Anyone NOT using a trust?

[djsherly]

Originally posted by DaleGG
So, let's say that you pay the bank $14,000 interest and receive a $4,000 profit from the trust. That leaves you with a $10,000 loss which offsets your personal wages or other income which translates to a tax refund of between $3,150 and $4,850.

I hope that this helps

Dale

One thing I did realise when setting up a hybrid trust was that
the interest that is being paid the bank comes out of your personal account, but the income (rent) for the property is going into the trust's account.

With my present properties, which are not held in trust, the income from the properties is placed in the same account as that used to pay the interest to the bank. As a result, I just chip in a little to make sure the interest payment can be met, depending on the month I don't chip in anything.

In the hybrid case, however, because the income is going into a different account, I have to make sure I have the interest payment left over every month, exclusive of the rental payments. I don't have the benefit of just making up the difference. It all evens out at the end of the year, but in my particular circumstance, it was going to create a potentially large cashflow problem for me.

It still, though, delivers the neg gearing benefits.

I suppose it hinges upon how often the trust distributes income, but I am not sure how often that can be....

Chris.

 

[NigelW]

Originally posted by DaleGG
Hi

Yes, he is wrong. You personallyborrow the money from the bank and as such you personally get the tax deduction for the interest and bank fees that you pay on that loan.

The trust receives the cash from you and it uses that money to buy an IP. Because that Ip has no loan interest it is very likley to be positively geared and the trust will then distribute this gain to you which will be less than the bank interest that you pay.

So, let's say that you pay the bank $14,000 interest and receive a $4,000 profit from the trust. That leaves you with a $10,000 loss which offsets your personal wages or other income which translates to a tax refund of between $3,150 and $4,850.

I hope that this helps

Dale

Dale is right (of course) but in defence of your accountant, perhaps you asked the wrong question with the result that TECHNICALLY your accountant is also correct?

Read Dale's response carefully and see if you spot the distinction. It is not the trust distributing a negative gearing benefit to you. Rather, you are the borrower who incurs the interest expense which exceeds the income which is distributed to you out of the trust (by virtue of you holding units in the trust and/or being a discretionary beneficiary) and therefore you have an allowable deduction to reduce your taxable income from other sources...

Sure it may sound like a matter of semantics, but what your accountant said may have been "strictly speaking" correct...

Of course he or she should be thrashed for being such a dunce to not realise the real question you were asking.

 

[NickM]

John
I am not suprised by those comments as the majority of accountants are not familiar with the operation of Hybrid Trusts.

Dale is right.

There are 2 main types of Hybrid Trusts
Hybrid Discretionary and Hybrid Unit Trusts

The Hybrid discretionary Trust does not make a loss. It makes a profit which is distributed to the income unit holder who in turn claims an interest expense against the income distributed to them from the trust.

Chris in relation to distribution of income (rent), that can be done as frequently as the trustees determine. ie weekly, monthly etc.
It is treated as an advance and then the relevant minutes and documents are prepared at 30/6.

Tony Units can be sold / redeemed and reissued if circumstances change, but it is best to try to get it right at the outset.

NickM

 

[Kevmeister]

Tony Units can be sold / redeemed and reissued if circumstances change, but it is best to try to get it right at the outset.

So, with a Hybrid trust you could originally assign all the units to the highest income earner to get the "best" tax benefit and then redistribute the units later (eg. perhaps 50/50 if you and your wife both retire)?

You seem to suggest it is a hassle to redeem and redistribute units - why?

 

[NickM]

Kevin

So, with a Hybrid trust you could originally assign all the units to the highest income earner to get the "best" tax benefit and then redistribute the units later (eg. perhaps 50/50 if you and your wife both retire)?

You seem to suggest it is a hassle to redeem and redistribute units - why? [/QUOTE]

No hassle, just no need to do it that way. If you are both retired and all debts relating to this property are extinguished then you would redeem all income units and allow the discretionary element of the Hybrid trust take effect. That way you can distribute income to whoever the trustee chooses, limited by the trust deed of course.

I dont recommend that you redistribute unit holdings based on the earnings of the individuals. The ATO may not take too kindly to that kind of restructure and you may have to prove that your primary reason for the change was NOT to "obtain a tax benefit"

Hope this clarifies the issue
NickM

 

[john doe]

Hi everyone,

Thanks for that. Just wondering, is it more expensive to set-up and run a hybrid trust than a discretionary trust?

Yes, reading into it perhaps the accountant I saw was (strictly speaking) correct. However, within the context of what we were discussing, he really should have understood where I was coming from. In fact, I do think he understood where I was coming from)

Thanks again

John

 

[XBenX]

perhaps you could approach either Nick or Dale

they both offer advice on this forum and dont just troll for clients

im sure they'd appreciate some paying customers

*hint*

PS Nick - personally I think this style of thing works so much better than what you were doing b4

 

[DaleGG]

Hi John


No, it should be no more expensive to run than a family trust. Nor should it cost to establish other than a couple hundreds dollars at most.

Dale

Originally posted by john doe
Hi everyone,

Thanks for that. Just wondering, is it more expensive to set-up and run a hybrid trust than a discretionary trust?

 

[strangep]

Hi all

As there's a lot of trust info being tossed back and forth in here I thought I'd throw this in as well.....

If I set up a hybrid discretionary trust with a corporate trustee in QLD, would there be any issues I might need to consider when buying properties in other states through this structure??

Thanks

Paul

 

[NickM]

John

i have found that the running costs of a Hybrid can be more than a family trust particularly if you have unit issues and redemptions during the year

The professional fees for a Hybrid are generally more as you need to factor in the no of units to issue and to whom

Dont forget that for each trust established in NSW there is $200 stamp duty payable to our friends at the OSR.

NickM

 

[NickM]

Hi Paul

if you set the trust up in Qld, my understanding is that you will save the $200 stamp duty. Best to check that with the OSR in QLd

once the stucture is established - no restrictions from investing elsewhere in Aust

No land tax threshold in NSW with a Hybrid trust

Nickm

 

[strangep]

Thanks Nick

Just to clarify on that last point, does that mean that no land tax is payable where the hybrid trust is being used as a hybrid, ie. with units issued??

Or is that the case whether there are any units issued or not??

(Does that make sense??)

Thanks again

Paul

 

[NickM]

Paul
no what i meant is that in NSW most people and entities can own land up to an unimproved value of $261000 before they are liable for land tax at the rate of 1.7%


regardless of whether units are issued or not, the OSR classifies a hybrid discretionary trust as a "special trust" and land tax is payable from the first dollar

So if you owned 1 IP property in your own name and the unimproved land value was $261K - no land tax

if that property was owned by a Hybrid trust land tax = $4437

does this answer your query ?

Nickm

 

[strangep]

Thanks Nick

Apologies for that

Post #31 was quite clear, I think I just read it wrong....

It was late.......I was sleepy......

Cheers

Paul

 

[investor]

Originally posted by DaleGG
Hi

Yes, he is wrong. You personallyborrow the money from the bank and as such you personally get the tax deduction for the interest and bank fees that you pay on that loan.

The trust receives the cash from you and it uses that money to buy an IP. Because that Ip has no loan interest it is very likley to be positively geared and the trust will then distribute this gain to you which will be less than the bank interest that you pay.

So, let's say that you pay the bank $14,000 interest and receive a $4,000 profit from the trust. That leaves you with a $10,000 loss which offsets your personal wages or other income which translates to a tax refund of between $3,150 and $4,850.

I hope that this helps

Dale

Hi Dale

Why can't one do exactly this with a discretionary trust ?

Regards

Investor

 

[DaleGG]

Hi

You cannot do exactly the same thing with a discretionary trust because of the very nature of a discretionary trust.

In a hybrid trust, you buy the units which then gives you a guaranteed right to income of the trust. However, with a discretionary trust the trustee has complete discretion over who will benefit, if anyone at all.

This was tested in a court case some time ago and the answers were faily dogmatic.

Dale

Originally posted by investor
Hi Dale

Why can't one do exactly this with a discretionary trust ?

Regards

Investor

 

[Kevmeister]

In a hybrid trust, you buy the units which then gives you a guaranteed right to income of the trust. However, with a discretionary trust the trustee has complete discretion over who will benefit, if anyone at all.

Hi Dale,

I don't know if your answer really answered the question *why* the discretionary trust can't do the same thing as the Hybrid? (Well, for me, anyway).

Hybrid trust has an individual get a loan, buy units in the trust, the trust therefore has income but no debt, and pays out income to the unit-holder. I guess that's not much different than borrowing $ to buy units in a managed fund - the fund pays you income, and you offset that against the interest expense.

With a discretionary trust the individual still borrows the money (don't they?) or is it the trust borrowing with the individual effectively being the guarantor? If the individual borrows, how is the money given to the trust (eg. gifted?). So wouldn't we have the same situation eg. trust has income and no interest expense, distributes income to the beneficary (who has the interest bill).

(Note: I'm not questioning the correctness of this, just trying to understand the mechanics of it).

On a separate note: so a discretionary trust is not actually obliged to pay out its earnings to anyone in any given year. It can therefore retain "income" for perhaps capital purposes, if the trustee so chooses?

 

[NickM]

Kev
I'll offer to throw in my view here

Hybrid trust has an individual get a loan, buy units in the trust, the trust therefore has income but no debt, and pays out income to the unit-holder. I guess that's not much different than borrowing $ to buy units in a managed fund - the fund pays you income, and you offset that against the interest expense.

CORRECT

With a discretionary trust the individual still borrows the money (don't they?) or is it the trust borrowing with the individual effectively being the guarantor? If the individual borrows, how is the money given to the trust (eg. gifted?). So wouldn't we have the same situation eg. trust has income and no interest expense, distributes income to the beneficary (who has the interest bill).

The ATO works off what they call the "matching principle" ie in order to claim a deduction there must be a "reasonable expectation of income"

As dale has said, in a disc trust the beneficiaries have no rights to income. so if you took out a loan and lent it or gifted it to the trust you may never receive any income therefore you will not be eligible to claim an interest deduction.

If the trust borrows, interest ded is allowable but losses are locked into the trust.

On a separate note: so a discretionary trust is not actually obliged to pay out its earnings to anyone in any given year. It can therefore retain "income" for perhaps capital purposes, if the trustee so chooses?

Sure can. However, not usually recommended as the trustee will be assessed at 47% for all income retained.

 

[Kevmeister]

As dale has said, in a disc trust the beneficiaries have no rights to income. so if you took out a loan and lent it or gifted it to the trust you may never receive any income therefore you will not be eligible to claim an interest deduction.

OK (and forgive me for being pedantic). I'm sure all this hinges on some gossamer-thin legal definition or something.

Sure you might not expect to receive any income. But you might receive income. What then? Or is "might" not good enough for the ATO, basically? Why is it not good enough because few managed funds guarantee income, either, or the return of capital. What difference am I missing?

How does the trust get your money? Do you "lend" it to them? Do you "gift" it to them? Do you "invest" it with them?

I can understand that if you "gift" it to them the whole arrangement is not seen to be one of "investing" and therefore it would seem stupid to gift money to a trust and then try claim the interest as a tax deduction.

If you "lend" it to the trust I guess you have asset protection problems because the loan could be called in. So, would I assume this is generally not a good strategy? Anyway, if you lend it to the trust can you not reasonably expect to be paid interest (income) for this transaction?

If you "invest" it with the trust (whether such a thing is possible - no idea), surely this would suggest you expect to receive a return on your investment (much like lending, I guess)?

 

[NickM]

Originally posted by Kevmeister


Sure you might not expect to receive any income. But you might receive income. What then? Or is "might" not good enough for the ATO, basically? Why is it not good enough because few managed funds guarantee income, either, or the return of capital. What difference am I missing?

Might is not good enough. Managed funds are not related parties therefore regarded as OK and they are essentially unit trusts.

How does the trust get your money? Do you "lend" it to them? Do you "gift" it to them? Do you "invest" it with them?

Can lend or gift. can only invest in a Hybrid trust.

If you "lend" it to the trust I guess you have asset protection problems because the loan could be called in. So, would I assume this is generally not a good strategy? Anyway, if you lend it to the trust can you not reasonably expect to be paid interest (income) for this transaction?

Could always get your spouse to lend the money to the trust if you are concerned about asset protection.

You could charge interest to the trust. However you would be hard pressed to charge anything under the rate you are being charged by the financier.