A Family Trust cannot distribute a loss (because it cannot distribute negative money). How do I get a tax deduction from a negatively geared investment property in the first few years before it becomes postively geared? I know that losses can be carried forward and then offest against future profits, but that doesn't help me to hold a property in the short term. Any ideas?
Getting a tax deduction out a Family Trust
- Thread starter tim123
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If you have a standard discretionary Trust you can not get a neg gearing deduction against your income. A Trust is another entity, so what you are asking is akin to asking "how can I get a deduction for the losses that XXX has incurred".
The only way to use up your losses is to offset them against a gain. You could buy a business, trade shares, buy a cf+ property. Of course, there are risks involved in this, and you should probably not hold a business in the same entity as the property, so I would seek professional advice if I were you.
The only way to use up your losses is to offset them against a gain. You could buy a business, trade shares, buy a cf+ property. Of course, there are risks involved in this, and you should probably not hold a business in the same entity as the property, so I would seek professional advice if I were you.
Hi Tim,
If you have the loan in your own name but the property in a family discretionary trust, then you still won't get the benefit of tax deduction in your name, as the funds have been onlent to the trust, so you charge the trust interest which covers your interest cost (net position - nil to you) and the interest deduction remains in the trust.
Zargor
If you have the loan in your own name but the property in a family discretionary trust, then you still won't get the benefit of tax deduction in your name, as the funds have been onlent to the trust, so you charge the trust interest which covers your interest cost (net position - nil to you) and the interest deduction remains in the trust.
Zargor
Getting a tax deduction out of a Family Trust
Thanks for that - seems clear now.
What do most people do out there in property investment land?
Do a lot of you accept the that it will take a long time to recoup the tax deductions from the carried forward losses, and view the CGT and Asset Protection benefits as more important?
(NB: I am an employee and can't funnel company profits into the Family Trust to offset losses).
Thanks for that - seems clear now.
What do most people do out there in property investment land?
Do a lot of you accept the that it will take a long time to recoup the tax deductions from the carried forward losses, and view the CGT and Asset Protection benefits as more important?
(NB: I am an employee and can't funnel company profits into the Family Trust to offset losses).
CGT is only payable when you sell, so you can control that.
If you're an employee, how much asset protection do you really need?
Alex
Like Alex said, do you need a Trust?
You will find that a Trust is just another tool that may or may not be appropriate to an investors situation. I would suggest you speak to a good accountant BEFORE you purchase something and work out what is best for you. Using the wrong structure could be a costly mistake.
You will find that a Trust is just another tool that may or may not be appropriate to an investors situation. I would suggest you speak to a good accountant BEFORE you purchase something and work out what is best for you. Using the wrong structure could be a costly mistake.
The only way to offset the losses is to divert your income into the trust somehow. This is where you need to get creative.
eg. If you personally own another property you could rent this to the trust on a long lease at a discounted rent. The trust then subleases the property out at a higher rate.
eg 2. another trust of yours may be able to enter into somesort of business - office services, cleaning etc. You/spouse may be able to be employed by this trust on a lowish wage so the trust makes a profit - which is then distributed to the other trust to offset the loss. You may be able to claim the expense as a deduction depending on your circumstances etc.
eg. If you personally own another property you could rent this to the trust on a long lease at a discounted rent. The trust then subleases the property out at a higher rate.
eg 2. another trust of yours may be able to enter into somesort of business - office services, cleaning etc. You/spouse may be able to be employed by this trust on a lowish wage so the trust makes a profit - which is then distributed to the other trust to offset the loss. You may be able to claim the expense as a deduction depending on your circumstances etc.
Coupled with giving the trust an option to buy the property at a certain amount. Trust exercises the option in future for agreed amount, although market value of property higher and hey presto! Equity is now held in the trust and probably cash-flow positive (read disclaimer below).
Zargor
DISCLAIMER
This is not advice, is not simple and definitely needs a solicitor involved!
Hey Terry do you know of any legal guidance on this strategy? Just thinking about Part IVA.
Interesting but what about the market value substitution rule?
Yes, you would have to be careful that you aren't doing it to avoid tax!
What's the market value of the strike price of an option (i.e. not the property itself)?
I'm not really sure what the answer would be (probably why it is best for a solicitor to be involved) but I would imagine that it is ok, generally speaking, given that put and call options are used quite extensively. It could be attached, however, given that it is a related party entering into the agreement.
Zargor
Watch out for CGT.
Options are extremely sneaky from a CGT point of view. Generally there is no problem as the paperwork disappears when the transaction is completed and nothing much shows up on the public record, but once the ATO spots an option they will usually squeeze CGT from it until it squeaks. Similarly, assignments of options usually attract Stamp Duty if the local OSR finds out about it.
On the whole, the best approach is to remember that you want equity in the Trust and income in the Trust. Actual title is not that relevant. The easiest approach is to borrow purchase costs and outgoings from the trust and give a second mortgage. This holds up reasonably well from an asset protection perspective if the Trust actually provided the money (and you are out of the relation back period for any gift to the trust in the first place). From a tax perspective the situation is a bit wobbly but provided all the rates charged are commercial it should be defensible. Make sure your Trust Deed authorises all the related party transactions.
Options are extremely sneaky from a CGT point of view. Generally there is no problem as the paperwork disappears when the transaction is completed and nothing much shows up on the public record, but once the ATO spots an option they will usually squeeze CGT from it until it squeaks. Similarly, assignments of options usually attract Stamp Duty if the local OSR finds out about it.
On the whole, the best approach is to remember that you want equity in the Trust and income in the Trust. Actual title is not that relevant. The easiest approach is to borrow purchase costs and outgoings from the trust and give a second mortgage. This holds up reasonably well from an asset protection perspective if the Trust actually provided the money (and you are out of the relation back period for any gift to the trust in the first place). From a tax perspective the situation is a bit wobbly but provided all the rates charged are commercial it should be defensible. Make sure your Trust Deed authorises all the related party transactions.
