opened up a new avenue for research. Given my age, are there other options and benefits open to me in buying IPs in an SMSF? Can you provide some links to further information on this aspect of investing through super.

regards
Mike

Hi Mike,

I have recently looked into this very thing, but decided not to go ahead with it for now because:

1) It's much harder to get finance, and it could be more expensive than regular finance.

2) Compared to buying property in one's own name, it seems quite complicated legally, and from an accounting point of view. [This might not be a problem for you, but I am on a K.I.S.S. kick at present.]

3) Profits are locked in the SMSF until retirement. [A possible issue for me, at age 40.]

4) At retirement, the tax benefits are superb - but only if the super laws remain unchanged. I am taking a wait-and-see approach on this for now.

Cheers,

Harriet

[klublok]

Given my age, are there other options and benefits open to me in buying IPs in an SMSF?

The big advantage at your age is that in a couple of years time (providing that the government does not change its mind about pensions) is that the rent from your properties will be tax free.

I have a lot of clients who owns huge number of properties that are becoming positively geared and wanting to move them into their super funds to take advantage of the tax free status.

What are the chances that the government will change its mind? Not sure - but it would take a whole lot of convincing and a brave government to take the tax free cookie away - given that most of them would be heading towards retirement age themselves...

Can you provide some links to further information on this aspect of investing through super

I haven't seen many people doing this properly. There has been lots of talk about how to do it, but few have actually had experience. Talking from the trenches, I am fighting battles everyday with ignorant comments so I am reluctant to give out any links as I don't know if anyone has real experience in doing these transactions.

Best get it from the horses mouth and visit the ATO's site.

[klublok]

1) It's much harder to get finance, and it could be more expensive than regular finance.

Not necessary. If you have equity outside of super, this is not an issue.

2) Compared to buying property in one's own name, it seems quite complicated legally, and from an accounting point of view. [This might not be a problem for you, but I am on a K.I.S.S. kick at present.]

Yeah this is slightly more complicated, but not more complex than buying a property through a trust or a HDT.

3) Profits are locked in the SMSF until retirement. [A possible issue for me, at age 40.]

Again not necessarily locked it. If you are borrowing from the bank and then onlending the funds to your super fund, you can still get access to the super fund's money in an emergency (as the money is a loan NOT a contribution). Further if you capitalise the interest component of the loan between you and the super fund then you can get some of the growth of the property as well.

[TheDoctor]

3) Profits are locked in the SMSF until retirement. [A possible issue for me, at age 40.]

Again not necessarily locked it. If you are borrowing from the bank and then onlending the funds to your super fund, you can still get access to the super fund's money in an emergency (as the money is a loan NOT a contribution). Further if you capitalise the interest component of the loan between you and the super fund then you can get some of the growth of the property as well.

Although there is a possible contravention of the SIS Act if you're lending money to your SMSF yourself.

[klublok]

Although there is a possible contravention of the SIS Act if you're lending money to your SMSF yourself.

Not if your loan arrangement is at arm's length.

[TheDoctor]

Although there is a possible contravention of the SIS Act if you're lending money to your SMSF yourself.

Not if your loan arrangement is at arm's length.

I'm a bit iffy on my SMSF law but could that still be construed as providing a benefit to members before preservation age?

[klublok]

No, the ATO has specifically said that related parties lending to the warrant trust is ok as long as the terms of the loan are commercial.

Further capitalisation of interest is also fine with the ATO.

[soyabean]

I am considering purchasing a business (fully managed) and has asked my accountant if I could buy it under SMSF. He said SMSF cannot purchase a business.

For those who already have your SMSF, is the managing of it hard/ too complicated ? Just that whenever I mention setting up one, my OTH keeps saying it it very "complicated" to manage etc ?
Thanks.

[TheDoctor]

No, the ATO has specifically said that related parties lending to the warrant trust is ok as long as the terms of the loan are commercial.

Further capitalisation of interest is also fine with the ATO.

Ah k. Cheers.

[Rob G.]

I am considering purchasing a business (fully managed) and has asked my accountant if I could buy it under SMSF. He said SMSF cannot purchase a business.

The ATO believes managing a business is incompatible with the objectives of SMSF legislation.

But being a landlord passively holding business real property is OK.

For those who already have your SMSF, is the managing of it hard/ too complicated ? Just that whenever I mention setting up one, my OTH keeps saying it it very "complicated" to manage etc ?
Thanks.

No more difficult than managing your own investments. Just a bit of extra compliance on audited financial statements.



Cheers,

Rob