Family Trust or Individual Name

[sivakumar_sr]

I need advice on whether I should buy the property in Family Trust or in my individual name.

My background:


Me and my brother are the trustee for the family trust and our main objective is to to hold on to the properties for long term and pass it on the kids in future.

Me and my brother are in high tax bracket and we both will be the gurantor if we buy it in the Family Trust name. I already got my tax variation done and nothing much to claim whereas I have my wife and brothers wife both not working and not planning to work in future as well. Me and my brother already have few investment properties and are already negativly geared.

The family trust receive income distribution yearly from my second job as part time director in a company. This should pay for the difference between rent and interest paid.

My question is

1. Should I buy it in Family Trust name or in my own name
2. Both me and my brother being a guarantor can reduce our borrowing capacity for next properties
3. Can we (me and my brother) claim tax benefit by being gurantor
4. What are the other disadvantage of this structure

Regards
Kumar

 

[nonrecourse]

I need advice on whether I should buy the property in Family Trust or in my individual name.

My background:


Me and my brother are the trustee for the family trust and our main objective is to to hold on to the properties for long term and pass it on the kids in future.

Me and my brother are in high tax bracket and we both will be the gurantor if we buy it in the Family Trust name. I already got my tax variation done and nothing much to claim whereas I have my wife and brothers wife both not working and not planning to work in future as well. Me and my brother already have few investment properties and are already negativly geared.

The family trust receive income distribution yearly from my second job as part time director in a company. This should pay for the difference between rent and interest paid.

My question is

1. Should I buy it in Family Trust name or in my own name
2. Both me and my brother being a guarantor can reduce our borrowing capacity for next properties
3. Can we (me and my brother) claim tax benefit by being gurantor
4. What are the other disadvantage of this structure

Regards
Kumar

Please note this is not advice only the opinion of an unqualified individual with a passion for investing in property through trusts. You need to first do a lot of reading like Renton's Guide to family and Unit Trusts. Then pay for expert legal advice but have a list of questions but with a least an understanding about what you are asking.

If your looking at the long term you should be thinking of your end game. There are a number of issues. Most people on this site focus on the tax advantages of negative gearing. With any strategy there are postives and negatives. The down side of focusing on the negative gearing is that it exposes you to more risk.

From what you have outlined my answer is that you should set up a unit trust and have your discretionary trust (family trust) own all the units in the unit trust. Some time ago people were using a Hybrid trust (both a discretionary and a unit trust mix) but the tax man has changed the rules

Its better that you do not hold property directly in your family trust, particularly when or if you have business assets in the family trust. The two trust strategy I mentioned is better long term when you pay the property/properties off because the units can be allocated at your discretion, and therefore advantages with regard to not having to pay stamp duty when you divide it up among the kids and also better asset protection if they marry the man or woman from hell or get involved in litigation.

 

[Michael Yardney]

Hi

It would be wrong to give financial advice but here is a great article on the Property Update website which discusses the ins and outs of trusts.

Click here to read this article

There is also a great article from Dale Gatherum-Goss from his book Trust Magic (that I would recommend) you can read it by clicking here

 

[Rob G.]

No deduction for going Guarantor.

How do you divert income from a "job" as a director (personal services) ? - unless you mean dividends ?

Cheers,

Rob

 

[see_change]

Which State ???

NSW doesn't give a property in a trust a land tax threshold .So if you buy a property in NSW in a trust you pay land tax for $1. There are forumities who have bought in nSW in trust who have been hit with nasty land tax bills which has significantly affected their servicability.

Even though I'm in a higher risk Profession ( I've yet to hear of a Doc sued and not be covered by their medical defence so I'll take the risk ) We've just bought our first IP in NSW in my name for the negative gearing benifits in the shorter term as well as taking advantage of the land tax threshold. Also we've done this as it might be a longer term PPOR.

Cliff

 

[contrary]

Which State ???
NSW doesn't give a property in a trust a land tax threshold .
Cliff

Cliff, unless you have sex with your patient or commit an criminal offence, I would say you are covered by your MDU. The trust thing is for paranoid surgeons who are more likley to be ripped off by their wives.

It's a shame they changed the law, but they're allowed to do that. I have 2 properties in a discretionary-unit trust setup and it is a waste of money.

If someone wants to sue you, they will. Or they could streal your identity or a meteor could land on your head.

I was speaking to a chap today who was telling me about a complicated structure where he is employed by a company owned by another comapny and another one x6, which is eventually owned by a company with an ostrich farm interest. This is to offest his bonus of 1m last year. The multiple companies are because apparently the ATO only audits to 5 degrees of separation, so yeah it's safe and you can't possibly be found out in an audit. Yeah right.

Anyway, I am not convinced the trust setup actually protects you from, or whether a P/L company does either.The lawyers and accountants are always keen on it and out to make a buck.

 

[skater]

Which State ???

NSW doesn't give a property in a trust a land tax threshold .So if you buy a property in NSW in a trust you pay land tax for $1. There are forumities who have bought in nSW in trust who have been hit with nasty land tax bills which has significantly affected their servicability.

Speaking as one of those who have nasty land tax bills each year, this is certainly the case. At one stage I had several regional properties in the Trust plus 4 Sydney properties. The overheads for the regionals was negligable, as the land values were not very high, in comparison to the Sydney ones, and I only had cheapies.

After enduring this for several years and continually going backwards due to the excess non-deductable expenses that the Trust costs, I see no benefit to this stucture at all. In fact I have only experienced financial pain since set-up of it.

Last year we had to sell one of the Sydney properties so that I had the funds to remove 2 others from the Trust. This year the land tax will certainly be a drop in the ocean compared to previous years. We will eventually divest ALL assets from the Trust.

 

[austini]

I'm not authorised to give advice but based on experience I would no longer own property in a discretionary or Hybrid Disc Trust. Land tax is one of the major issues. We do however own a substantial share portfolio in a discretionary trust and this has been a great setup. Shares are not subject to land tax and there are no litigation issues either.

We will be winding up the Hybrid trust hopefully in the not too distant future and divesting the investment property from the discretionary trust over time.

Cheers - Gordon

 

[see_change]

btw

I Q'land we have owned 14 IP's in Trust funds and not paid a single cent in Land tax as each trust has it's own threshhold . Just set up new trusts when you're getting close to the limit.

Land tax in Tassi is negligable in a trust . I think every one pays land tax there so the burden is spread ( check for your self )

CLiff

 

[skater]

Land tax in Tassi is negligable in a trust . I think every one pays land tax there so the burden is spread ( check for your self )

CLiff

I think you are right on this one Cliff. We used to hold a couple of Tassie properties and paid land tax on each one of them. I can't remember how much one of them was as we only had it a short time, but the second property we held for several years, only selling in around 2003/4. The land tax bill was in the vicinity of $25.00. No problem at all.

 

[Lukey13]

Interesting discussion...

I'm a little confused now as my accountant has recently advised me to set up a Family Trust which would work this way (if my memory serves me correct):

* Part-time business income to be directed into Trust and then distributed between my wife (who will be on the much lower income whilst on maternity leave), baby (the limit of $1K or so) and myself (already on high tax bracket due to main job).

I also remember my accountant mentioning the possibility of purchasing the next IP using the Trust as I would be able to negatively gear against the business income being earned in the trust.

Our current scenario is:
* Wife on well-paid salaried job, but expecting to take long maternity leave before going back part-time.
* I'm on very well-paid salaried job as well as having a part-time business (currently sole trader) with very little overheads.
* Current PPOR (62% LVR) owned as Joint Tenants
* IP1 (100% LVR) owned as Tenants in Common (99% in my name)

So really there are two questions here:
1. Is the Family Trust a useful setup for business income?
2. Is the Family Trust also useful for gearing IPs against this income?

 

[tubs]

Whilst no expert, I think you need to check this structure again Lukey.

Depending on the nature of your business, you may find you can't distribute the profit if its of a Personal Services Income nature. In other words, if you are the one earning the money, then the money has to go to you. For example, if you're a painter, gardener etc.

Secondly, owning the property in the SAME trust as the business could expose it to any litigation against the business. Far better to have them in separate trusts and have the property trust as a benificiary of the business trust.

I'd be interested in the opinion of others on this too.

 

[GreatPig]

Agree with Tubs on both counts.

Personal services income is if you earn something like 80% or more of your "business" income from a single client. In that case, the ATO will just treat you as if you were an employee of that client (ie. it would all be your personal income for tax purposes).

Would the trust income (business plus rent after deductions and depreciation) likely be higher than the IP loan interest? If not, then the loss would be trapped in the trust until offset by a future profit, whereas in your own name it could offset some of your other personal income. If yes, then the trust would provide greater flexibility for distributions, as you indicated, but at higher cost (accounting fees and possibly extra land tax).

GP

 

[Lukey13]

Thanks tubs and GreatPig.

I recall my accountant determining that my business is not of a "Personal Services" nature. I am in a medical profession in which I undertake work through Medicare, private payment and Government contracts.

I remember reading something about GPs being in a similar scenario whereby some are considered "Personal Services" while others are not, depending on the way the receive payment, who their clients are etc. I must say the ATO information is not very straightforward.

GreatPig, the business income and rent would be much higher than the IP loan interest. From rough calculations I could have many IPs geared against the business income. However, as tubs points out there is the issue of risk mitigation. Although, I'm not sure I would want to go out of my way to structure things to mitigate risk when I already have what appears to be substantial public liability insurance. Tubs, as you've suggested, if I were to have the property trust as a beneficiary to the business trust would they both be family trusts?

So to sum up, if I can verify that my business income is not "Personal Services" I would be able to distribute income to family members to spread the tax burden as well as negatively gear IPs against this income?

In regards to the dreaded issue of land tax my properties (thus far) are in Queensland so I'm not sure whether I will need to spread them between trusts and persons to avoid land tax.

 

[GreatPig]

If you want to separate the risk, another possibility might be operating the business in a company owned by a family trust, with properties being purchased in the trust. That way the trust (shareholder) would be protected by limited liability - only the director(s) would potentially be at risk.

Business profit would be taxed at 30% and could then be passed to the trust in the form of franked dividends (although I don't think in the same financial year - you'd need to check that). The main issue then is you'd want the post-tax business income (ie. 70% of the total) plus net rent to exceed the loan interest so that you'd actually have some distributable profit, otherwise I believe the franking credits couldn't be distributed from the trust. Provided that was the case, any excess profit could be distributed discretionally from the trust along with the franking credits.

You'd need to check all the details with your accountant though, particularly in relation to the trust loss provisions and family trust elections (otherwise there's a limit on the amount of franking credits that can be distributed).

Note that this only isolates the properties from the business risk, not the other way around. If one of your tenants sued, the trust assets would be at risk, which would include the company and any profits it might have retained. If you wanted protection in both directions, you might need three entities - another trust in between so that the trust with the properties wasn't the shareholder of the company.

GP

 

[Lukey13]

Thanks again GreatPig.

Would I be correct in assuming that by setting up two or three separate trusts that the costs and fees would be two or three times those of a single trust?

 

[GreatPig]

I think the setup costs would be independent (ie. each entity would have its own cost) but ongoing maintenance and accounting fees would probably vary depending on the amount of activity in each entity (the intermediate trust might be a bit cheaper). Companies also have an annual ASIC fee of $212 (from memory), with your accountant charging a fee on top of that for the company statement.

I'm not an accountant though, so I can only go by what I get charged by mine.

GP

 

[coastymike]

Agreed with GreatPig. Without making any comment regarding personal services income I would think two trusts will provide better asset protection and assist in achieving the same objective.

The disadvantage of using one trust is that if you are sued as a medical practitioner then the trustee will have the right to be indemnified against the assets of the trust. This means that the property held in the trust will be able to be sold to meet the claims made by the person suing the trustee of the trust.

With a seperate trust for your business activities and a seperate trust for your passive investment assets this will mitigate some of the risk. The profit trust can then flow profits into the loss trust. You will however need to make family trust elections and/or interposed entity elections. All things worth discussing with your current accountant.

In my view having both your business income and passive income running the same trust would be a poor decision. It will mean additional costs but in my view a reasonable cost for insuring your assets. It is up to you at the end of the day.

 

[sivakumar_sr]

I had read the Trust Magic book to refer what Family Trust can claim as tax deduction each year. The book only mentions about potential tax benfit for Trust running as a Company and not as a family trust. Do anyone know what are the potential things a Family trust can claim as tax deduction.