Deciding future property structure

My partner and I met with my accountant recently to discuss our situation. We currently have a corporate trustee to a hybrid unit trust with a JV to a SMSF as our main investment vehicle (as this is what we were advised at the time). We were told that this is was a good structure to tap into our super to buy our first IP. We bought an IP and got some decent cap growth and rental return. It's covering the mortgage and will soon be positively geared.

However, our accountants have told us today that the ATO is heavily scrutinising the JV structure to an SMSF. A few years ago, it seemed it was all legal and fine - particularly well when you couldn't own property in an SMSF. Now that they (the ATO) have changed their position on that, it seems the ATO is doing the reverse and cracking down on every person who tried to comply with that ruling and kept the transaction at arms length.

We've been told that at our accounting firm, all of their clients with the same structure with us (note: it is a LOT numerically) that have been assessed by the ATO and found to be non-compliant. While we have not been given this notice yet from the ATO (but we suspect it will come) we've been advised to wind it all up now and be proactive. Which we can and probably will do. However this is going to be around six figures with of equity going back into our SMSF, factoring in capital gain which was going to go towards buying our own PPOR. To say I am livid is an understatement.

That's also to say nothing of the hassle we've had getting loans into the hybrid trust in the years since we established it.

The "solution" we've been told is a) to setup a discretionary trust instead and b) use their finance brokers to get mortgages for their trust structures. I feel like I'm just being upsold TBH.

But I'm wondering how long before the ATO starts examining them and cracking down on those. It seems so much more complicated than it needs to be. I'm almost ready to just start buying property in a company and dealing with some additional taxes. At least probate is easier (i.e. bequeath the shares). Also them telling us to use their broker's is a bit of a sales pitch with no guarantee of outcome. They're still dealing with the major banks and at the end of the day, if they don't trust the structure then another person selling it to them isn't going to change it. The asset protection I feel is a false economy. People suing and the courts can unwind trusts. Banks often have personal guarantees for the debt. Individuals can be sued and their shares can be targeted. The list goes on. Unless you're looking at seriously fancy stuff like off shore companies, loans or second mortgages (which is hard to justify unless you have a significant asset base), you don't really get the asset protection.

Anyway, I also seriously question now how many accountants have PERSONALLY been able to get loans using the structures they sell and how people with big portfolios ACTUALLY setup/manage their structures. I think a lot of these guys are glorified salesmen (sorry to anyone reading that's an accountant).

I guess my questions are:
1) What structures do people ACTUALLY use to build portfolios
I don't want to hear how this is tailored on my tax situation. I'm aware of my situation. I want practical answers on how folks do theirs so I can understand what they do, see if it is relevant or applies to our case and what we can do different.
2) Why not use a company over a discretionary trust?
Yes I get less deductions, losses are contained (same as a discretionary trust anyway), there's CGT issues, but it's easier to get loans and probate sounds easier (leaving shares to my kids). For full disclosure we are doing property development and plan on doing more in future.
3) For asset protection, wouldn't a second mortgage be better than relying on a trust?
4) Can people make suggestions which accounting firms they use and would recommend?
I don't want to publicly mention who I use for fear of staining them but let's just say they're well known in this industry and leave it at that.

Thanks. The only reason this has come up is because the ATO has changed the definition of how they defined related parties as best as I can tell. This whole setup was compliant and had been for years. We've had it audited each year for compliance and never had issue.

My gripe is a) how disorganised my accountants are (I won't go into detail but they're getting pretty bad) b) the advice we've received and c) the moving goals posts thanks to the ATO.

I'm now looking to simplify everything, remove the admin headache and be compliant without accounting sorcery. I'm really jaded to advice on structures and looking for a little more independent advice on how other people structure their portfolios.

EDIT: You are right. I am going to chat to a few other firms. It seems all accounting firms lose their sheen after 3 years.
Sounds like you might have a pre 1999 unit trust? My guess is that both you and the SMSF own units in the unit trust and the trust has borrowed. This is no longer possible as it is prohibited under SIS Reg 13.22C but existing structures can continue and be complying but small changed could make them non complying. Ask the accountant why the other client?s structures are now non-complying. I imagine it is difficult to find finance for this structure now.

Also sounds like your accountant is out of his depth as the advice you require is legal advice on structure with a bit of tax advice separately.
Asset protection ? you are wrong in this regard. SMSF and Discretionary trusts are generally extremely strong and it would be rare for one to be attacked and even rarer for it to be unwound if you set it up correctly. But something like an out of character contribution just before bankruptcy could as could a gift to a trust.

Second mortgages don?t really work. A mortgage is security for something ? so if you are borrowing money from a trust and using your personally owned property as security it can work to a certain extent, but the property will grow in value. If you just slap on a mortgage for no commercial reason ? as some spruikers promote ? then this could be unwound easily.
Companies are good, but 2 reasons why you may want to use a unit trust over a company are:
1. Income retains its character in a trust when passed to the unit holder, and
2. Unit trusts can get the 50% CGT discount

Units can be left is a will ? if you personally own them. SMSF member benefits can be left to the estate and then pass via a will or the members death benefits can be left to a dependant directly ? bypassing the will which can have benefits (e.g if will is invalid, or contested). An interest is a discretionary trust cannot be left via a will ? but you may be able to ?leave? the appointor role. The trust will survive the death of the person behind it and keep going ? again benefits as bypasses the will. Companies can be dangerous if you are the sole director and shareholder as upon your death the company will be controlled, until probate/administration by the legal personal representative ? and the wording of the legislation for this means it could be someone other than the executor or administrator as appointed by the courts.

Everyone has different structures. Most are personal names with little consideration given to the various issues. Most people are unable to tell me if their jointly owned property is held JT or TIC for example.

A unit trust is a good structure as it is extremely flexible. Discretionary trusts less flexible in that you cannot do a few strategies with them, but you could have units of a UT owned by a DT which would make a flexible and strong structure.

All this needs to tie into finance as well.

And it is not the ATO moving the goal posts but the laws changing.
Hi Terry

Thanks for the detailed answer.

Trust was established 2008/09 from memory (pre-GFC). I suppose you're right. It just seems the interpretation of related party has changed since we owned it considerably which is frustrating when we're trying to be compliant but don't have money to burn on staying ahead of every legislative, regulatory and compliance change they make and just want less stress in our lives.

At the time we established it, we had no problem with lenders at the time. After the GFC it has been impossible since. It is a hybrid unit trust with no vesting period (setup in SA). That alone might be enough to tell you which accounting firm set it up.

As for being out of their depth, maybe. They are well regarded in the property scene so I should hope to god not. Then again, it wouldn't suprise me.

Re: unit trust vs discretionary
I am leaning towards getting a discretionary trust to hold the property. Would a corporate trustee make it harder for purposes of estate planning? I asked if we could transfer the trust across. In NSW I hear you can transfer assets between trusts for $50 (our property is in Sydney) but my accountant said we'd have to pay stamp duty and all sorts of stuff.

Re: second mortgages
I'm a long ways even contemplating anything like this but the way I understand it- any company or entity is wound up is that creditors are paid out first during any dispute in order in which they came. So if a bank has a mortgage, they get paid first, the second mortgage is against the equity balance. Yes they can be unwound but logistically and practically it is considerably harder (at least so I hear and not just from this accountant). In effect, pretty much anything can be unravelled and a lot of this stuff of asset protection is really vague.

It seems to come down to who are you trying to protect your assets from and how much are they willing to spend to come after you. If it is to stop or deter someone from suing you frivolously because they want an easy payout then that is reasonably feasible.

Can anyone advise what structures they use and why? Or how they started building their portfolio and maybe switched the structures over time?

I'm not looking to copy them but I am curious to find out how people get lending into their structures, how easy/difficult they found it, any gotchas, etc. At least that way I have some more intelligent questions to go and ask accountants and see whether these would be applicable in our own circumstances or not.

Also the names of any good accounting firms that deal with property, finance with practical advice that understand these structures and don't get slapped around by the ATO would be appreciated.
With SMSFs you must expect constant legislative change. Changing faster than the tax acts and harder to keep up to date with. ? even for advisors. It makes advisors prematurely bald.

I can guess who your set up your structures with and they are no lawyers and this is out of their depth. Just because a trust may be governed by SA law doesn?t necessarily mean it won?t vest ? where is the trustee company set up, registered office, location of central management and control and location of trust assets. In fact even if you pass all of these requirements there is something in the SA Property Act which means the trust can be vested by the attorney general or any beneficiary once 80 years is reached. But in 75 more years there will be no one left to sue = good marketing.
Stamp duty in NSW on transfer from one trust to another. Don?t forget CGT too. New loans required.
Re second mortgages, it will depend on the structure of the mortgage and what it was used for. Certainly they are worth considering as part of an asset protection plan. But slapping a mortgage on willy nilly won?t achieve anything because of sections in the bankruptcy act ? anything in a trust deed or contract could be overturned if it was a non commercial transaction. I don?t think a lot of asset protection is vague. There is certainty in this. I have written a book on asset protection which I am trying to finish and will look to put out next year.
If a trustee in bankruptcy sniffs there is money to be clawed back then they must make a commercial decision on whether it is worthwhile do attempt a claw back. Often they may take a property or put a caveat and then it is up to the other party to fight it.
I have seen the second mortgage work on several occasions with bankruptcy/liquidators.

BUT you set it up for commercial reasons and the longer it is setup the better. If you run off and do it once you get a whiff of looming trouble then it is not so good.

Sounds like you need a lawyer before the accountant. Could be worth a trip to Sydney to Terry W.
Terry - please post when your book is out. I'll definitely buy it.

Yeah I'm open to the discussion on structures and what not. What I'm after is something practical.

I don't want a trust structure that I can't get loans for or be told it's for asset protection and it can be dismantled easily. Same deal with the SMSF. I don't see a point maintaining it if I have to move assets around every few years, losing large amounts of equity I was planning to use. It really screws things up. If SMSF is going to change that much, I may as well just buy CBA & ANZ shares and some bonds and leave them alone. Or worse case, kill it and roll it back over to another managed fund and forget about it.

Sorry I realise I sound like sour grapes, but I'm really frustrated and not really sure where to go.
My partner and I met with my accountant recently to discuss our situation. We currently have a corporate trustee to a hybrid unit trust with a JV to a SMSF as our main investment vehicle (as this is what we were advised at the time). We were told that this is was a good structure to tap into our super to buy our first IP. We bought an IP and got some decent cap growth and rental return. It's covering the mortgage and will soon be positively geared.

However, our accountants have told us today that the ATO is heavily scrutinising the JV structure to an SMSF....


A Hybrid Trust of any form has always been prohibited as a SMSF investment. For tax purposes there is no such thing as a "JV"other than under GST law. A JV isnt a structure. Even pre-1999 trusts are prohibited if its a HUT / DT/ HDT. Any income would non arms length income and the fund investment an in-house asset. If this exceeds 5% then its a further breach. This is a very serious position. Your SMSF is exposed to non-compliance and it is regrettably likely to be incapable of repair.
This "scheme" is a old one and generally tries to assert that a HUT is a unit trust and therefore covered by Reg 13.22. A HUT isn't a unit trust is the main concern. The second excuse is that the HUT is a widely held unit trust. Again, incorrect as it isn't a unit trust.

The rules have NOT changed. The ATO position hasnt changed. They have always held a HUT to be a prohibited investment and with a related party. Thus prohibited by s66. They have always been the same. Their view that a HUT can be used hasn't changed either. A hybrid trust of any form is not a fixed trust and therefore is a prohibited investment (s66) as the SIS Reg 13.22 exemption does not apply.

I suspect I know the firm....You may have a claim for negligence under a PI scheme if you were given advice to use this structure. Happy to discuss privately. The Cmmr "may" agree to allow the fund to restructure this without penalty....You need some good independent advice. Your accountants are butt covering and may be less than truthful.

Click on my email below...Happy to discuss offline.
Thanks everyone for the replies and the PMs. I greatly appreciate it.

I've had some trust deeds updated and sent everything to a second accountant and got his input. I'm also talking to a lawyer to discuss next steps. Their view is that the setup is not kosher and that the accounting firm has been "hyper aggressive" in the way they have set this up and that the ATO if they look at this with any degree of scrutiny will rip it apart. Potentially I am looking at 1) having to move the equity from this property back into the super 2) there's the potential they may deem the trust as invalid and that I get the income from the property but can't claim the deductions and may have something like 4 years of back taxes to square up.

Our existing accountants seem to be running with private rulings to get everything square. To me it sounds like smoke and mirrors. My other concern is that our super kicked in more than 5% of it's base to purchase the property (which I think is considered reckless under the law) which is another nono with an even worse penalty -- but our accountants knew exactly how much we had and how much we invested when we set this up.

You're right, my accountants are butt covering. That is evident from the conversations. They're also seem pretty unwilling to discuss the options in fixing our six figure hole in our finances.

Moreover I'm pretty sure that their auditors are rubber stamping our SMSF audit reports and that it has been non-compliant from the onset due to the a few things with the way this was done. I've been told that they are giving people 12 months to fix their super using this structure and return any equity borrowed -- which we can and will do.

I don't know where this is headed but the plan is to switch everything to another accountant and this lawyer, self reporting to the ATO (and hoping for mercy) and explain they sold us this setup, demonstrate we have fixed or can fix the breach and throw my former accountants under the bus to the ATO and tax agents board (as a large number of their clients are under ATO scrutiny it seems) for selling this structure and knowing full well how much we contributed from our super to potentially suing them outright. All options are on the table.

Personally I'd be happy with not suing and just paying the cost to fix my structure and squaring everything with the ATO and reporting them and watch the ATO nail them to the wall. I've done much more research now and I'm aware there are criminal charges for people selling this structure. These people should be in jail for selling us this structure and the way it's been done. A good chunk of this money was going to help pay for our first home as a family. :(
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J - I have replied to your PM.

First things if its truly non-compliant it can be fixed. The ATO compliance process is about penitent taxpayers unless they do something criminal or its a blatant matter. That said a breach is still a breach and it is one of the key risks to a SMSF. Despite your obtaining apparent advice which may be flawed it remains that you made that choice.

Recent changes to SMSF laws may also mean you cannot use SMSF funds to fight this fight. That is yet to be explored.

I wont sugar coat this...The fix may be very costly. You may be required to sell the asset. The Commissioner has no power to allow a breach to be ignored. A good example of this is SIS Reg 13.22D which requires sale within twelve months. That's a unit trust issue and I suspect it wont apply to your trust since it isn't a unit trust to commence with. I suspect your investment is just a prohibited and in-house investment.

I do several of these a year. Its scary how many accountants are stupid. Focus should be on fixing it with minimal cost. The cost should be subject to a claim for professional negligence if that can be established. I often provide a letter of opinion to the lawyer which assists to give weight to the technical aspects of where the negligence advice was. ie : SMSF setup, investment advice, incorrect structure etc... It usually means the weight of evidence for the insurance claim favours settlement rather than court.

Before "fixing" it the problem must be identified. Then all solutions considered. Then the ATO need to be asked for their opinion on how it should be fixed. We identify the fix and then put the proposed changes to them. When agreed then it is completed under legal advice. The ATO reply should also act as evidence it is flawed. (eg a hybrid trust)

There is a potential claim against the auditor too but that wouldn't have changed the occurrence in any event. At least a claim that there was a lack of independence. That's a serious complaint made to ASIC in many instances...

Its bad but not as bad as you think. It can be fixed and if the advice was flawed your had a good chance of recovering some/most/all of your losses as the parties are covered by professional indemnity insurance. However it can be limited.

The parties to this would more likely fear disqualification
J - you should sue :eek: or at least make a claim against them which they will probably settle without going to court.
You would have a claim against the lawyer, the accountants and the auditor. The auditor should be banned for rubber stamping as this is basically fraud.

It is going to cost you a fortune to fix too. All of these 'professionals' are covered by insurance so the insurance company will cover them (unless the accoutants have been giving legal advice).

you should speak to a good tax lawyer and also a litigation lawyer.