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From: Firefrog .


This topic may have been done to death but here goes : )

Is there a business entity that best suits IP's to provide maximum personal protection and most efficient use of cash flow. Robert Kiyosaki talks of ABC xyz - corporations (can't remember the real names) what is the equivalent in OZ.
 
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Reply: 1
From: Rolf Latham


Hi

Robert K is mainly concerned about Protection of asset, rather than tax treatment I think. Obviously you can do IP through your own CO here but has its own problems too. flat tax rate, an more diff and expensive to get loans

Ta

Rolf
 
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Reply: 1.1
From: Michael Yardney


This a topic I address regularly with my accountant. Often your first IP is worth having in you own name, but once you start to accumulate a few, a discretionary trust with a corporate trustee (that you control) is the most flexible structure. But ask your accountant about your own circumstances.
 
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Reply: 1.1.1
From: Jude H


Michael,

I asked my accountant that same question this week. Definately leave in own name. Not enough tax benefits with changing tax laws to warrant a trust or any other setup.

Now I am confused.

Jude :(
 
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Reply: 1.1.2
From: The Wife


I am totally with Michael Yardney on this one, well put Michael.
 
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Sim

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Reply: 1.1.1.1
From: Sim' Hampel


Don't forget that the proposed tax changes for trusts are just that.. proposed. They haven't come into force yet (July 1, 2001 was the target), and based on recent press, they may be thrown out all together (or at least heavily tweaked !)

The other thing to remember that the new trust tax laws may actually be a fantastic thing for long term investors.

The current plan that was slated for implementation on July 1 was that trusts would be taxed at the company rate, but you would also have the option of NOT making a distribution.

(PS. I know this applies to discretionary trusts but I'm not sure about other types)

This means that if you chose to reinvest your returns as opposed to distributing them, your returns would be taxed at 30% (when the new company tax rates come in), not at 48.5% if you are in the top tax bracket.

Of course, if you have a beneficiary on less than a 30% tax rate, then you can still make a distribution to them and they will get a tax refund at the end of the year for the difference between their personal rate and the company rate. If you make a distribution to someone in a higher tax bracket they will have to pay the difference between the company tax rate and their personal rate.

In short... don't give up on trusts !

You need to look at and understand the effect on your overall returns of using trusts / companies as structures for your IPs, but their primary use is for asset protection, not tax minimisation.

If you are only going to own a couple of IPs and don't consider yourself a target for 'Robin Hoods', then you may want to avoid the costs and hassle of using trusts etc.

However, if you are thinking of becoming (or indeed already are) wealthy through your IPs, then you really should think about protecting your assets ! You've worked too hard for someone to come and take away all you own.

 
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Reply: 1.1.1.2
From: Gerard C


Hi Jude,
It sounds like your accountant is looking at it purely from a tax effective perspective. I would agree with him (& so does my accountant)from a tax point of view. But, from an asset protection point of view, the trustee/trust scenario has no equal. For example - you owned 5 IP's in your own name. Someone sues you for something ridiculous and they win. Your assets are then fodder for the courts/plaintiff! However, if the IP's were in the trust, they would be shielded from your own misfortune, as you are just one of the directors of the trustee company.
Hope this helps Jude.
GerardC
 
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Business Entity and Lending

Reply: 1.1.3
From: Marshall Brentnall


Hi all

I definitely like the sound and logic behind Michaels comments - do lenders have any problems about lending for the purchase of an IP in a trust?

Is it necessary to sign guarantees?

Would it be better to be in a positive cash flow situation, if this were to be utilised? Because any loss could not be passed through....or could it......? Keen to learn.


Thanks.
 
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Business Entity and Lending

Reply: 1.1.3.1
From: Judy A


dear marshall

2 years ago I lent some money from bank for an IP in a company name. Bank lent the money but you still have to sign a personal guarantee.

yehudith
 
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Business Entity and Lending

Reply: 1.1.3.1.1
From: T W


I would like to find out more details about the taxation and other issues involved with trusts and companies. Could anyone recommend any good books??
 
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Business Entity and Lending

Reply: 1.1.3.1.1.1
From: Firefrog .


How do trusts etc differ from other structures. What exactly is a discretionary trust.
: )
 
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Disc v Non Discretionary....for Firefrog

Reply: 1.1.3.1.1.1.1
From: Marshall Brentnall


Hi Firefrog

From N.E.Renton - Wills and Estate Planning, 1999....p71-72.

Discretionary Trusts - under such an arrangement the trustee, in addition to having the usual obligations to manage the trust fund in a prudent fashion, is also given the power to decide which of the eligible beneficiaries are to get what share (if any) of the distribution.

In a D Trust, such things as the beneficiaries age, tax situation, health, marital status, assets, liabilities etc can be taken into account and the income \ assets be distributed at the Trustees discretion. Allowing for you to control the assets and distribution very easily in the capacity as trustee.

Non-Discretionary trusts - Certain named beneficiaries are entitled to some defined share of the assets and or income.
 
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Sim

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Reply: 1.1.3.1.1.1.2
From: Sim' Hampel


If you want to know more about trusts and how they work from a more general point of view and not just investment properties, I would recommend the following book:

"Family Trusts", N.E. Renton, 1997, Wrightbooks Pty Ltd.

Cost me $26.95 (inc. GST) from Myer in Melbourne.

It does not mention the new taxation changes that may or may not come into effect though.

Of course, any decent accountant should be able to explain the nuts and bolts of trusts to you too !

 
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Reply: 1.1.1.1.1
From: Terry Avery


I have looked at trusts as I agree that they provide very good asset
protection. However, I found a few drawbacks:

- the costs of doing so are quite high, as in Victoria (which has the
highest stamp duty rates) the cost of transfer of title and taking out new
mortgages in the trust's name wipes out any benefit

- the deductions from your own salary are higher if you are in the 48.5% tax
bracket rather than the trusts proposed 30% so it might be better to
transfer after you have taken advantage of furniture depreciation deductions

- you need capital losses to offset the capital gain because you have to
sell the property to the trust (as far as I know, if I could do it without
triggering CGT that would be wonderful) and you then pay CGT

- the government is delaying the introduction of the new rules because of
some problems with the legislation and won't be introduced until after the
election. If the opposition wins then who knows what form the legislation
will take, or even if they will change the current situation (the current
situation is that you have to distribute the profits every year whereas the
new rules taxed profits in the trust and you could retain profits in the
trust so compounding could work its magic).

As I have ruled a trust out (for me) for the time being I am now looking at
a company and should they introduce the trust legislation later then I will
appoint the company as trustee. I will still have to face the cost of CGT
and stamp duty though and find a bank that will lend to the trust with a
director's guarantee.
 
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Sim

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Reply: 1.1.1.1.1.1
From: Sim' Hampel


On 3/2/01 8:21:22 PM, T Avery wrote:
>I have looked at trusts as I
>agree that they provide very
>good asset protection.
>However, I found a few
>drawbacks:

>- the costs of
>doing so are quite high, as in
>Victoria (which has
>the highest stamp duty rates)
>the cost of transfer of title
>and taking out new mortgages
>in the trust's name wipes out
>any benefit

How about for new properties you acquire... if you don't wan't to go to the expense for your existing ones, fine, but still consider it for the new ones. Got to be better than nothing. Assuming that you will have enough new properties to justify the expense and time involved of course.

 
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Reply: 1.1.1.1.2
From: Michael G


Here's a question.

In the states there's a tax deferring option called 1031.

This allows property tax to be deferred if the profits are re-invested. Actually its something Kiosaki talks about all the time.

I wonder if it would be possible to set up a company in the states and use that as a vehicle to acquire property.

Then when one sells or flips property you could use the 1031 to defer the tax.

I though this would be interesting since banks lend to companies as long as the loan are based on your own serviceability and LVR if you're the Director of the company.

I thought this would be an interesting way to minimize capital gain.

The only things I can think of that would hurt this idea is;

1) the company may be treated as a CFC (controlled foreign company) and thus not be treated as a US company for 1031 tax purposes.

2) Foreign companies are not allowed to buy 2nd hand property, only new property.

Any one here experience with the 1031 tax exchange law or buying overseas, or even with using overseas companies?

Michael
 
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Reply: 1.1.1.1.1.1.1
From: Terry Avery


Hi Sim,

Yep I am looking at the possibility of the next IP going into a trust
structure but not in a position to do the leg work of organising the finance
and setting up a trust just yet. Gotta convince the bank to lend the
company/trust the money using director's guarantee backed by current IPs
plus I bought one five months ago so I have to be patient (didn't have the
time to research the setting up of trusts then but know more now).
 
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Reply: 1.1.1.1.3
From: D R


Hi All,

For now (TTLC)Treating trusts like companies has been dumped and won't be implemented for a while.

As far as which entity to use. Well it depends on everyones personal circumstances I thinks.

Having a Corporate Trustee and trust setup is basically for protection of your assets. If buy chance your assets have a positive cashflow then you will be able to use a discretionary/family trust to allocate this positive income in the most appropriate way. eg to your spouse or children or someone else who has no income.

If you have assets that don't produce any positive income then the tax relief is non-existence, especially if you are heavily into negative gearing. Keep them in your own name.

Setting up a company is great but without some positive income there is no point.

If you are hell bent protecting your assets and don't mind waiving any tax relief from negative gearing then put your assets into a company/trust entity

Cheers

DR
 
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Reply: 1.1.1.1.3.1
From: Michael G


Hi there,

I am very interested in structures and have asked many people about the topic. But I thought it might be an idea to post something here as well.

Something I've been told which has got me thinking is this...

"One cannot escape/defraud legal creditors" of course the term legal creditor could be anyone who fires a claim your way using the right paperwork, set up by "helpful" legal assistance.

So placing assets in a trust for no other reason than to "protect" them from creditors would, under this definition be seen as escaping from legal creditors, would it not?

I've also been informed, that the courts have a lot of power to unwind structures.

For example it is seen that you are the beneficiary of the trust and there is no other reason for the trusts existence other than creating a firewall, then the courts have the power to unwind the structure and free up such assets.

On that note, a trust is like a will, is a document spelling out intentions. These days we all know how wills can be contested, so could not a trust?

Also I've been informed that courts don't look to favorably on trusts. As soon as they hear the word "trust", they think "mistrust" and therefore you are on the back foot to protect yourself.

A word of advice I was given once was it pays to know who sets up your structure. Ideally it should be one who has experience in courts who has fought and one cases regarding asset protection, because creating a company or a trust is relatively simple. Actually fighting to protect them in a heated court battle is something else entirely.

Ok, enough ramblings about my concerns. I would be interested to hear of peoples experiences. Has anyone hear had their structure attacked?, what was the form of attack, how did it stand up?, what were the costs in fighting it?, did the costs of the structure prove worthwhile?

I'm all ears...
Michael
 
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Reply: 1.1.3.1.1.1.2.1
From: Rasputin .


what about the use of offshore company to hold the IPs once you accumulate a few off them how does this go with ATO ...
 
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