Can I use family trust buy property then rent back for NG, and how about pay off loan

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Poweregg

I have a family trust, Can I use it buy property and rent back to myself for Negative Gear, And how about I pay off the mortgage


Hi guys,

Just get a bit confused under following condition:

I want use family trust buy a property to live in, so I can rent from the family trust and the family trust get negative gearing.

(I have had a PPOR-principal place of residence but too far from where I living.)

Here is my questions:
1, Current my parents live in my PPOR for free, If I rent outside a long time like 10 year, will the ATO still treat my property as PPOR?
Or they will consider it's a investment(even no income!) and I have to pay CGT when I want sell?

2,Like I pay rent to my trust(company trustee) to get negative gearing, If one day the trust pay off the mortgage, so no Negative gear anymore, Can the Trust said to ATO "The home is not rent any more, it just provide free accomodation for xxx?"
Is this possible? or Fringe Tax Benefit will apply?

Thanks a lot
 
I don't think you completely understand how negative gearing works and how family trusts work. You can't negatively gear via an asset in a family trust.

The 'losses' incurred will be retained in the trust until it makes a profit, at which point the losses will offset the profit and reduce your tax at that point in time. You won't get any tax benefits until the assets in the trust are producing a profit.

(I have had a PPOR-principal place of residence but too far from where I living.)
Click to expand...

If you're not living in the property, it's not really your PPOR unless you're making use of the 5 year rule. Also you can't claim another property as your PPOR and still have this one as your PPOR if you're living elsewhere.

If I rent outside a long time like 10 year, will the ATO still treat my property as PPOR?
Click to expand...

No. It's no longer your PPOR. Also if the trust owns the property, it can't be your PPOR as you don't own it, the trust owns it, thus no PPOR capital gains exemptions.

Also keep in mind that if you currently own the property and want to move it into the trust, the trust will need to pay stamp duty as it's buying the property from you. When you change ownership in this way, the new owner pays stamp duty on the rateable value of the property.
 
PT_Bear said:
I don't think you completely understand how negative gearing works and how family trusts work. You can't negatively gear via an asset in a family trust.

The 'losses' incurred will be retained in the trust until it makes a profit, at which point the losses will offset the profit and reduce your tax at that point in time. You won't get any tax benefits until the assets in the trust are producing a profit.
Click to expand...

Hi,PT_Bear

Thanks for reply and sorry for I incrocectly using the word "Negative Gearing"

What I mean is,like the trust have 100k income a year,

If I buy a property and rent back,if interst is 50k and rent income is 30k, & expense is 10k, so the trust lost 30k(50k-30k+10k) per year. This loss can be used to offset the 100k(trust income).

After this,the trust only have 70k income to distribute to family(a couple), it's like you save personal tax(before the couples have 50k dividends per year, now reduced to 35k per person.)

Then,like after 10 years, if the trust pay off the principal of the mortgage, there would be a extra positive income 20k(rent 30k-expense 10k). As extra income,it has to be distribute to the couple so means they pay extra tax!

Can the trust declares provide "Free Accommodation" to the couple(the beneficiary)?
Will this trigger Fringe Tax Benefit?

Thanks
 
Last edited:
Your assumptions regarding income vs expenses is correct. One is used to offset the other.

Think of the trust as just another person in this respect. It has income, it has expenses. Tax or gearing benefits is allocated on the difference.

The one thing with trusts is the profits must be distributed to the benificaries each year and the benificiaries will pay tax on those profits. The tax is paid at the marginal rate of the benificiaries (so usually profits are distributed to the lowest income bendificiaries). As a result of this, you can't pay down the principal directly.

Once the bendificiaries have paid the tax, the benidiciares can opt to pay down the principal of the loans.

I'm not sure about the second part (FBT etc). It may depend on the circumstances of the people living in the house and how other income in the trust is generated. You'd be best to get specific advice from an accountant.
 
Hi PT_Bear

Much appreciate for the answer. Just wonder:

As a family trust, can the trust provide free accommodation to the beneficiary?

Or Even claim for the expense like council fee,land tax....then provide free(or cheap) accommodation to beneficiary?

Thanks.
 
alexlee said:
Poweregg, why this fascination with using your family trust to own the property you'll be living in?
Click to expand...

Hi alexlee,

I already have a PPOR, and for some reason I have to buy a property at other place and have to live there.
(If I buy the property under my name,I can't use the loan interest to offset my income to reduce tax....because I can;t rent to myself)

I want keep my current place as PPOR(one person can have one PPOR for sure),
so the property I prepare to buy will need pay CGT for sure and I think it's reasonable.

Using family trust to buy is I can rent the property from my trust, so the trust can use the loan Interest to Offset Trust's income. and fees like council fee.strata fee also can be used to Offset Trust's income.
(I also think this is allowed because trust is like another person, he can rent property to you and offset the interest from bank...)

What I wonder is:
If a family trust owns a property, can the trust provide "free accommodation" to beneficiary....
If can, can the trust still use the expense(council fee,land tax) to offset its income?

(It's a bit complex/confused...hope I explained well:eek:)
 
Last edited:
Poweregg said:
Using family trust to buy is I can rent the property from my trust, so the trust can use the loan Interest to Offset Trust's income. and fees like council fee.strata fee also can be used to Offset Trust's income.
(I also think this is allowed because trust is like another person, he can rent property to you and offset the interest from bank...)

What I wonder is:
If a family trust owns a property, can the trust provide "free accommodation" to beneficiary....
If can, can the trust still use the expense(council fee,land tax) to offset its income?

(It's a bit complex/confused...hope I explained well:eek:)
Click to expand...

Smells like a fish that's been dead for a month, if you ask me. Have you actually received the professional opinion of a lawyer or accountant who says you can do this and get it past the ATO?

A trust is technically a separate entity (especially if you use a corporate trustee), but the ATO is very wary of just what you're suggesting.
 
alexlee said:
Smells like a fish that's been dead for a month, if you ask me. Have you actually received the professional opinion of a lawyer or accountant who says you can do this and get it past the ATO?

A trust is technically a separate entity (especially if you use a corporate trustee), but the ATO is very wary of just what you're suggesting.
Click to expand...

Nope, haven't got any advice from my accountant.

Just read an article the people rent a home from their trust
good side is can offset the trust's income, and can claim deduction like council rates,renovation...
(as you said trust is a separate entity, it can rent home to beneficiary and claim the expense..)

bad side is you have to pay CGT(if sell)/Land Tax, any I wonder whether ATO agrees.

So I post here and will ask some advice from accountant.(will keep updating:))
 
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alexlee said:
Are there additional issues where the particular beneficiary also controls the trust?
Click to expand...

From my vague recollections (accountant please help!) the issues start arising where there is a corp trustee.

If the beneficiary is in the employ of the corp trustee, I think it starts having FBT implications.

The Y-man
 
Hi wobbycarly,alexlee,The Y-man, thanks for the reply.

I checked some ATO's info.

1. like my previous link
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/83291.htm

If the property is rented at market price, the trust can claim all expense like intertest,land tax,council rates and I think if it's rented as 'Fully Furnished', the depreciation of the furniture also can be included to offset the Trust's income.
(But the expense or loss can't take out of the trust to NG personal income.)

2. If the rent is lower than market rate, all you can offset is what you got.
http://www.ato.gov.au/individuals/content.asp?doc=/content/00191817.htm&page=7

Ato example:
Renting to a family member
ATO Web said:
Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent – $180 per week. They allowed their son, Tim, to live in the property at a nominal rent of $40 per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants.

Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement.

Assuming that during the four weeks of Tim’s residence the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total – that is, $40 x 4 weeks.

If Tim had been living in the house rent free, the Hitchmans would not have been able to claim any deductions for the time he was living in the property.
Click to expand...
 
Poweregg said:
Hi wobbycarly,alexlee,The Y-man, thanks for the reply.

I checked some ATO's info.

1. like my previous link
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/83291.htm

If the property is rented at market price, the trust can claim all expense like intertest,land tax,council rates and I think if it's rented as 'Fully Furnished', the depreciation of the furniture also can be included to offset the Trust's income.
(But the expense or loss can't take out of the trust to NG personal income.)

2. If the rent is lower than market rate, all you can offset is what you got.
http://www.ato.gov.au/individuals/content.asp?doc=/content/00191817.htm&page=7

Ato example:
Renting to a family member
Click to expand...

you're almost there. now go see an accountant rather than randoms on the net.

find one who is familiar with oz tax and your language.
 
The Y-man said:
From my vague recollections (accountant please help!) the issues start arising where there is a corp trustee.

If the beneficiary is in the employ of the corp trustee, I think it starts having FBT implications.

The Y-man
Click to expand...


Another further question,

1,The Trust do have a company trustee(one person is Director,and share 50% shares with his wife)
2,The Trust have a business to generate income(The couple works to run business).
3,The couple don;t get paid from Trust or company, only get dividends as beneficiary

Is ATO consider the couple as employee of Trust? they got no hour rate...no super...
 
Poweregg said:
3,The couple don;t get paid from Trust or company, only get dividends as beneficiary
..
Click to expand...

You're not getting dividends, unless you're operating the business in a company owned by the trust. You're getting distributions of business profit.

You'll note the ATO example was of renting a property at commercial rates to the son, with the property owned by a trust controlled by the parents.

Can you find an ATO example where the property is rented to the actually controller of the trust (i.e. in that example the parents)?
 
Still trying to understand your logic here Poweregg.

You want the trust to own your PPOR so the trust can receive a tax deduction for the shortfall in holding costs. This deduction may only be offset against other trust income. In order to acheive this, you (or the trust) will be liable for the following:

- CGT on sale of property
- Stamp duty on transfer
- Land tax (possibly)
- FBT (possibly)
- Rent at commercial rates in after tax dollars

If over 5 years the property loses 15k pa and you are on the top marginal rate, you will save 37k in tax.

If the property costs 500k and appreciates by 5% pa and you sell after 5 years you will pay 34k in tax.

...and then there's stamp duty, potential Land Tax and FBT, plus possible scrutiny from the ATO.

What's the point??
 
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