Property investment Trust - Discussion

Rather than continue with a discussion on the SIG thread re PIT , I thought it might be worthwhile starting a new thread to discuss peoples thoughts and issues raised as it appears to be somethings worthy of further consideration.

Ed and Tony gave a good talk and certainly there are a lot of people who are interested in the PIT.

Talking to people afterwards there was one main area that people were talking about , and that is how it would stand up if challenged legally.

Tony and Ed have been using it for a while and said that when they've had clients audited by the ATO , the way that they've been using it hasn't been challanged by the ATO . ( probably the most obvious advantage is that with the PIT you don't have to pay land tax in NSW ) You also have greater flexibility as to where you distribute income and capital gains from the trust . They made the point that while it use ( PIT ) hasn't been queired at this stage that was no guarantee the gound rules may not be changed at some stage in the future , but that could occure to any structure that people use at the current time.....


One benifit proposed with the PIT is that you can claim negative gearing benifits from the income of the higher income earner during a phase when the property is negatively geared , but subsequently , when it becomes positive geared , or a capital gain is realised , this can be moved to the lower income earner. A recurring theme from Tony was the need to be able to justify one's actions on the basis of the action being commercially justifiable. If one's actions were done purely from the point of Tax avoidance then the ATO has the ability to disallow.

One issue that I heard raised afterwards concerning the it's use afterwards was how to justify a change this change in income and capital gains distribution from the trust. The ATO could argue that given the higher earner has gained the benifits from the negative gearing , why should they not then gain the benifits from the subsequent income or capital gain. ( or at least I think what Nigel was saying , it was getting late at that stage....).

I'm sure other people have points they would like discussed . This is just to kick things off.

See Change

Thanks See_change for getting the discussion going on P.I.T. I am looking forward to hearing more about it!

Do Ed Chan & Steve Naylor have a website where I could read more about there product and services?

Their website is www.chan-naylor.com.au

or here

http://www.knowledgecentre.net.au/

you can join here for free and get newsletters on updates.

There is also an article "What is the Property Investor Trust™ Deed?" . The article is the same as what Ed and Tony said at SIG.

Their web address is www.chan-taylor.com.au which is meant to have a fair bit of information on it as well.

They also mentioned they had clients using the propertly investors trust to buy a PPOR and rent from the trust. I wanted to question this but we ran out of question time. I'd love to know how this isn't considered 'avoiding tax'

This would be perfect for me, as I can understand the advantages of renting over buying your own home, but I'm already sick of moving from house to house renting, so the security of renting my own investment is ideal, as you get the best of both.

What are everyone's thoughts on this?

Grimey

Re renting from Trust. This has been discussed on various threads before. There is a TD that says the deductions will be disallowed however some accountants argue that if its one of many properties in the trust, then thats your commercial reason plus you only live there for a couple of years rather than for ages as its then more likely to be deemed your PPOR. I'm assuming they are going to argue this reason when challenged but I don't like to push that line seeing the ATO has already released a TD on this subject specifically denying deductions under such scenarios.

Plus, when Ed was asked what do you do when you reach the threshold? He said the threshold would go up, albeit slowly so my take on it is that you would buy one NSW IP for each trust and then maybe one IP in each state to minimise land tax if ur in the buy and hold camp. My calcs were $1.6K for trust, $2K for trustee co., $600-$800 pa to maintain. $4K in 1st year.

Re getting queries by the ATO. I don't think that is a huge problem. They have obviously worded their trust in such a way that the discretionary elements in the trust doesn't deem it a special trust as per land tax definitions. They would've got specific stamp duty advice from the external lawyers who drafted the deed but at the end of day the advice would only state something like, "the better view is..." or "we believe"... so
theres always a risk but if the ATO is not going to define super funds and unit trusts as special trusts, I can't see why they will suddenly include the property investors trust as a special trust (as Ed explained last night). I think what differentiates this to the vanilla hybrids is probbaly the smarter use of the unit trust elements in it (not having reviewed their trust deed).

In terms of allocation of income and capital in the units, you will have the same issues to consider under a hybrid with how aggressive you allocate the earnings and again - a commercial reason.

Query I had was can anyone (MRY?) clarify what Ed meant about building deductions being available for discretionary trusts only but not the chattels or fixtures component and they are lost?? I thought all depreciations in general (without a distinction) are deductions which can be claimed by the trust which then flows onto the beneficiaries eventually.

Any other comments folks? thanks again for organising. Good night!

ASDF

Trusts

Overall, I enjoyed the evening immensely and was very glad I came along. I've been to a previous trust seminar held by a rival Sydney company and I found I was quite lost in my understanding. Tony and Ed's presentation was so different. They not only know their stuff, but manage to convey it to the audience extremely well. I was very impressed and am looking forward to reading their book. I've been planning on setting up a trust and now I know where I'll be going to have the work done.

Ed's talk was informative, but I think the first half of his talk was preaching to the converted as to why property investment is the way to go. But at the same time, it was good to cover old ground and figures to remind yourself why you're doing it.

Oh, and got to ask Tony a question re asset protection which has been on my mind for some time. For those interested it was "I'm single, I have my properties in a trust, I meet a guy, he moves in and a year later decides he wants half of what I have worked hard for even though I have maintained them financially during our relationship. Are my assets protected?" Tony's answer was "yes, as long as the trust was set up prior to the relationship, you are protected". But this has raised more questions for me which I'll ask later.

Thanks to those who set the evening up!!

One benifit proposed with the PIT is that you can claim negative gearing benifits from the income of the higher income earner during a phase when the property is negatively geared , but subsequently , when it becomes positive geared , or a capital gain is realised , this can be moved to the lower income earner.

Click to expand...

That is really cool and makes so much sense . Yet, I didn't hear any reference to how you approach things to get max benefits when you don't have two people in the team. One day (very soon perhaps) I will be able to plan with teamwork but just not at the minute.

A lot of literature is geared to mums and dads becasue they make up the majority but how about giving a few tips to those not part of a team. Sitting there I felt like I must be from planet Mars

That aside I found lots of things interesting and it was nice to meet some more people face to face . (waves to Ani, Skater, Bargain Hunter, NikkiK, Jacque, & especially Kissfan for his kind words)

Jindaro said:

Oh, and got to ask Tony a question re asset protection which has been on my mind for some time. For those interested it was "I'm single, I have my properties in a trust, I meet a guy, he moves in and a year later decides he wants half of what I have worked hard for even though I have maintained them financially during our relationship. Are my assets protected?" Tony's answer was "yes, as long as the trust was set up prior to the relationship, you are protected". But this has raised more questions for me which I'll ask later.

Click to expand...

This is something else I wanted to ask as well, I have two properties in my own name currently. But I've been seeing a girl for 4 years, but we don't live together or married etc. So to protect these I'd need to establish the trust before moving into a de-facto relationship?

While I DO trust her, things can go pear shaped. My dad got badly burnt by my mum and lost alot of money, so I'm somewhat more wary than I should be.

Ed Chan reminded me of Robert Kiyosaki. Not sure why, same sort of approach, same way of presenting etc

FrankGrimes said:

Ed Chan reminded me of Robert Kiyosaki. Not sure why, same sort of approach, same way of presenting etc

Click to expand...

There was that element of Rich Uncle , Poor dad in the presentation, though their underlying approach is different. Ed specifically doesn't like the Cash flow only approach.

Though Ed's use of computer graphics is slicker than RK's large paper sheets.


See Change

Do we a seminar about PIT in Perth?

see_change said:

There was that element of Rich Uncle , Poor dad in the presentation, though their underlying approach is different. Ed specifically doesn't like the Cash flow only approach.

Though Ed's use of computer graphics is slicker than RK's large paper sheets.


See Change

Click to expand...

Yes, they are definitely different in what and how they inevst. I more meant how they speak and present, general persona etc..

The PIT's

Can anyone please explain to me what might happen if the ATO rule against the No land tax benefit (NSW) of the PIT. How will the Property Investor Trust work then? Does it become a Hybrid trust???

Sorry for the WHAT IF's?? I think it sounds like a very powerful tool (from what I have read on their websites and on the forum) and I know it has been discussed here and everyone is concerned on what the ATO ruling might be?

I suppose worst case we have to pay land tax (as we are already doing now)

"Query I had was can anyone (MRY?) clarify what Ed meant about building deductions being available for discretionary trusts only but not the chattels or fixtures component and they are lost?? I thought all depreciations in general (without a distinction) are deductions which can be claimed by the trust which then flows onto the beneficiaries eventually. "

Firstly thankyou to all involved in organising the event last night which was very educational.

My recollection in regard to this question is perhaps a little basic because with so much information I missed getting notes on all the areas that were covered. So apologies in advance.

I believe that Ed's comments related to CGT on Unit Trusts/Hybrid Trusts. As I understand you can claim two types of depreciation being a building depreciation (eg 2.5%) and depreciation of fixtures and fittings ( say as set out in a Depreciation Schedule prepared by a QS) as non cash tax deductions.

When the property is sold the basis of calculating whether a CG has arisen or not goes as follows.

Sale price $750,000 less costs of sale $50,000 net $700,000.

Cost price $500,000 less depreciation claimed (Building $43,750 , Fixtures and Fittings $6,000) total $49,750. Therefore reduced cost base for CGT now $450,250

Net Sale Price $700,000

Reduced Cost $450,250

Taxable CGT $249,750


Whereas in a non Unit/Hybrid the amounts would be

Net Sale Price $700,000

Reduced Cost $456,250

Taxable CGT $243,750


The difference being the depreciation on Furniture and Fittings ($6,000)

This is because in some instances (Unit/Hybrid) I think the total depreciation claimed is used to reduce the cost base and in other cases it is only the depreciation claimed in relation to the building


Rgds,

aquila

obiwan said:

Can anyone please explain to me what might happen if the ATO rule against the No land tax benefit (NSW) of the PIT. How will the Property Investor Trust work then? Does it become a Hybrid trust???

Sorry for the WHAT IF's?? I think it sounds like a very powerful tool (from what I have read on their websites and on the forum) and I know it has been discussed here and everyone is concerned on what the ATO ruling might be?

I suppose worst case we have to pay land tax (as we are already doing now)

Click to expand...

I can't answer your other questions but I would say the P.I.T would operate very similar to a Hybrid Trust if the land tax benefit was disallowed.

Would an ATO Ruling come into it? Or would it have more to do with how the Office of State Revenue classifies the trust?:
http://www.osr.nsw.gov.au/pls/portal/docs/page/downloads/other/landtax_info_booklet_2006.pdf

From the above OSR link:

(Page 3 of 16)
"A trustee of a trust is assessed in the same way as a sole owner unless it is a special trust"

(Page 11 of 16)
"Special trust
Trusts regarded as special trusts are:
- trusts which elect to be taxed as special trusts
- discretionary trusts
- non-complying superannuation funds
Some unit trusts and family trusts are also special trusts if the beneficiaries are not equitable owners of the land. This happens when discretionary powers are present in the trust deed."

The OSR defines a hybrid trust as a Special Trust but a Property Investors Trust gets assessed "the same way as a sole owner" and therefore receives the tax free threshold.

aquila said:

This is because in some instances (Unit/Hybrid) I think the total depreciation claimed is used to reduce the cost base and in other cases it is only the depreciation claimed in relation to the building

Click to expand...

Why is this? How does it apply to each of the different structures (individuals, hybrid trusts, discretionary trusts, P.I.T's etc), and in what cases would only the building component be used to reduce the cost base? Is there an ATO link where I can find further information because I was unaware there were different calculations for different entities.

it'd be interesting to get feedback from DaleGG, NickM, Mry and Coastymike as well..Ipresume they didn't attend though and would need posts from members that did?

From what I've heardthere was a fair bit of discusion about the power of leverage the way Chan-Naylor construct things??

PS- IMO Cant see a WA seminar in the near Future..

It was an interesting night indeed. Thanks for organising it Perky.

Is the NSW office of state revenue as aggressive as the ATO when it comes to Tax avoidance? Do they work together on such matters?

Considering the way the product is marketed (The book is called how to legally reduce your tax), it wouldn't be that hard for the ATO to make a case that the primary motive for people who use such a product is to reduce tax.

What concerns me is the high visibility and popularity of the product which is likely to make it a target of the attention of the ATO.

Cheers,

"Why is this? How does it apply to each of the different structures (individuals, hybrid trusts, discretionary trusts, P.I.T's etc), and in what cases would only the building component be used to reduce the cost base? Is there an ATO link where I can find further information because I was unaware there were different calculations for different entities."

As I mentioned there was an so much information and data provided it is difficult to be precise. I think Ed said he was getting a 6 hour presentation into 2 hours so the specifics are a little fuzzy. To the best of my memory this point arose in the comparison as and between traditional trust structures and their P I T and was a point of difference that the wording of their P I T deed ensured that only the building depreciation claimed was deducted from the cost to get an adjusted cost base for CGT rather than the total ( building and fixtures) claimed.

Over to the experts on this.


Rgds,


aquila

House_Keeper said:

What concerns me is the high visibility and popularity of the product which is likely to make it a target of the attention of the ATO.

Click to expand...

I believe that Ed answered this in the talk by referring to the fact that their P I T has been in existance for a number of years, they have invested in a Trade Mark for the product, and as a quality assured practice (ISO ???) have been subjected to numerous audits by the Tax Office. Ed referred to the similarity of the P I T to Macquaire Margin(? )Share Products and that is not an "End of Tax Year" Ostrich Farm Scheme.

BTW an interesting comment that was made by Ed regarding the ATO was that historically in the courts they have only won 50% of the cases that they have brought to court based on their interpretation of the various Tax Acts !


Rgds,


aquila