Property Investor Trust vs. Fixed Unit Trust

[mooki24]

Hi all

I'm looking at setting up a trust for my next property purchase for asset protection and to reduce my land tax, but I'm finding it confusing knowing which trust to go for.

The Fixed Unit Trust looks like the best option however the C&N Property Investor Trust looks very similar.

Can anyone explain what the differences are between the 2?

I have noticed that the PIT is a Hybrid Trust which can be hard to get lending for - is this true?

 

[Aaron_C]

Hybrid trusts are harder to get finance for, yes. Unit trusts are harder than your normal family trust but a lot easier than hybrids.

 

[jrc77]

Mooki,

You stated aim is for asset protection and to reduce land tax - which made me curious.

My understanding is that if you have a unit trust there is little asset protection ... (as you own the unit - so someone can come after the units instead of the property directly).

In which state are you purchasing your next IP? QLD seems to be only one which provides a meaningful land tax free threshold to trusts.

Regards,

Jason

 

[Peter_Tersteeg]

What's the actual need for a trust? What do you expect to acheive by using one?

There's lots of good reasons to use a trust, but in a lot of cases they're unnecessary. It really depends on your circumstances.

Personally I'm a little hesitant to suggest HDTs or the property investor trust. As indicated they're difficult to get finance for, but I've seen a lot of instances where they haven't met the investors needs as anticipated and there's been a lot of people winding them up.

 

[mooki24]

jrc77 and Pt_Bear:

The aim is to setup a company and have the company own the trust. As far as I'm aware this will provide me with asset protection? (At least I thought it did?)

I'm looking at buying in Victoria next.

These are the the things I thought I would get from using a trust:

- Asset protection
- Wouldn't have to pay land tax

Would a unit trust do these things?

 

[jrc77]

Mooki,

If the company controls the trust (holds all the units) then who owns the shares in the company? It it's you, not sure where the asset protection is (someone sues you and takes the shares - they control the company which controls the trust).

Also are you having a corporate trustee for the unit trust? If so, are you then having two companies created?

On the face of it so far my understanding is that the setup probably wouldn't meet either of your goals. Maybe someone can enlighten me?

Jason

 

[Aaron_C]

mooki24 don't get caught up in the asset protection hype. It is not as easy as you think.

 

[Peter_Tersteeg]

My understanding is that a unit trust doesn't offer the best asset protection unless it has additional structures around it. Terry or another solicitor will probably be better placed to advise on this.

You should also consider why you feel you need asset protection. Most people in a PAYG job simply don't need it as much as they think they do.

Trusts also pay land tax and in many states it actually costs more (although I don't think Victoria falls into this category). In many cases, the cost of running the trust and related entities is greater than the land tax.

I'm not saying that a trust is wrong for you. If you've already got a medium to large portfolio that's diversified around the country then you probably should be investing via a trust. If you've only got one or two properties though, it's probably too early.

 

[Terry_w]

The company wouldn't own the trust but would act as trustee.

There are two aspects of asset protection to consider. 1. The trustee is sued and 2. A beneficiariary of unit holder is sued.

1.
A trust cannot be sued as it is not a legal entity. It would be the trustee that is sued. for example say you didn't have smoke alarms in the property and a tenant died during a fire the owner of the house is the trustee so it would be the trustee that is sued. The trustee would be indemnified out of the trust assets so the trust assets would be at risk. If the trust assets are not enough to cover the action then the trustee's personal assets are at risk. This is why you shouldn't be trustee but to use a $2 company.

(incidently they may also be able to go after the director in many cases)

2. If a beneficiariary or unit holder is sued then their personal assets will be at risk. Units in a unit trust are considered property so they can fall into the hands of the trustee in bankruptcy.

But if you have a discretionary trust then a beneficiary has no property in that trust or assets of the trust (depending on the deed). So if a trustee in bankruptcy does take over your affairs then all they have is a right to be cosnidered by the trustee for a distribution. The trustee doesn't have to distribute to them however. So this is where the asset protection comes in.

It is possible to hold your units vi a discretionary trust for asset protection, but then you may not get the land tax exemption or be able to personally claim the interest on the loan.

Holding units in a unit trust can add some limited asset protection over and above owning in your own name but it is not great.

 

[devank]

Mooki,
I recently spent a bit of time with this. This is the conclusion I reached. You can't have both the asset protection and land tax exemptions together.

If you want the asset protection then create a DT with a company as trustee which doesn't do anything else.

If you want to re-start the land tax threshold then create a unit trust with an individual as trustee. Get good insurance policies and manage your IPs via PM.

 

[jrc77]

Mooki,
If you want to re-start the land tax threshold then create a unit trust with an individual as trustee. Get good insurance policies and manage your IPs via PM.

Can we explore this a bit ...

I am assuming you are talking about in NSW (as land tax rules vary per state).

Say we had the following property currently:

In My Name:
IP1 worth land value $396k (in NSW)

In my wife's name:
IP2 worth land value $396k (in NSW)

So currently not paying land tax as holding exactly the land tax free threshold.

If we purchase a new IP with land value of $396k (in NSW) in either of our names we'd be getting a nice $6336 annual land tax bill (1.6% x $396k).

My understanding was that if we purchased in a fixed unit trust (say 50/50 holding of units between my wife and I) we would effectively pay the same land tax - half the land value would go to each of us, combined with the existing land value so we both pay $3168 annually.

Your post seemed to suggest the unit trust would get another land tax free threshold?

Jason

 

[devank]

I think it is because a unit trust is a separate entity.

 

[coastymike]

Where a discretionary trust holds all the issued units it is possible to access the threshold by undertaking the following steps:

1. Redeem the units owned by the discretionary trust before 31 December,
2. Issue units to an individual or company who would receive the threshold before 31 December,
3. Convert the Unit Trust to a Land Tax Unit Trust before 31 December,
4. Issue units to the discretionary trust in early January,
5. Redeem the units issued at 2. to the individual or company in early January.

Land Tax

Land tax is assessed on the owner and for unit trusts the unitholder on midnight on 31 December (section 8 of the Land Tax Management Act 1956). The section assesses the obligation at a particular point in time regardless what happens for the other 364 days of the year.

NOTE: The Land Tax Management Act 1956 does not contain any anti-avoidance provisions.

 

[Terry_w]

Mooki,
I recently spent a bit of time with this. This is the conclusion I reached. You can't have both the asset protection and land tax exemptions together.

If you want the asset protection then create a DT with a company as trustee which doesn't do anything else.

If you want to re-start the land tax threshold then create a unit trust with an individual as trustee. Get good insurance policies and manage your IPs via PM.

The trustee of the trust doesn't matter. Type of trust does and if it is classed as a fixed trust then the individuals get the threshold.

 

[mooki24]

PT_Bear - Thanks for your comments. The main reason I'm looking at trusts (besides the land tax reduction) is that I want my assets to be protected from any defacto relationships I have. It's not the most positive thing to think about however I used to work at the Family Court, and have seen many peoples assets been taken from their partners just because they feel they're entitled to take half. I don't want this to happen to me. I don't think I can say I have a medium portfolio yet I'm only up to my 4th

Terry - Thank you for your comments. I'm still trying to get my head around everything and I have to admit I'm still a bit confused. Especially since Chan & Naylor have told me that I WILL have asset protection and reduced land tax.

They've suggested that I either a) get a Property Investor Trust (which is the hybrid trust) or b) get a Unit Trust with the deed worded similar to the PIT trust however it will not be considered a hybrid trust for financing reasons. Confusing eh?

I've been told that the company will be the trustee so there's no way they can trace it back to me. But if I'm the Director of the company - they can trace it to me can't they?

I'm assuming I will be the unit holder also. However I've been told if I get sued, there is only 100 units in the company at $1 each, so all I can be sued for is $100.

This whole process is very confusing

 

[Terry_w]

PT_Bear - Thanks for your comments. The main reason I'm looking at trusts (besides the land tax reduction) is that I want my assets to be protected from any defacto relationships I have. It's not the most positive thing to think about however I used to work at the Family Court, and have seen many peoples assets been taken from their partners just because they feel they're entitled to take half. I don't want this to happen to me. I don't think I can say I have a medium portfolio yet I'm only up to my 4th

Terry - Thank you for your comments. I'm still trying to get my head around everything and I have to admit I'm still a bit confused. Especially since Chan & Naylor have told me that I WILL have asset protection and reduced land tax.

They've suggested that I either a) get a Property Investor Trust (which is the hybrid trust) or b) get a Unit Trust with the deed worded similar to the PIT trust however it will not be considered a hybrid trust for financing reasons. Confusing eh?

I've been told that the company will be the trustee so there's no way they can trace it back to me. But if I'm the Director of the company - they can trace it to me can't they?

I'm assuming I will be the unit holder also. However I've been told if I get sued, there is only 100 units in the company at $1 each, so all I can be sued for is $100.

This whole process is very confusing

You shouldn't be taking legal advice from people unqualified to give that advice. Many things wrong here.

Firstly the family court can and do make property orders on third parties such as trustees, s 114 FLA. Trust assets will be property of the relationship and They can alter property interests even though a trust deed may not allow it -s 90AC. The units of the trust are property in any event.

Using a trust will not assist in asset protection in a family law dispute.

There may be slight asset protection against creditors when using a unit trust or a PIT. But your units will be property and can fall under the control of creditors. Depending on the set up the creditors will then control the trust and likely sell the trust assets to distribute the proceeds to satisfy their debts. You may weaken this by only owning part of the units of the trust and having the deed restrict the sale of property, or delay it etc.

not sure what you mean about having the company as trustee and tracing. If the trust is sued it will be the company that is taken to court. Trust assets will be at risk. Director and director's personal assets can be at risk in many situations such as breach of law, OHS, failure to pay tax etc.

If you get sued then the creditors can take your units. Depending on how the trust is set up they will then control the trust and receive income from the trust. You would potentially lose more than $100.

To get reduced land tax in NSW you would have to own the units in your own name. In QLD discretioanry trusts could own the units and get some threshold.

 

[Peter_Tersteeg]

I'm no lawyer, but having seen quite a few clients go through separations, I'm pretty sure that a trust doesn't give you any protection in the family law courts. There isn't much that does...

My suggestion to avoid this sort of problem would be two-fold:

1. Don't put yourself in a situation where a 'girlfriend/boyfriend' might become 'defacto'. No joint accounts, charge them rent if they live in your house, no significant joint purchases. No kids.

2. When you do decide to get hitched on a permanent basis, look at your partner objectively, think hard about it, and make sure that they're the person you do want to be with the rest of your life. The right partner will make both of you happy until the day you die. The wrong partner will make you miserable for years. I think a lot of people enter into long term relationships without giving it sufficient consideration.

Personally I'd call 4 IPs a pretty good start. Most people on this forum don't have that many. Depending on how it's mixed up, it may be a good time to start thinking about trusts.

 

[mooki24]

Terry - Did you used to be a finance broker? If so, I think you actually helped me buy my first house back in Perth

Thanks again for your advice. Now I feel completely confused about what to do to be honest. Each type of trust seems to have its pros and cons. Would you recommend I go speak to a solicitor first about what type of structure I should be looking at? I really don't want to get this wrong.

PT_Bear - Good tips, thank you. I'm already doing most of those things and have absolutely NO plans to pop out any kids in the near future. Need to get a few more properties and travel first

 

[Terry_w]

Terry - Did you used to be a finance broker? If so, I think you actually helped me buy my first house back in Perth

Thanks again for your advice. Now I feel completely confused about what to do to be honest. Each type of trust seems to have its pros and cons. Would you recommend I go speak to a solicitor first about what type of structure I should be looking at? I really don't want to get this wrong.

PT_Bear - Good tips, thank you. I'm already doing most of those things and have absolutely NO plans to pop out any kids in the near future. Need to get a few more properties and travel first

Yes, I used to be a broker and still am. I think you should get some professional advice before setting up a structure as if you get it wrong it will cost you dearly.

 

[nathank]

Can we explore this a bit ...

My understanding was that if we purchased in a fixed unit trust (say 50/50 holding of units between my wife and I) we would effectively pay the same land tax - half the land value would go to each of us, combined with the existing land value so we both pay $3168 annually.

Jason

it depends on whether the trust it self is treated as a special unit trust or a fixed trust (with assessment) by the OSR. You can have dodgey unit trusts that are treated as a SUT, even though by deed they are a FUT.

a fixed trust will receive its own land tax threshold independent of you and your wife.