Renting from a trust

Hi all,

Was just wondering if it is possible to set up a trust with a company as the trustee and then be able to rent from that trust therefore gaining the negative gearing? Legally they would be two separate entities but it may not work due to a "arms-length" clause or the like.

If anyone has any experience with this it would be appreciated.

Cheers

Ben

A number of people do this through a hybrid trust. You'd want to speak with your accounant before setting this up, but it is possible.

You do need to try to keep things at arms length, and it's best to have more than one property in the trust to avoid issues with the tax department. With one property they see it as tax avoidance, with two properties (and the right structure and accountant) it can be treated as tax minimisation.

exactly what I wanted to hear! perfect PT, i will start it with one but have two soon after - just allows be to borrow more with the "income" through the trust. Cheers mate

hmm - say i rent the property to 2 people at $200/week in total (with one of them being me at $100/week). So my outgoings for rent is $400 and the incoming is $800. Just did a quick check using westpac calc and changes borrowing power by about $23k increase.

I guess the other positive is that I wont be paying a management or letting fee.

I have a HDT with 2 properties in it, and one of them is rented to me. I got excellent accounting advice before proceeding on this course though.

Just make sure you do your numbers as I think you would loose any capital gains exemption that you may be entitled to if it is your PPoR and that may hurt more that the benefit of neg gearing it.

Can you legally rent it for any price? for e.g. say the market rent might be $300 p/w and you rent it to yourself for 150p/w for negative gearing. Is this ok to do?

eternit said:

Can you legally rent it for any price? for e.g. say the market rent might be $300 p/w and you rent it to yourself for 150p/w for negative gearing. Is this ok to do?

Click to expand...

No. This is not 'at arms length'.

my only reason for doing it would be to:
save on mgt fees
save on letting fees
look after the place

over a year that could be $1200ish in mgt + letting fees.

To put this into a bit of perspective, renting a house to yourself that you control through a HDT is a very aggressive strategy that introduces its own risks and additional costs.

It's a case of understanding those risks and costs and figuring out if they are worth the reward for you given your personal circumstances.

And you lose the PPOR CGT exemption.

And it would suck if it became positively geared over time. And both cases on this issue since Part IVA came in failed.

Mry said:

And it would suck if it became positively geared over time. And both cases on this issue since Part IVA came in failed.

Click to expand...

That was the other question I was going to ask. Does the ATO have a blanket view that renting your own PPOR from a trust controlled by you to be avoidance regardless of whether rent is at market rates?
Alex

Mry said:

And both cases on this issue since Part IVA came in failed.

Click to expand...

Indeed, that is no small point.

I'm a complete layman on these things, but FWIW the only case I've read of that succeeded involved a doctor (ie high litigation risk profession) renting their house through a DT (not HDT) which had other investments inside the DT which meant the DT was producing a profit. Is that correct?

A low risk proffesional, renting through an HDT which is NGed will potentially fail on any or all 3 points.

I've spoken to a few accountants about this and not one of them has said it's a good idea. Just some food for thought.

Mark

Hi Gang,

What really irks me is that if you want to live in a property owned by your Disc Trust and NOT claim any deductions one can then potentially be hit with Fringe Benefits tax. I've never really understood why. Perhaps it is to do with directorship of the related corp trustee.

Unfortunately professional opinion on renting from a trust does seem to be divided. It seems that since Part 1VA came into being more professionals are now suggesting renting from a trust to be an agressive strategy.

From what I understand things that help strengthen your case assuming a standard Disc Trust include: being in a high risk profession; owning one or more other IPs in the Trust preferably purchased prior to the one you intend to rent off the trust; not renting the trust IP long term etc.

I may be wrong but I vaguely recall one of the highly respected accountants on InvestEd who specialises in structures stating that doing this through a HDT (using a negative gearing situation) is very risky. I think it may have had something to do with a more recent case or Private Ruling(s))?

Cheers - Gordon

HDT To Personal Names

For a number of reasons I have decided to shift an IP which is in a corporate structure thru a HDT back into personal names. Can someone give me some advice in what is involved. I suppose I need a market appraisal. I still owe approx. $200K on the loan thru St. George. Thanks

Hi Guys,

I hope you don't mind if I put my 2cents worth in on this debate

You have a big problem! I have hopefully attached a copy of the tax office ruling TR 2002/18 regarding unit trusts and home loan arrangements. The problem is as follows:

1. The Hybrid Trust, although not a true unit trust, issues units like a unit trust and therefore falls within this tax ruling.
2. You have purchased your primary place of residence inside your hybrid/discretionary trust, and issued units for this purchase (i.e. loan)
3. You are claiming a deduction against your other income for the losses on interest payments in relation to the trust.
4. Paragraph 6 of the ruling states, that the interest is not deductible under section 8-1 of the ITAA 1997 as it is a loss or outgoing of a private of domestic nature.
5. If you proceed with the structure as they are at present you have the problem of the anti-avoidance provisions under Part IVA of the ITAA 1936.


With this information you have one of a couple of options.

1. To redeem the units issued back to the trust therefore changing the trust back to a discretionary trust. This should solve the problem on the anti-avoidance provisions. You would also need to look at adding more properties to the trust in order to show that the trust has a pool of assets and is for asset protection purposes not purely as a tax deduction for your primary place of residence.
2. Ignore this tax ruling and this would then risk the tax office issuing procedures once they investigate and see that Part IVA of the ITAA 1936 has been breached. I highly recommend you DO NOT take this option.

That's my thoughts on the subject anyway I hope they help, but i would seriously suggest you speak to your accountant and get her/him to thoroughly investigate the issue, or look at maybe getting a ruling before moving back into the property.

Liverpool St said:

For a number of reasons I have decided to shift an IP which is in a corporate structure thru a HDT back into personal names. Can someone give me some advice in what is involved. I suppose I need a market appraisal. I still owe approx. $200K on the loan thru St. George. Thanks

Click to expand...

You really should speak to an accountant about this.

HDT to personal names

Hi Liverpool

Liverpool St said:

For a number of reasons I have decided to shift an IP which is in a corporate structure thru a HDT back into personal names. Can someone give me some advice in what is involved. I suppose I need a market appraisal. I still owe approx. $200K on the loan thru St. George. Thanks

Click to expand...

You will need to get a registered property valuer to value the property. You can then get your solicitor to transfer the property into your personal names. You will however need to pay stamp duty etc on the transfer of the property.

your accountant should be able to tell you all about it, in much greater detail. Give them a call

Just for curiosity's sake.... why do you want to transfer it anyway?