Property portfolio structure for tax etc.

[Finism]

From an accounting and tax point of view what is the best way to structure and property portfolio.

If you were to start again from the beginning how would you structure it?

I hear people talk about companies and trusts etc.

Obviously there are tax advantages for these.

What would be the best for a full time property investor?

 

[Perp]

I am not an accountant or solicitor, but here is my amateur understanding. Hopefully it explains enough for you to ask the right questions of your own accountant/solicitor.

A discretionary trust (often referred to as a "family trust" as they're often used by families) can distribute profits at the Trustee's discretion, so you can, for example, give profits to the partner with lowest income to minimise tax. You can split the profits however you want - all to one beneficiary (family member) or different amounts to each beneficiary etc, and you can change the allocation every year. You don't have to specify beforehand how profits will be distributed - you can do it as you're doing your tax returns to "optimise" things.

You also have some asset protection, in that if somebody trips on your IP and sues you for public liability, for example, they can only claim against the assets of the Trust and then the Trustee (if the assets of trust are insufficient to meet the debt). Because of the potential liability of the Trustee, you generally should have a corporate trustee if you own assets in your own name (eg PPR). This involves setting up a company to act as trustee of the trust, and you should have the corporate trustee holding no assets and having no duties other than being trustee. (A so-called "shelf company", or $2 company.) You and your spouse would usually be directors of the corporate trustee, but there may be reasons why you'd do things differently.

So in the example of being sued, you could lose the IP that you hold in the trust, and the corporate trustee may go broke (which didn't own anything anyway), but assets held in your personal name (eg usually your PPR) are shielded.

The discretionary trust is a "flow-through" entity, ie it only exists to distribute profits to its beneficiaries, can't retain profits, and pays no income tax of its own. At the end of the year, the accounts for the trust are prepared and the profits immediately distributed, and tax is paid by the recipients (beneficiaries). A benefit of Trusts (over companies) is that capital gains can be passed on to beneficiaries and they can still benefit from the 50% CGT exemption if the asset was held more than 12 months.

Some disadvantages of discretionary trusts: losses cannot be distributed. So if the Trust makes an overall loss, the Trust has to "hold" that loss to be offset against future gains, it can't be written off against current income. So immediate negative gearing benefits disappear. This can be a big disadvantage, depending on your investment strategy.

Companies have some income tax benefits, but the CGT exemption doesn't apply to property owned by companies. For this reason, generally companies aren't recommended for investors. (If you're very active, ie doing mainly wraps, renos, or developing, it may be a different story.)

And there are unit trusts, which are kind of like companies (in that you have unit holders who are analogous to shareholders) whilst retaining the CGT benefits of Trusts, but you lose flexibility in allocating profits - it has to be done in accordance with unit holdings. Unit trusts are often used for partnerships or syndicates with unrelated members/entities, eg if a group of investors get together for a project.

There are also hybrid trusts, which can be set up to still allow negative gearing benefits whilst retaining CGT exemption, but I've heard that the ATO is having a close look at this. (Can anybody more knowledgeable address this?)

All care, no responsibility from this amateur... hope this is somewhat helpful and hasn't led you too far astray.

 

[handyandy]

Another consideration could be estate planning.

With RE owned in Trusts you literally don't own them and as such it is relatively easy to assign the benefit to someone else when you leave this earth.

Obviously it depends on how successful you plan to be

The downside of owning property in trusts is that the landtax tends to apply from zero dollars. Certainly in NSW Trusts don't get a thresholds allowance and there are also states which apply a higher land tax rate.

Mind you in Qld trust do presently get a threshold. So you will need to check the individual state rules regarding land tax and trusts.

Cheers

 

[Finism]

Thanks Tracey and handyandy.....will take me a while to digest this...I will certainly run it past my accountant and let you know how I go ....I really appreciate your time and input..Tracey....although you are not an accountant or solicitor you have provided me with more relevant information than I have ever been able to draw from an accountant or solicitor
GREAT FORUM!!