Buying a PPOR in a Trust

Hey Guys,

following on from my post in this Thread. This idea grew on me so much that ive ran the numbers. Its turned out to be a better outcome than i though so i thought id share it with you guys.

Ive attached the calculations but to summarise,

  • The example is based on an actual purchase back in 08 so depn rates, and costs are actuals, FY10 onwards are estimates
  • Purchase a property in a trust for $355k.
  • 95% lend, capitalised LMI.
  • 7.64% fixed rate for $277k, remainder variable
  • Rent house as your PPOR paying MARKET RENT, thus being a proper investment property
  • Selling the property on the 6th year anniversary

As the income of the trust is lower than expenses, you get to 'carry forward' the losses the trust makes and offset this against the future sale price.

The trust makes an accounting loss of $121k over the 6 years of ownership (mainly thanks to $52k of depreciation). On a Growth rate assumption of 5%, the property will increase in value of $476k in the 6 years, representing a taxable gain of $128k (after deduction of selling costs, add back depn etc).

This gain is offset against the carried forward losses in the trust before being halved, resulting in a real taxable gain of only $7k. Then this gets discounted 50%, resulting on tax being paid on only $3.4k.

So combined this with a 6 year ppor rule where capital growth will remain non taxed, and thanks to the deductions offsetting capital growth on your new ppor, you end up only having taxable income on both property of $3.4k for 6 years of growth in 2 properties.

Love to hear your thoughts on this.
 

Attachments

  • PPOR Trust.pdf
    7.6 KB · Views: 177
  • PPOR Trust Assumptions Page.pdf
    10.8 KB · Views: 187
Flaws in my argument-

  • I haven't included stamp duty - Why - Situation will be the same regardless if purchased in your name or trust
  • Land Tax - Holding a PPOR in a trust will result in land tax being payable where as outside the trust its exempt - True, but you may get an exemption on your existing PPOR, or some states exempt land tax on PPOR inside trusts (Qld for example)
  • 5% Capital Growth Rate - If the property grows at greater than 5%, tax will have to be paid on anything additonal (hey i didnt say it was perfect)
  • I havent included trust set up or annual fees - Sorry my oversight, im also not sure what to estimate as prices can range widely
  • You probably wouldnt run it through an agent if you were renting to your own trust, thus these deductions are increasing your deduction by about $10k - Gain would be halved so only $5k extra would be taxed and at a 30% tax rate this is only a $1.5k difference)

Im sure there's others, i just cant think of them
 
Part IVA. You're avoiding tax by using a trust to claim personal expenses. I've heard of some people doing this, but they have lots of properties and are developers.

If you really want to go down this road, ensure you have a private binding ruling from the ATO from the start.
 
Something I'm not understanding here. How can you claim the PPOR 6 year rule for CGT exemption if you own the property through a trust? This rule applies only to privately held property.

Also, what is the point of setting up a complicated structure into which you sink $121k over 6 years for no taxable benefit (since the losses are quarantined in the trust - assuming it has no other income to offset), only to make a taxed profit of $7k in the end? Sounds like a lot of work on a pretty dud investment. May as well hold the dud investment in your own name and save the tax, plus the extra legal and accounting fees.
 
I believe you need to add back your fittings depreciate too, which will bring your gain up to around $32k by my rough calculations.
 
I believe you need to add back your fittings depreciate too, which will bring your gain up to around $32k by my rough calculations.

I was about to add this when I got to your post.

The depreciation gets added back onto the purchase price, correct me if that's wrong for a trust though.
 
Part IVA. You're avoiding tax by using a trust to claim personal expenses. I've heard of some people doing this, but they have lots of properties and are developers.

If you really want to go down this road, ensure you have a private binding ruling from the ATO from the start.

The reason why i dont think Part IVA applies are

  • As long as your paying market rent, it would be no different than having a general IP in this structure.
  • From an asset protection perspective, as long as your not a guarantor on the loan you have no family home to suit for
  • The above scenario results in little taxable gain based on the assumptions. If the capital growth is greater than 5%pa you will have higher taxable gain, if you lock in interest rate lower than the assumed 7.64% you will have a higher taxable gain
  • If your not using this in conjunction with 6 year rule on a PPOR in your own name, you are really paying tax on your ppor. If you held it in your own name you would have no tax

Something I'm not understanding here. How can you claim the PPOR 6 year rule for CGT exemption if you own the property through a trust? This rule applies only to privately held property.

Sorry, to better explain, if you have a PPOR in your own name and want to upgrade to a better PPOR. You would rent out the PPOR in your own name and claim the 6 year exemption so there will be no capital gains tax on the property in your own name. You then use the above strategy to reduce your gain on your new PPOR

Also, what is the point of setting up a complicated structure into which you sink $121k over 6 years for no taxable benefit (since the losses are quarantined in the trust - assuming it has no other income to offset), only to make a taxed profit of $7k in the end? Sounds like a lot of work on a pretty dud investment. May as well hold the dud investment in your own name and save the tax, plus the extra legal and accounting fees.

Agreed a PPOR can be a dud investment but you need to live somewhere. Also your not sinking $121k for no purposes, if you held the new PPOR in your own name its going to cost you the exact same money over the same period of time (with the exception of increased accounting fees and potentially stamp duty). You would be making the same return in your own name compared to a trust, the only purpose of the trust is to minimise the amount of that tax you pay on your profit.

I believe you need to add back your fittings depreciate too, which will bring your gain up to around $32k by my rough calculations.

I thought you only had to add back the depreciation on your building allowance and not your fittings. Ive added back the building but not the fittings. Can update it if someone can confirm.
 
Sorry, to better explain, if you have a PPOR in your own name and want to upgrade to a better PPOR. You would rent out the PPOR in your own name and claim the 6 year exemption so there will be no capital gains tax on the property in your own name. You then use the above strategy to reduce your gain on your new PPOR

When you say "new PPOR" you mean the house which is owned by the trust (which you are renting from the trust).
 
Sorry, to better explain, if you have a PPOR in your own name and want to upgrade to a better PPOR. You would rent out the PPOR in your own name and claim the 6 year exemption so there will be no capital gains tax on the property in your own name. You then use the above strategy to reduce your gain on your new PPOR



Agreed a PPOR can be a dud investment but you need to live somewhere. Also your not sinking $121k for no purposes, if you held the new PPOR in your own name its going to cost you the exact same money over the same period of time (with the exception of increased accounting fees and potentially stamp duty). You would be making the same return in your own name compared to a trust, the only purpose of the trust is to minimise the amount of that tax you pay on your profit.

I think you are making it too complicated. Unless you want the asset protection of the trust, I believe you can get the same tax benefit holding it your own name.

You can still claim the 6-year PPOR CGT exemption for the old PPOR if you hold the new PPOR in your own name without paying rent. In this case, as you are aware, your gain on the new PPOR would then be taxable (and able to be discounted by 50% if held for more than 12 months). Your interest (and other property-related) expenses are then not claimable against income, but can be added (capitalised) to your cost base when calculating the capital gain.

So, for your example, when you sell, your cost base becomes your purchase price of $355k plus your accumulated property expenses along the way of around $200k (forget about depreciation since it cancels out and gains you nothing in this case) for a total cost base of $555k. Selling for $475k now gives you a loss of $80k (which could possibly be offset again other taxable capital gains), so you have no tax to pay, or alternatively you can rejig your capital growth assumptions upwards before being liable for CGT.

The difference comes about because you now have less (taxable) income, namely the amount of rent you paid yourself in the trust. With the trust case, you are effectively increasing your tax liability by taking income on which you have already been taxed to pay rent to yourself, which you will then be taxed on again.

Depreciation is only relevant/beneficial when you can claim it against income, such as with a hybrid trust.

I thought you only had to add back the depreciation on your building allowance and not your fittings. Ive added back the building but not the fittings. Can update it if someone can confirm.

Technically, in an accounting sense, you are subtracting the depreciation from your cost base to reflect the property's decreased value "on your books", but the calculated result is the same.
 
I think it will count as tax avoidance, which is illegal.

Dont quote me but I suspect this is where you'll get unstuck.
 
I think it will count as tax avoidance, which is illegal.

Dont quote me but I suspect this is where you'll get unstuck.

you are not allowed to do something purely for tax avoidance but you are allowed to do something for other reasons that also minimizes tax (from my understanding).

So you could do this because you wanted to have the house clearly divided in multipule names. Or you where planning to convert it to an investment property and are treating it like ever other IP. Or you want some level of security from being sued.
 
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