Thanks Terry. By professional advice though, do you mean legal advice? Accounting? Or both? Who is the best person to advise on trusts?
Property Investor Trust vs. Fixed Unit Trust
- Thread starter mooki24
- Start date
Thanks Terry. By professional advice though, do you mean legal advice? Accounting? Or both? Who is the best person to advise on trusts?
You need legal advice because you are talking about asset protection. But you also need tax advice as there are many tax issues.
Reading the OSR FAQ page it says:
Sounds good so far. But then it also says:
This sounds to me that the land value gets passed on to the individual when calculating the land tax - so you would get stung there anyway. Am I reading that wrong?
Jason
Thats my understanding. The value flows through to the individual
Hi Terry
I've received some legal advice and have been told a discretionary trust may be most suitable to me. However I was of the view that discretionary trusts, whilst good for asset protection, don't allow negative gearing. Is this correct?
The solicitor then advised that I should check this with the accountant. Oh fun
I've received some legal advice and have been told a discretionary trust may be most suitable to me. However I was of the view that discretionary trusts, whilst good for asset protection, don't allow negative gearing. Is this correct?
The solicitor then advised that I should check this with the accountant. Oh fun
Hi Terry
I've received some legal advice and have been told a discretionary trust may be most suitable to me. However I was of the view that discretionary trusts, whilst good for asset protection, don't allow negative gearing. Is this correct?
The solicitor then advised that I should check this with the accountant. Oh fun
Yes, that is correct - sort of. A trust is treated as a separate entity for tax purposes so any loss by the trust cannot be used to offset personal income. But a trust could negative gear a property and off this with other income. Think of the trust as a separate tax person. If you had a loss then I couldn't use your loss to offset my income.
Unit trusts can be used to get around this because the individual can borrow to buy the units in the trust. if the units entitle the holder to income and capital of the trust then they will be able to claim the interest on this borrowings. So this allows the individual to claim the interest on the loan.
But if you do this then you weaken asset protection.
So is there any reason why a property investor would use a discretionary trust? Would it be if they have a positively geared property? I don't see how this would be useful.
The Unit Trust sounds like the better option for me however if it doesn't provide much asset protection, I don't really see the point in this either. It seems like all it would provide is a reduced land tax bill?!
A positively geared property in a discretionary trust would allow asset protection and distribution of the income.
A negatively geared property will (hopefully) one day become positively geared - then the discretionary distributions are extremely beneficial. In the meantime you may be able to offset the losses if you have another trust which makes a profit (a business for example, or another property in a trust). The profit from one trust could be distributed to the "loss" making trust.
Also the ability to distribute capital gains could make it worthwhile.
I'm yet to see how a trust is going to save significant amounts of land tax.. although only really looked for NSW.
Yes, plenty of reasons to use a DT.
1. Asset protection
2. Tax minimisation.
Good reasons to use a UT are:
1. Flexibility in transferring units without changing legal ownership.
2. This is a way to save stamp duty, and
3. a way to pass income onto other beneficiaries later on
4. There is also the 'refinancing principal' which is where a trustee borrows to buy back the units from the unit holder and they are able to claim a deduction on the interest for this.
5. Ability to get the land tax free thresholds
6. Ability to transfer units to your SMSF later on, possibly without stamp duty (imagine tax free income once an income stream is commenced).
jrc77 - Thank you for your advice. My property will still be negatively geared for a while and I don't have any other trusts / businesses to offset the losses against so I'm not sure a discretionary trust would be the best solution for me.
Terry - Thank you also for listing out the positives of each trust. I think the Unit Trust would be the best solution for now, even though it doesn't provide much asset protection, it seems to have many other benefits. Although my accountant has advised that he can put wording in the deed so that unit redemption is at the discretion of the Trustee (instead of the creditors) so this may provide more protection?
Terry - Thank you also for listing out the positives of each trust. I think the Unit Trust would be the best solution for now, even though it doesn't provide much asset protection, it seems to have many other benefits. Although my accountant has advised that he can put wording in the deed so that unit redemption is at the discretion of the Trustee (instead of the creditors) so this may provide more protection?
Your accountant shouldn't be drafting clauses or documents or providing legal advice. Is he familiar with the Bankruptcy Act, especially with s302B?
http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s302b.html
Two issues here.
1. Business is lot more risker than a property. So why do you want to place your asset in the same structure?
2. My broker mentioned that it is a bit difficult to get mortgage for a trading trust.
I am sure JRC wasn't advocating the same trust - one should never hold assets in a trading trust. but one trust can distribute to another trust so the trust with the income can distribute to the trust with the loss. Special care is needed though so as to avoid certain legal issues.
More questions are asked but it's not a big deal. If the borrowing entity is the actual trading trust itself it is fine since you would be relying on the income of the trading trust to service the loan. It only becomes an issue if the borrower owns/controls a trading trust that is not being used for the loan but usually all is required is verification that the trading trust is profitable.
As Terry said - I wasn't advocating doing it in the same trust. But a business running in a separate trust could distribute profit to the "negatively" geared trust to soak up the loss (assuming it was an allowed beneficiary).
Regards,
JAson
I'm not sure what S302B is trying to say Terry, are you able to explain in lamens terms? My accountant has advised that this is possible as the Property Investor Trust Deed is drafted this way. And as far as I'm aware there are product rulings for the PIT that allow this?
This whole thing is just going around in circles - the accountant refers me to the solicitor, the solicitor refers me to the accountant. I think I may need to get a second opinion from another solicitor.
