Thanks, so this bit above is referring to something like a 'blood line trust'?
HDT not so rosy.
- Thread starter DonkeyKong
- Start date
Thanks, so this bit above is referring to something like a 'blood line trust'?
I think so too. Once your portfolio gets to a certain size, you're going to need other income sources like dividends and so on anyway. You're less likely to be running a big tax loss. I mean, running a 3% tax loss on a $300k portfolio is one thing, but when you debt gets into 7 figures, just how much negative gearing could you afford? More likely the earlier properties would be tax positive, and you would also have built up alternative sources of income.
If someone were to ask me (not that I'm qualified to give financial advice, mind) I would suggest they buy the first properties in their own name(s) first, then use family trusts. You don't have much equity to start with anyway, so asset protection is moot in the early years. When the portfolio gets bigger, you can buy new properties in family trusts, and even shift the mortgage into the trust (i.e. have the trust lend you the money to pay out the mortgage on the ones in your personal names, so that the trust becomes your lender). In any case, after 20 years, if I have 3 properties in my personal name and 17 in trusts, and someone sues me and takes away my 3, that isn't devastating. Sucky, but not devastating.
Is that the most tax efficient? Maybe not, but it's the simplest and safest in that buying in your own name or in a family trust is a known quantity. Instead of spending time worrying about tax rulings, they can then focus on managing debt and selecting investments. And I run less risk of the rules changing on me (not because the ATO and courts can't change the rules on family trusts, but because there's a lot more political will against it).
Call me weird, but I've just put HDTs in the 'too hard, still have doubts about it' pile. By using structures I do understand (knowing the limitations as well, of course), I have fewer doubts about how it will turn out, and I can invest with more confidence.
Alex
Other advantages of HDT's could be that they can also act as a DT if you don't issue units, so a bit like getting '2 for the price of 1' and 'hedging your bets' so to speak.
And also that additional tax deductions available through a trust structure could potentially far outweigh the running costs, hence perhaps even making HDT's cheaper than owning in your own name...
And the refinancing principle too, which wasn't on Shadow's list.
And also that additional tax deductions available through a trust structure could potentially far outweigh the running costs, hence perhaps even making HDT's cheaper than owning in your own name...
And the refinancing principle too, which wasn't on Shadow's list.
Hi Alex,
There is really no limit to the amount of negative gearing one can afford, if one is comfortable with living on equity. Even with a seven figure debt, for example a $5M debt, if that portfolio is growing by $500K per annum, you can take out Lines of Credit against all the properties and use those LOCs to pay the interest bill.
As long as Growth plus Rent > Interest... then your net worth still grows exponentially.
Of course the loans may need to be low-doc/no-doc since you have no real 'income'.
And since you're living on the equity, and have no other income, you don't pay any tax at all.
Cheers,
Shadow.
I found HDT is still at its infancy. I don't recommend other to venture into this at the moment. Unfortunately I was a bit p#$#@!@# off because I was promised with this and that but in reality it is not. I am seeking an opinion of a property / trust lawyer soon. I will let you guy know what is the verdict.
SOyabean -
Offset your equity in the properties by a second mortgage to a trust you control by a round robin of cheques in your bank managers office. Borrow from the bank to gift the mortgage trust the value of your equity in the property then borrow this money back from the mortgage trust to pay the bank back. This is not a tax effectve arrangement just and asset protecton arrangement so you do not have to worry about Part IVA.
Offset your equity in the properties by a second mortgage to a trust you control by a round robin of cheques in your bank managers office. Borrow from the bank to gift the mortgage trust the value of your equity in the property then borrow this money back from the mortgage trust to pay the bank back. This is not a tax effectve arrangement just and asset protecton arrangement so you do not have to worry about Part IVA.
Too young for that... there could be one on the way though!
That is what the buffer is for... to ride out the recession. Obviously using ALL of your capital growth to live on would be madness. Anyway I'm nowhere near the stage where I can retire or LOE yet. Give me 10-12 more years at the day job. But when I get there, I would always make sure I had at least 3 years of buffer in my Lines of Credit to cope with low growth periods.
Cheers,
Shadow.
Hi DK,
Do you really need the asset protection... how high-risk is your profession?
If you can cover yourself with insurance rather than asset protection, then don't be put off by all the 'HDT haters' on this forum. There is no debate about the following benefits that a HDT provides. The only area of doubt was the ability to asset protect and negative gear at the same time time. If you don't need the asset protection, then the HDT does still allow...
- Negative Gearing
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
- Flexibility
I would suggest you listen to the real experts in HDTs - i.e. the people who use them every day, and who have been through many reviews and discussions with the ATO... not the people on this forum who sell alternative structures.
The HDT experts are Chris Batten & Chan&Naylor.
Talk to them both and do your own research, then decide.
Cheers,
Shadow.
Ah, my mistake. You just sounded you knew what you were talking about living off equity and HDTs so I figured you're already living it, so to speak.
Alex
I do know what I'm talking about. I do a LOT of research and have very detailed plans for the future. My strategy is quite straightforward, and others on this forum have followed a similar strategy that has worked very well for them (with and without the use of HDTs). It is a long term plan, it will take another 10 years to get there, but if it works out as planned then I can retire very comfortably in my mid forties, if I want to.
The LOE concept is really quite simple... as long as Capital Growth + Rental Income is greater than Interest Payments + Buffer, then your net worth grows exponentially and safely.
Of course, if it doesn't work out then I've always got the day job to fall back on, but really the LOE concept is so simple that it is hard to see a way for it to fail, unless we go through a major recession that lasts for most of the next 10 years, which is very unlikely. And even if that did happen, I'd still be in a better position than people with no plan at all.
The other way it could fail is if I got greedy and started buying boats and plasmas with my equity. But that's not going to happen either.
The HDT just adds an element of Flexibility to the LOE plan. It means that if I decide not to LOE or follow some other strategy, I can simply redeem my units and stream income as per a Discretionary Trust, or let the portfolio become cashflow positive and allow the income to flow to the unit holders.
At the same time, I know I will have enjoyed the benefits of negative gearing up to that point, and I know my assets can be smoothly passed on to my children when I'm gone, without the Trust suddenly vesting after 80 years and leaving everyone in a mess.
Since this thread is going the way of all the others, I'll give my final word.
If I had an employee giving advice like Shadow, I'd sack them. The issues relating to HDTs are not settled and people need to look at these things with their critical thinking skills turned on.
Shadow is a client of Chan and Naylor. Shadow is not an accountant. The 'naysayers' are actual accountants with years of practice and experience with cases, rulings and tax law to explain their position. Shadow is reading press releases and repeats positions like a broken record player ad nauseam and will continue to do so. You can say things a hundred times and that will still not make them true.
The arguments for the use of HDTs keep changing. First it was that you can negative gear, then PBR 66298 came out. Then it was you can redeem at cost, and that just changed. This is more like guessing than a proper position founded in solid tax law.
There are two contradictory private rulings on HDTs, and that should be enough to freak people out. Apart from that, all we get are whispers about how they all pass ATO muster with no evidence. People buying HDTs deserve that evidence and strangely there is none when the ability to obtain evidence is right there.
Go ahead and paste your rebuttals and attacks. I am done here, again.
If I had an employee giving advice like Shadow, I'd sack them. The issues relating to HDTs are not settled and people need to look at these things with their critical thinking skills turned on.
Shadow is a client of Chan and Naylor. Shadow is not an accountant. The 'naysayers' are actual accountants with years of practice and experience with cases, rulings and tax law to explain their position. Shadow is reading press releases and repeats positions like a broken record player ad nauseam and will continue to do so. You can say things a hundred times and that will still not make them true.
The arguments for the use of HDTs keep changing. First it was that you can negative gear, then PBR 66298 came out. Then it was you can redeem at cost, and that just changed. This is more like guessing than a proper position founded in solid tax law.
There are two contradictory private rulings on HDTs, and that should be enough to freak people out. Apart from that, all we get are whispers about how they all pass ATO muster with no evidence. People buying HDTs deserve that evidence and strangely there is none when the ability to obtain evidence is right there.
Go ahead and paste your rebuttals and attacks. I am done here, again.
Personally, it's the moving target thing I'm most worried about. HDTs are supposed to allow both negative gearing and discretionary trust-style asset protection. This is no longer the case. The issue isn't whether I need both, but that things are changing.
Ask yourself, do you really want to use a structure where fundamental things are still changing? With buying in my own name and a discretionary trust, I know what I'm getting into.
Alex
Ask yourself, do you really want to use a structure where fundamental things are still changing? With buying in my own name and a discretionary trust, I know what I'm getting into.
Alex
Law is a constantly moving beast. Take Dixon Consulting Pty Ltd v FCT. first the courts held that a garage was a place of business for the purposes of the personal services income rules. This was then overturned by the AAT. I remember reading a lot of newsletters which said that a garage was now a place of business. And it was. Until the rules changed. Welcome to the world of tax. In fact welcome to the world.
As Mry has said we all have different views and opinions. Hybrids are not unique in this respect. Discuss any area of tax and people will have many differing views. If your practitioner has read relevant cases, understands the law and applies them and believes you have a reasonably arguable position then that is really the best you can hope for. Nothing in life is certain. Except death and taxes as they say.
Now if we really want to get the discussion interesting let's discuss the theory of higher cosmic intelligence. I think you get my point.
As Mry has said we all have different views and opinions. Hybrids are not unique in this respect. Discuss any area of tax and people will have many differing views. If your practitioner has read relevant cases, understands the law and applies them and believes you have a reasonably arguable position then that is really the best you can hope for. Nothing in life is certain. Except death and taxes as they say.
Now if we really want to get the discussion interesting let's discuss the theory of higher cosmic intelligence. I think you get my point.
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I don't think anything has changed. I think some people previously had an incorrect understanding of what a HDT can and can't do. The HDT itself has not changed in any way. The only thing that has changed is the interpretation of some people.
Yes, some employers do sack employees who don't agree with them. That is life. By the way, are you a WorkChoices fan?
Those employees could of course apply for a job at one of the large accountancy firms who have a better understanding of the benefits of HDTs.
As CoastyMike says, nothing in the tax world is really settled. Tax laws can and will change at any time. We all have to work within our best understanding of the current law.
Oh... so do I need a disclaimer now? OK then...
Disclaimer: I am not an accountant, I am a client of Chan&Naylor, my views are my opinion only etc!
And likewise, there are many 'actual accountants' with many years of experience who take the opposite view to you.
No, I am not just 'reading press releases'. I also read the relevant ATO guidelines and private rulings, I take advice from many sources. I discuss the issues with knowledgeable accountants. Then I form my own opinion.
Ditto.
Nothing has 'changed' except the interpretation of some people with regards to one aspect of HDTs. The main benefits of HDTs are clear and undisputed. I won't repeat them again lest I completely destroy my poor broken record player.
Ha. That is funny. There are multiple contradictory private rulings on just about every aspect of tax law! The ATO loses 50 percent of it's court battles. Believe it or not, most accountants who specialise in a particular area of tax law actually understand that area much better than the ATO. The ATO is not always right - they don't make the rules, they simply interpret them. At the end of the day, the government makes the rules.
There is plenty of evidence. I have linked to the relevant PBRs in earlier posts. The ATO has no issue with HDTs when they are used correctly.
Mry, do you take it as a personal attack every time somebody disagrees with your position? You must be sacking employees left right and centre!
Cheers,
Shadow.
By the way Mry, I read your post in an earlier thread from a few months ago that you were getting yourself a HDT to take through various rulings with the ATO - for example, purchasing units, redeeming units, gearing etc.
How is that going? Did you get any of your PBRs yet?
Which of the benefits below have you disproved so far?
- Negative Gearing
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
- Flexibility
Apologies for repeating the list of benefits again... I managed to draw a few more gasps of life from that old record player...
Cheers,
Shadow.
Hi Matt, which of the HDT benefits do you believe does not really exist... the Negative Gearing, the Estate Planning, the Anonymity of Assets, the Land Tax Threshold, the avoidance of 80 year vesting, or the Flexibility?
Cheers,
Shadow.
