Buying property in a trust and finance.

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From: Michael Mudman


This question is for all the people who have previously bought property using a trust.

I would like to buy my next property in a unit trust structure. I would like to borrow the money under my own name to buy income units in the trust, using the property in the trust as security for the loan.

What is the process (and how is it different) for buying a property and applying for finance for a property held under a trust?

What are the steps I should take in setting up something similar to the example mentioned above?

Thanks,
MICK.
 
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Reply: 1
From: Mark Laszczuk


Michael,
Can't help you with your queries, but I can put in the direction of Chris Batten. He seems to specialise in this stuff. His website is at: chrisbatten.com.au. You can get a free booklet from there that goes into using unit trusts. Good luck!

Mark
'no hat, some cattle'
 
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Reply: 1.1
From: Geoff Whitfield


Chris Batten also has a manual for $99.

It goes into a lot of details about different structures- but sort of lost me along the way.

There's some interesting (and exciting) ideas, but I'd need expert help to figure some of it out. Like passing the manual onto my accountant.
 
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Reply: 1.2
From: Geoff Whitfield


Chris Batten also has a manual for $99.

It goes into a lot of details about different structures- but sort of lost me along the way.

There's some interesting (and exciting) ideas, but I'd need expert help to figure some of it out. Like passing the manual onto my accountant.
 
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Reply: 2
From: PT Bear


Talk to your broker or bank rep. They may give you a few more hoops to jump through, so try give the approval plenty of time.

Many people at banks don't have knowledge of how trusts work and will reject it because it's too hard. Keep at it until you find someone who can help you.

PT_Bear

"Have fun, be successful, make lots of money, be someone who makes a difference, and above all else, don't forget the view."
 
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Reply: 2.1
From: Dale Gatherum-Goss


Hi Michael!

The concept is one that I am beginning to like more and more as I delve into it and so it sound like you have had some good advice. As always, it is best to discuss your concerns and confusion with the person who suggested the idea to you in the first place.

However, it works a little like this:

You borrow $100,000 from the bank at 6.5% I/O for the sake of simplicity here.

You use those funds to buy 100,000 x $1 units in the Hybrid trust. This will give you an entitlement to the income of the trust which you would not get with a typical family trust.

The trust takes your $100,000 and uses it to buy an IP.

The trust earns rental income and pays the normal rates and insurance etc.

Any left over income (profit) is distributed to you which you use to offset against the interest that you are paying to the bank.

Trust

Rental Income 9,000
Less Rates 600
Less Insurance 400
Less R & M 400
Less Depreciation 1,000
Less PM fees 600
Less Water rates 400


Profit $5,600

In your ITR, you would show

Profit from trust 5,600 (as above)
Less Interest 6,500

Net Loss $900

Effectively, this structure allows you to have the benefits and flexibility of a family trust AND negatively gearing benefits at the same time.

I hope that this helps

Dale
 
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Reply: 2.1.1
From: Owen .


What if the property the trust buys does not earn a positive income? Are the losses also distributed to the individual to be claimed as a tax deduction?

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.2
From: Gordon Austin


This was one of the features of Hybrib Trusts that really caught my attention some time back. But it appeared a more aggressive strategy and finding professionals who fully understood how to implement the strategy could prove difficult.

In addition to investment property some are also using this strategy for their PPOR and I recently read that the ATO has warned that it is watching this very closely. Although it was suggested that the ATO shouldn't be so harsh given that you would have to pay capital gains on sale of the asset. Plus it is highly likley that land tax would also have to be paid.

I can't help but wonder about the consequences of using fixed units in the trust for investment property. Does this reduce the flexibility to change the income distribution in the future? For example what happens when the property becomes cash flow positive. Is the flexibility still there to distribute this income to a benificiary in a lower threshold? I suppose it is just a matter of redeeming the units and reissuing them etc.

However the extra flexibility that is gained by having just a few paragraphs added to the standard discretionary trust deed is enticing. You can compare the difference between the two on Chris Batten's site.

Gordon
 
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Reply: 2.1.1.1
From: Dale Gatherum-Goss


Hi

No, the losses would be quarantined, however, if the property cannot make a profit when you exclude interest then I would wonder at the sense in buying that particular property.

Have fun

Dale
 
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Reply: 2.1.1.1.1
From: Owen .


Thanks Dale. Did you spot my deliberate mistake in my question? It was my misreading of the structure you described.

Those aren't teeth I show when I smile, they're toenails!!! Oops!!!!

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.2.1
From: Waverly Bay


Dale

thanks for that description - very clear as always.

Some quick questions:

Does a unit holder of a unit trust have an interest in the underlying property held in the unit trust ?

If so, are there possible CGT issues on the redemption and reissue of units (for example, to cater for say new unit holders for the purpose of income distribution)?

Will the so called "land rich" provisions under each state's stamp duty legislations be triggered...in certain circumstances where there is an issue of new units by a real property owning unit trust?

For calculating land tax ... i assume that the unit holder's interest in the property owned by the unit trust will be aggregated with any other property interests owned by the individual ... ie the unit trust itself will not be liable for the land tax ?


Finally, does the unit trust structure provide asset protection along the lines offered by a discretionary trust? What sort of safeguards need to be put in place to ensure that the units themselves are protected (from creditors etc) ? ie would u need to structure the unit holding registry in a way to ensure that a creditor taking control of the units themselves...will not be in a position to control the fixed trust?

cheers

Waverly
 
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Reply: 2.1.3
From: Nigel W


On 7/10/02 7:17:00 AM, Dale Gatherum-Goss wrote:

>The concept is one that I am
>beginning to like more and
>more as I delve into it and so

Hi Dale!

I know you're not fond of seeking private rulings from the ATO, but would setting up a hybrid trust be a good scenario to seek one?

>You borrow $100,000 from the
>bank at 6.5% I/O for the sake
>of simplicity here.

Could you use say a LOC secured on existing property held in your own name or that of another trustee to provide the money to buy the income units from the trustee of the hybrid trust? The subscription money for the income units is then used by the t'ee of the hybrid trust as the deposit and it then goes and gets its own 80% loan secured over the property to be purchased???

In this scenario the interest on the trustee's loan would only be available to be set off against the income of the trust before distribution right? The holder of the income units couldn't claim the trust's interest as a deduction as well...

N.
 
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Reply: 2.1.3.1
From: Waverly Bay


Hi Nigel

Why would you restrict your contribution of funds into the unit trust to an amount that only allows the unit trustee to place a deposit on an ip?

Isn't it more beneficial to the taxpayer/unit holder to maximise their gearing (and hence tax deduction)> The max gearing of course would be for the unit holder/taxpayer to borrow the full purchase price plus costs from the bank (use loc to fund deposit/costs) ...and contributing those funds into the trust to allow the unit trustee to purchase the property outright for cash?

cheers

Waverly
 
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Reply: 2.1.2.1.1
From: Dale Gatherum-Goss


Hiya wb!

>thanks for that description -
>very clear as always.
>

Thank you.


>Some quick questions:
>Does a unit holder of a unit
>trust have an interest in the
>underlying property held in
>the unit trust ?


I am not sure, but, I understand that the answer is no. The unit holder buys the units in the trust and the trust buys the assets - as you know.


>If so, are there possible CGT
>issues on the redemption and
>reissue of units (for example,
>to cater for say new unit
>holders for the purpose of
>income distribution)?

There is no need to do this. The trust allows for the best of both worlds of a unit trust and a discretionary trust and so I understand that income can still be split as we want.


>Will the so called "land rich"
>provisions under each state's
>stamp duty legislations be
>triggered...in certain
>circumstances where there is
>an issue of new units by a
>real property owning unit
>trust?


See above, I don't think this will be an issue.


>For calculating land tax ... i
>assume that the unit holder's
>interest in the property owned
>by the unit trust will be
>aggregated with any other
>property interests owned by
>the individual ... ie the unit
>trust itself will not be
>liable for the land tax ?


Not sure. Sorry, I'm still coming to terms with the concepts myself and as you know, land tax is a little different for each state as well.


>Finally, does the unit trust
>structure provide asset
>protection along the lines
>offered by a discretionary
>trust?

No, the asset protection is not as good at face value.


>What sort of safeguards need to be put in
>place to ensure that the units
>themselves are protected (from
>creditors etc) ? ie would u
>need to structure the unit
>holding registry in a way to
>ensure that a creditor taking
>control of the units
>themselves...will not be in a
>position to control the fixed
>trust?


Whoa nelly!!!! I don't know the answer to this yet and hopefully I can find out soon. I do have a document that a solicitor prepared that runs through the basics if you would like a copy. Let me know and I will email it to you.


>cheers
>
>Waverly


Cheers

Dale
 
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Reply: 2.1.3.2
From: Dale Gatherum-Goss


Hi Nigel!

>I know you're not fond of seeking
>private rulings from the ATO, but would
>setting up a hybrid trust be a good
>scenario to seek one?


Yes, this is not a silly idea at all if you like to play it very safe. I'm still not keen on flagging what we do, but . . .


>>You borrow $100,000 from the
>>bank at 6.5% I/O for the sake
>>of simplicity here.
>
>Could you use say a LOC secured on
>existing property held in your own name
>or that of another trustee to provide
>the money to buy the income units from
>the trustee of the hybrid trust?


Yes, I do not see why not. In my example, I tried to simplify the concepts so that we could all follow them.


>The subscription money for the income units is then used by the t'ee of the hybrid
>trust as the deposit and it then goes
>and gets its own 80% loan secured over
>the property to be purchased???


As wb suggested, one of the reasons why a hybrid trust is becoming popular is simply to allow you to get the benefits of negative gearing whilst having some of the flexibility of a discretionary trust.


>In this scenario the interest on the
>trustee's loan would only be available
>to be set off against the income of the
>trust before distribution right? The
>holder of the income units couldn't
>claim the trust's interest as a
>deduction as well...


I'm not quite sure what you're trying to achieve here. Hopefully, my comments above and wb's post have clarified this for you and please let me know if it is hasn't and I will try again.


Cheers

Dale
 
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Reply: 2.1.3.1.1
From: Nigel W


On 7/10/02 3:20:00 PM, Waverly Bay wrote:
>Hi Nigel
>
>Why would you restrict your
>contribution of funds into the
>unit trust to an amount that
>only allows the unit trustee
>to place a deposit on an ip?
>
>Isn't it more beneficial to
>the taxpayer/unit holder to
>maximise their gearing (and
>hence tax deduction)> The max
>gearing of course would be for
>the unit holder/taxpayer to
>borrow the full purchase price
>plus costs from the bank (use
>loc to fund deposit/costs)
>...and contributing those
>funds into the trust to allow
>the unit trustee to purchase
>the property outright for
>cash?
>
>cheers
>
>Waverly

Hi Waverly

Just thinking out loud...

I was envisaging a scenario like this - here's some fictitious numbers:

Mr X has $1M in property in his own name. The debt is say $500K. X has a LOC of $400K sitting in his offset.

Option 1

- buy $400K worth of income units
- Trust then buys $400K property (okay I'm ignoring costs etc for simplicity)
- income from property is say $25K (must be a Sydney or Melbourne property with that crap yield!)
- Trust distributes $25K income to Mrs X who is minding the kids and not working.
- Mr X gets a deduction for interest paid on his $400K
- $400K of additional property growing
- new property remote from Mr X

Option 2

- buy $400K worth of income units
- Trust then buys $2M worth of property (ignoring costs etc for simplicity)
- Trust borrows 80% of purchase price ie $1.6M
- income from property/ies is $125K
- repayments on 1.6M loan at say 7% are $112,000
- trust pays out $13K to Mrs X
- Mr X gets his deduction for interest paid on his 400K
- $2M of additional property growing
- new property remote from Mr X

which is better? naturally the higher the gearing the higher the potential risk on interest rate movements, but I think merely buying with Mr X's contribution is letting that money be lazy.

Happy to hear your views on it though...

btw are u working in HK? hopefully its a bit warmer than Sydney!

Cheers
N.
 
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Reply: 2.1.3.2.1
From: Simon St John


Hi Dale

All the above sounds rather interesting.

What would you recommend to someone who has just set up a discretionary trust with one property and was looking to acquire a second?

Stay with the discretionary trust or look into a hybrid unit trust?

I must say, having the benefits of a trust AND negative gearing is very enticing.....


Cheers,

Simon
 
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Reply: 2.1.2.2
From: Anonymous


Gordon,

I recently attended Chris Battens seminar and used one of his accountants to set up a hybrid discretionary trust for me. I haven't yet bought a property using this structure but plan to do so in the near future. It's a matter of speaking to experienced professionals who can guide me through the whole process.

I like the idea of borrowing in your own name to buy units in the trust, and being able to negative gear for the first few years by having 100% of the net trust income go straight to you as the unit holder, offset against your interest repayments. Once the income from the property becomes positive, the trust borrows money from the bank to redeem your income units, allowing you to pay out your loan. Once the income unit holder has been paid out, the trustee can then distribute the income to beneficiaries on lower thresholds etc, the same way as they would for a discretionary trust. There is no need to re-issue any units - the same flexibility as a family trust applies!
 
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Reply: 2.1.4
From: Anonymous


Dale,
Is this the exact order it would happen in? How would you be able to borrow the $100,000 to buy the units in the Hybrid trust first if you were using the IP as security for the loan? But the trust will need the $100,000 from you first before it can go out and buy the property?

Does all this happen simultaneously???
 
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