Discretionary Trusts

[seano4ever]

Hi everyone,

I am looking at setting up a discretionary trust where myself and my partner are the trustees and primary beneficiaries. We are looking at purchasing 2 units in the next few weeks in QLD.

I have a few questions that I would be grateful for if you could answer.

1) If both properties are purchased under a single trust name, is land tax accumulative for properties?

2) Can property expenses (including depreciation) be used to offset income tax? Say if I earn $100,000 and the property runs at a loss of $10,000. Is my total taxable income $90,000?

3) As we are the beneficiary, does the income we receive from the trust increase our total personal tax income? Say if I earn $100,000 and the property runs at a profit of $10,000. Is my total taxable income $110,000?

4) If the answer is yes to questions 2 + 3.
If my partner earns $80,0000 pa and I earn $100,000 pa, and the property is generating $10,000 gross, does this mean for tax benefits, the income is best paid into my partners account? Or is the profit split according to the property share? Then again, the trust owns the property, not us.

 

[alexlee]

1) If both properties are purchased under a single trust name, is land tax accumulative for properties?

Yes, note that trust land tax thresholds may be different from individual thresholds.

2) Can property expenses (including depreciation) be used to offset income tax? Say if I earn $100,000 and the property runs at a loss of $10,000. Is my total taxable income $90,000?

In your setup, no, because it's the trust that will be making the loss of 10k. Trust losses cannot be distributed to beneficiaries. However, they can be offset against future income in the trust. In your example, your taxable income is still 100k and the trust has an accumulated loss of 10k. Depreciation would be part of the trust's tax loss.

3) As we are the beneficiary, does the income we receive from the trust increase our total personal tax income? Say if I earn $100,000 and the property runs at a profit of $10,000. Is my total taxable income $110,000?

Yes.

4) If the answer is yes to questions 2 + 3.
If my partner earns $80,0000 pa and I earn $100,000 pa, and the property is generating $10,000 gross, does this mean for tax benefits, the income is best paid into my partners account? Or is the profit split according to the property share? Then again, the trust owns the property, not us.

Not sure if you chose 80k deliberately, but a good example. Answer: in that situation, no. The marginal rate of tax from 80 - 180k is 38% for ye Jun 2010. So in your example, whether it's distributed to you or your partner, you'll still pay 38% tax on it. Income streaming is beneficial when one person is on a lower marginal rate than the other.

There is no property share because, as you say, the trust owns the property 100%. As it's a discretionary trust, the trustee can distribute in whatever way it wants.

Why are you looking at using a trust for the purchases? Income streaming can't be used if the property runs a tax loss. For most resi properties with a high LVR, including depreciation, it might be a few years before it's tax positive, and you don't get to deduct against your personal in the meantime.

You need to either learn how trusts work or have an accountant who knows trusts holding your hand. Right now, you don't know enough to use trusts effectively.

 

[mja]

In a discretionary trust, the negative gearing is trapped in the trust - ie, you can't use your income to offset the loss.

The trust is also forced to distribute the income to something/someone, but you get to decide who gets the income.

In QLD, You get a land tax threshold per trust, so if the trust owns three properties, as long as the total land value of the properties stays under the threshold ($360k from memory - don't quote me), then you pay no land tax.

 

[seano4ever]

Thank you so much for your answers. You wouldn't believe how many people I have spoken to in regards to this issue.

Yes, note that trust land tax thresholds may be different from individual thresholds.

Yes they are. This is a major reason why I am considering setting up discretionary trusts for my properties.

Rates for companies, trustees and absentees
$0–$349,999 $0
$350,000–$2,249,999 $1,450 plus 1.7 cents for each $ more than $350,000
$2,250,000–$4,999,999 $33,750 plus 1.5 cents for each $ more than
$2,250,000
$5,000,000 and over $75,000 plus 2.0 cents for each $ more than
$5,000,000

Rates for individuals
$0–$599,999 $0
$600,000–$999,999 $500 plus 1 cent for each $ more than $600,000
$1,000,000–$2,999,999 $4,500 plus 1.65 cents for each $ more than $1,000,000
$3,000,000–$4,999,999 $37,500 plus 1.25 cents for each $ more than $3,000,000
$5,000,000 and over $62,500 plus 1.75 cents for each $ more than $5,000,000

You need to either learn how trusts work or have an accountant who knows trusts holding your hand. Right now, you don't know enough to use trusts effectively.

I'm learning quick.

So the major disadvantage of the discretionary trust is the inflexibility of negative gearing benefits. Are there any other negatives associated with discretionary trusts?

So the way I see it, any property that is positively geared off the bat should be purchased under a trust. This will provide land tax benefits, flexibility of distributing the funds to the beneficiaries, and asset protection (feel free to add to the list).

I have been reading into the setup of a trust and believe this is the best structure.
Trustee - Myself and my partner
Appointor - Myself and my partner. (The appointer can sack the trustee).
Settlor - My Lawyer (this person gives you the first $10 to start the trust off. You never hear from the Settlor again.
Beneficiaries - Myself and my partner

Please advise.

 

[mja]

You have to select your lender carefully. A lot of lenders don't do trusts. Other lenders require that the trustee is an individual(s). Get a good broker.

So the way I see it, any property that is positively geared off the bat should be purchased under a trust.

No, not really. For example, in NSW, trusts pay land tax - there is no threshold. Individuals get a threshold. So it makes sense to talk to a GOOD accountant to work out the best options now, and for the future.

If you want to negatively gear, look at a hybrid discretionary trust. There has been so much discussion on this forum about the pros and cons about HDTs...

 

[seano4ever]

You have to select your lender carefully. A lot of lenders don't do trusts. Other lenders require that the trustee is an individual(s). Get a good broker.

My partner is a home loan lender so that should be no problem

No, not really. For example, in NSW, trusts pay land tax - there is no threshold. Individuals get a threshold. So it makes sense to talk to a GOOD accountant to work out the best options now, and for the future.

Good point, but I was referring to QLD properties where land tax thresholds do exist. Is there any other disadvantages of the discretionary trust I should know about?

(I have just booked a meeting with an accountant who specializes in property).

If you want to negatively gear, look at a hybrid discretionary trust. There has been so much discussion on this forum about the pros and cons about HDTs...

Thanks for the hot tip.

 

[alexlee]

I have been reading into the setup of a trust and believe this is the best structure.
Trustee - Myself and my partner
Appointor - Myself and my partner. (The appointer can sack the trustee).
Settlor - My Lawyer (this person gives you the first $10 to start the trust off. You never hear from the Settlor again.
Beneficiaries - Myself and my partner

Please advise.

Why are you considering individual trustees as opposed to a corporate trustee?

 

[alexlee]

Seano, the individual threshold for land tax in qld is 600k land value. Are you actually hitting this yet?

 

[Rolf Latham]

zippo asset protection as personal trustee...........u can still be sued

ta
rolf

 

[Ausprop]

a trust with personal trustee is really just a tax planning tool.

however good luck getting funding for a trust with a corporate trustee

 

[Rolf Latham]

My partner is a home loan lender so that should be no problem

.

No disrespect, but there potentially is a problem.

If your partner is a multi lender broker that used to setting up multiple IP strategies for clients, OR has been trained to do so, then great.

If not, and yur partner works for a lender as a home loan specialist.........thats usually what they are good at. A home loan structure that suits that lenders needs, and isnt optimised for the investor.

A really good example may be that you want to do X properties in the next 10 years. Obviously you cant do all X with the ONE lender unless X is a small number.

So, if you use up your "high serviceability" lenders early, you could get stuck quickly.

Thats just one area as to why people use an experienced broker, its not to get "the best deal" but to make sure you can meet your goals and dont paint yourself into an expensive corner.

ta
rolf

 

[Rolf Latham]

a trust with personal trustee is really just a tax planning tool.

however good luck getting funding for a trust with a corporate trustee

Generally, not a problem...............Lo doc is a pain, but full doc to 90 is poss in many cases

ta
rolf

 

[seano4ever]

Why are you considering individual trustees as opposed to a corporate trustee?

Any excellent question. Pick me apart so I have plenty of ammo for the accountant when I see him. What are the pros and cons of an individual trustee to a corporate trustee?

[/QUOTE]

Seano, the individual threshold for land tax in qld is 600k land value. Are you actually hitting this yet?

Yes I am. And I have goals to grow my portfolio significantly so it is important to be set up correctly from the start.

 

[mja]

Don't use individual trustees. They have less asset protection than corporate trustees. A savvy lawyer who's looking to sue will notice the individual trustees and will have a go anyway.

 

[alexlee]

Any excellent question. Pick me apart so I have plenty of ammo for the accountant when I see him. What are the pros and cons of an individual trustee to a corporate trustee?

You don't have any knowledge to pick apart at this stage. I'm not going to give you the analysis if all you're going to do is parrot it back to your accountant verbatim. You need to understand it yourself first, and at the moment you don't. That's why I asked what your understanding is of the difference between using individual and corporate trustees.

Asking a question is useless if you don't have enough knowledge of your own to understand and evaluate the answer. Right now you don't have the knowledge to understand whether your accountant gives you good advice. Have you at least read some books on trusts? Find some in your local bookstore.

As Rolf said, if your partner is an experienced broker who is used to structuring loans with multiple lenders for investors with multiple IPs, great. If they work for a bank as a loan officer, then it doesn't really help you. They might be better at paperwork, etc, but they won't have the experience of the serviceability calcs of different lenders.

 

[coastymike]

"For example, in NSW, trusts pay land tax - there is no threshold."

Not if you have a NSW land tax unit trust where approval has been obtained from the OSR that the trust obtains the threshold.

 

[mja]

"For example, in NSW, trusts pay land tax - there is no threshold."

Not if you have a NSW land tax unit trust where approval has been obtained from the OSR that the trust obtains the threshold.

Is this a Chan and Naylor trust?

 

[mja]

I can recommend the e-book "Trust Magic" by Dale Gatherum-Goss. Lots of information in there. Get yer learn on!

 

[seano4ever]

I can recommend the e-book "Trust Magic" by Dale Gatherum-Goss. Lots of information in there. Get yer learn on!

thanks mja you've been really helpful

 

[coastymike]

MJA,

No not a Chan & naylor trust but a Macquarie Group Services trust. They have the advice from the OSR on their website which confirms the land tax threshold applies to these trusts

http://prc.macquariegs.com.au/