Streaming Income
JIT wrote
“…So there's no benefit at all with this structure in terms of streaming income once the investment is positively geared, compared to purchasing the property in your own name...is that correct?...”
You can continue to stream your income as long as you have recognized there is a commercial transaction when you redeem your units such as declaring a capital gain versus the tax saved by streaming the income to a lower taxpayer.
For example if the tax saved by redeeming the units and streaming the income to a lower taxpayer was $100,000pa over many years (based on a tax rate of 46%) and you had to pay $10,000 in capital gains tax (with a 50% exemption for CGT thus reducing your tax rate to 23%) than you would consider it.
The Trust would achieve this streaming to a lower tax payer by refinancing the loan within the Trust and redeem the units to the unit holder and pay say $10,000 in capital gains tax but save $100,000 in income tax (as an example).
However you would need a commercial reason other than to minimise your tax position, so a good commercial reason would be to give the lower income earner an income so she or he could show serviceability in order to borrow funds in her own right for further investments or she may want to become independent showing income in her own tax return. A number of commercial reasons for redeeming units other than for tax reasons.
Once the units are redeemed the capital value sits in the Trust as a capital distribution for the future and this can be at the discretion of the Trustee because the Trust is now a Discretionary Trust since all the unit holders no longer exists. The positive rental (after interest is deducted because the loan now sits within the trust) can now be distributed to the lower taxpayer beneficiaries at the discretion of the Trustee.
Hence if the Units were bought for $400,000 (property also valued at $400,000) and redeemed at $700,000 (being deemed market value of units which may or may not be the market value of the property) a CGT on capital gain of $300,000 is payable but the cost base of the property in the Trust is now $700,000 so if the Trust were ever to sell the property at $1,000,000 than a capital gain of $300,000 can be distributed to any beneficiary which could include a person being the lowest taxpayer thus saving CGT.
If the units were redeemed at $700,000 but the market value of the property at the time was $800,000 than the Trust would have acquired a property at $700,000 and its cost base would be $700,000 even though the real property value was $800,000 hence having a lower cost base for the future and paying more CGT when the property is sold. There must be a commercial reason for redeeming units at $700,000 instead of $800,000. The commercial reason could be that the redemption of the income units were at a value less than the property value as the income units may not be valued at the same value as the property which includes 100% of all rights and benefits.
There are many other benefits with Hybrid Trust such as Estate Planning (you may want to pass assets to your children without any CGT and stamp duty or you may want to pass control of your assets to someone else without stamp duty and CGT ). You cannot do this if the property was in your own name.
Asset protection can even be achieved with units in a trust provided you have 2 trustees as the creditor is unable to force the other trustee to agree to redeem their units, unlike if the property were in ones own name.
There are many more creative ways of income streaming that has not been mentioned here but this cannot be done if property was held in ones own name.
There are also many ways to determine “market value” for example if you bought units in “GPT Property Trust” (a publicly listed Property Trust) you can buy units that only give you 2%pa growth and you can buy units that show more income than growth or more growth than income. Hence you can set up your Trust to do whatever as long as it resembles some form of commerciality when compared to what else is out there in the market place.
There are many more ways of creating flexibility in a Hybrid Trust than just buying in your own name.
Hope this helps
Regards
Bianca on behalf of
Chan & Naylor Accountants
www.chan-naylor.com.au