Financial shock! Opinions, please . . .

[Harriet]

Hello again,

Hope you are not sick of me! I have just received a bit of a financial shock, and my head is spinning a little - the reason for all my posts. I would welcome your feedback on my situation.

My husband and I have a Hybrid Discretionary Trust (HDT) with a company as the trustee, and three IPs bought in its name. We registered for land tax back in 2004, but have never received a bill. I've called the Office of State Revenue (OSR) several times over the past few years to check why, and they assured me I didn't have to pay it. They said we were under the threshold. This confused me, because I thought trusts didn't have the benefit of the threshold, but I didn't question it. (A big mistake, in hindsight.)

Well, this week, all has been revealed. It turns out that while we are registered for land tax, the OSR has no record of our trust. I am not sure how this happened; whether it is a mistake at our end (in the way we filled in the rego form) or at their end (in the way they entered the data from our form). I'll be on the phone about this next week.

Anyway, I have sat down today and added up the land tax we will owe dating back to 2004. It's almost $22,000. If they decide this is all our fault, I guess we could also be up for interest - which would amount to about $6000 (assuming their penalty is still around 13.5%).

Suffice to say, I feel sick about it. But we can scrounge up the money, if need be.

All that aside, this situation has raised a bigger issue. And here's where I need your input.

Given the high cost of land tax, I am now really starting to question the value of HDTs. And I'm wondering if we should find a way to extricate ourselves, and the properties we have bought so far, from the trust.

Here's my train of thought. I'll try to be lucid!

There seem to be three main perceived benefits to buying property in a HDT. First, asset protection. Second, the ability to minimise tax by apportioning profit or loss to different beneficiaries. Third, easy transfer to children (or whomever) when you die.

Points one and three are only so-so benefits for me. My husband and I don't work in high-risk professions, so - barring some kind of freak event - I doubt we will need heavy-duty asset protection. (And we can insure against this anyway, for much less than it costs to have the trust and land tax.) As for the third point . . . well, I do have one child. However, I'm not sure it's worth having the trust and paying tonnes of land tax over the next 40 years when he might just as well want to sell the properties when I'm gone.

So that leaves point #2. And here's where I'm struggling. The tax-minimisation advantages of a HDT are undeniable . . . but are they worth more than the land tax we will have to pay on the 10 to 15 properties we eventually hope to own? I am expecting that by this time next year, my husband and I will be in the same tax bracket - so there's no real benefit for us from then on. Sure, we can apportion around $1000 to our teenage son, but, pffft, that's nothing. Hubby will probably retire about five years before me - so we could get the benefit during that time. But again, will it outweigh all that land tax between now and then?

What do you think? To trust or not to trust? And if I want to get out, what are my choices for the properties we already own in it????

Complicating matters, we are supposed to exchange on our 4th IP this coming week. I am wondering if I should hold off on that until this is sorted?

Thanks for listening! I feel (a bit) better.

H.

 

[Player]

Hi Harriet,

leaving the (current) land tax issue aside for now as you will no doubt receive further clarification next week when you are on the blower to the SRO.

As far as estate planning any assets external to entities such as trusts and company structures may be willed to the heirs (your son) by way of a testamentary trust. These assets go to trust and the benefit here is that there is no minors age penalty to the beneficiaries so your son can distribute to any of his future children and still claim the tax free threshold of an adult.

You now need to ascertain what it will cost you in terms of stamp duty and deemed captial gains (if any) to extract the assets from the trust or if you still wish to keep in a trust strucutre, you may clone the trusts (although I believe that CGT is no longer waived as it was in the past), and I anticipate also a stamp duty event. Also I am not sure of HDT can be cloned.....I'm assuming the properties are still negatively geared and so your HDT is at unit trust status. Please seek advice from whoever set up your HDT.

This would then leave you with either one property per trust, which I dare say would have been an more ideal scenario at acquisition (ah, we are all so smart with the benefit of hindsight), or if you extract the IP's to be placed in your (either or both) personal names(s). It would depend on how much you owe on each property (current LVR based on present value and loan amount), also is IP number 4 going to this HDT as well and is it all in the same state as the rest?

These are just some ideas and further questions that have sprung to mind and not to be construed as advice. I would strongly recommend you seek counsel from your accountant (or a different one as relevant) and also a property savvy lawyer. Best to spend some money now and ensure whatever you elect to do is indeed best for your situation from a tax, retirement income and estate perspective.

As for not coming under the SRO's radar until now, you need to check if your conveyancer or lawyer at the time if IP acquisition actually registered ownership with the SRO. I had a similar situation with an IP I purchased in Sydney and didn't receive a land tax notice and the lawyer acting on my behalf didn't register me as the owner at settlement.

Good luck with it all and keep your chin up. The gut wrenching and "sick in the stomach feeling" is no fun, but DO NOT let this affect your health. Vent it out and see how some of the suggestions on this forum may help you make more lucid and financially optimal decisions.

All the best

 

[Rob G.]

While units are issued on a "sub-trust", there is no asset protection for such assets and no benefit of streaming to discretionary beneficiaries - at least not if you want the unit holder to be able to deduct interest on borrowings.

I don't like your chances of cloning a HDT in a form with units issued, sounds tricky.

If you redeem units then CGT could be a problem for the unit holders, but might prevent double CGT if the trust can be cloned without resettlement based on its discretionary status.

The Commissioner has changed his position with regard to resettlement, making it much harder to avoid.

Even then, you could still be stuck with zero thresholds depending on your State Revenue laws.

It is very complex creating structures and even harder unwinding them, you need specific advice that can only come from a few hours with a competent advisor.

Cheers,

Rob

 

[Harriet]

Thanks, Rob and Michael.

What is involved in transferring the three properties out of the trust's name and into mine and my husband's?

Will we have to "buy" the properties from the trust - and therefore pay stamp duty on them again?

 

[Player]

The transfer will involve stamp duty as it is from one owner to another. You don't have to physically "buy" them, although it would likely be deemed as such so that any loans in the trust can now be recorded against the new owners (you or your husband or both.....hence seek tax and legal advice), so any negative gearing is now offset to your/his income tax.

The stamp duty will be paid at valuation rates, so an independent valuation (or at the very least a council valuation for Capital Improved Value) may be used to calculate the stamp duty payable.

You need to obtain advice from a competent tax lawyer, or property lawyer and savvy accountant. While your at it, ask about testamentary trusts.

 

[lizzie]

after having an hdt for 18months - and granted it was a good potential structure at the time - i'm over it.

we're selling our development site out of the hdt for four reasons.

1. no land tax threshold
2. property to go in hubby's name (he is hdt unit holder) as he retires in around 10 years anyhow, and this one is a keeper
3. great difficulty getting decent finance
4. we don't need asset protection

at the moment it should only cost us the minimum in stamp duty to transfer, which will be made back in less that 18 months of land tax in interest rate savings. if left until after development, the stamp duty would be rather large.

the reason we set up the hdt was so that distributions can be made at discretion - but i think we're better in the long run by just buying two in his name and two in my name and two in his name and two in my ...

as for the big land tax bill ... i got one of those for $27,000 two years ago due to some properties being missed for a couple of years (i too thought there was a threshold in trusts - but there ain't). i sat at the computer and cried for half an hour wondering why i bother with property.

it also came at a time when we were sailing very close to the wind and had no buffer, so i had no idea how i was going to pay it. things did fall into place, after much stress, but i am still learning (hence the wrapping up of the hdt).

the osr does let you pay the account off over 6 months interest free, but you have to make a monthly payment - so you'd be looking at around $3,600/mth. if you want to pay it off longer then you have to prove genuine hardship - ie - nothing available to liquidate and living on poverty level.

the system sux big time. land tax was supposed to be abolished when gst was introduced - another broken promise that hits those who prefer not to be reliant on a pension.

but - then i look at what property has given me, and it does make it worthwhile. i can make better money being a full time mum and part time property investor/renovator/developer than i ever could working full time and putting junior in care. most years anyhow