Purchasing IP in unit trust vs discretionary trusts

[omni]

Suppose:

• You are on the highest tax bracket as an employee, your partner has no income
• You will make an investment in IP's once per year for the next 5 years. Assume they will be profitable after depreciation (e.g. assume net tax profit situation on each purchase, so no negative gearing)
• There is a 100% chance you will sell your IP within 10 years time

Would you choose to use a unit trust for each IP or a discretionary trust for all your IP's, and why?

Reasons for 1 DT for all IP's
* income streaming to partner
* simpler and cheaper ongoing and set up costs
* if set up with corporate trustee, better asset protection compared to UT

Reason for 1 UT for each IP
* can refinance and make a personal purchase (e.g. car/ppor) and still have deductibility
* low/no stamp on transfer - but not relevant in this case, if 100% chance of selling IP?
* can transfer to SMSF - again not relevant if 100% chance of selling IP?

 

[Rolf Latham]

From a finance POV

DT every day as long as your serviceability is ok - more lenders will accept them at normal LVRs, Uts can be more limited

But, not enough info really

ta
rolf

 

[omni]

From a finance POV

DT every day as long as your serviceability is ok - more lenders will accept them at normal LVRs, Uts can be more limited

But, not enough info really

ta
rolf

Hey Rolf, is 80% LVR a challenge for UTs?

 

[Rolf Latham]

less so than 90%

most butnot all lenders will do DTs

the issue is with the"3rd party guarantee" to make it work properly

BUT, if your Ips arent neg geared, you can simply borrow in the unit trust with a directors guarantee vs personal borrowing with security guarantee from trustee

ta
rolf

 

[omni]

Thanks Rolf. Be nice to hear from a tax expert from a tax point of view, weighing up flexibility vs simplicity/costs of the two for this scenario

 

[Paul@PFI]

Which state is the IP in ??

If its in NSW you will pay land tax on every $ of unimproved land value from the first dollar if a DT owns the IP. If its a fixed unit trust (NSW Land Tax UT) then the threshold remains saving $6,000+ per property each year.

Have you also considered what may happen "IF" you change the beneficial ownership at some future date.For example your SMSF acquires some of one of the IP's...but only in a UT. No DT !

Then there is the ability with a UT to later internally refinance the trust property. ie borrow against it and the trust can payout a unitholder - They can use the $$$ to repay NON-DEDUCTIBLE DEBT, buy a boat or even another IP. Quite legally too. Its the only way I know of that allows deductible loans to reffinance non-deductible use and the deduction isnt a scheme.... Its actually done every day by most listed unit trusts.

 

[Terry_w]

Suppose:

• You are on the highest tax bracket as an employee, your partner has no income
• You will make an investment in IP's once per year for the next 5 years. Assume they will be profitable after depreciation (e.g. assume net tax profit situation on each purchase, so no negative gearing)
• There is a 100% chance you will sell your IP within 10 years time

Would you choose to use a unit trust for each IP or a discretionary trust for all your IP's, and why?

Reasons for 1 DT for all IP's
* income streaming to partner
* simpler and cheaper ongoing and set up costs
* if set up with corporate trustee, better asset protection compared to UT

Reason for 1 UT for each IP
* can refinance and make a personal purchase (e.g. car/ppor) and still have deductibility
* low/no stamp on transfer - but not relevant in this case, if 100% chance of selling IP?
* can transfer to SMSF - again not relevant if 100% chance of selling IP?

Not enough info to decide.

Which state will you be purchasing in?
Property amounts
non deductible debt.
structure of each trust
structure of each trustee
succession issues on death, incapcity.
cashflow of property
stamp duty issues
why would you sell?
other debts? Non deductible debt?
how much cash available.

 

[omni]

Hey Terry, thanks for your questions.

Not enough info to decide.

Which state will you be purchasing in? QLD
Property amounts 400-500k
non deductible debt. PPOR 500k, assume there is also 500k sitting in offset account such that there is no interest payable
structure of each trustNot sure... this is where I need guidance
structure of each trusteeNot sure... guidance would be good
succession issues on death, incapcity.Would want to leave to partner
cashflow of propertyAssume 100% cash (or expect to be mostly cash in next few years)
stamp duty issues Not sure...
why would you sell?Just an assumption that there is a 100% chance I will sell within 10 years (most likely 7-10 years). E.g. buy 3 IP's, when they appreciate, sell 1 and reduce loan on the remaining 2
other debts? Non deductible debt?Assume no other debt/have offset balance equal to PPOR loan balance
how much cash available.

 

[omni]

Thanks for your reply Paul. IP is in QLD.

If you were to set up a UT (say 1 UT for IP), presuming that you expect it to be positively geared, would you set up the UT in my partner's name or my name?

Or would you set up a UT that is owned by a DT? Seems like it is over complicating and holding cost is quite significant.

Suppose a UT was set up in my partner or my name, and it is subsequently transferred to a DT, is duty payable?

I am leaning towards keeping it simple, but am conflicted as it would be nice to get it set up right to begin with.

Which state is the IP in ??

If its in NSW you will pay land tax on every $ of unimproved land value from the first dollar if a DT owns the IP. If its a fixed unit trust (NSW Land Tax UT) then the threshold remains saving $6,000+ per property each year.

Have you also considered what may happen "IF" you change the beneficial ownership at some future date.For example your SMSF acquires some of one of the IP's...but only in a UT. No DT !

Then there is the ability with a UT to later internally refinance the trust property. ie borrow against it and the trust can payout a unitholder - They can use the $$$ to repay NON-DEDUCTIBLE DEBT, buy a boat or even another IP. Quite legally too. Its the only way I know of that allows deductible loans to reffinance non-deductible use and the deduction isnt a scheme.... Its actually done every day by most listed unit trusts.

 

[Terry_w]

Hey Terry, thanks for your questions.

Trust assets do not belong to you so you cannot leave them via your will. If you own units in a unit trust these can be willed, but not an interest in a discretionary trust. You can pass control of the trust on by careful drafting and planning. You need to consider control of the trustee too.

You should look at the land tax laws in QLD in relation to individuals and trusts. Possibly one property per trust, or may be even 2 trusts per property may be a strategy.

Also consider how you will get the initial deposit into the trust - gift or loan, who from, who to. eg. Do you gift to a discretionary trust which then lends to a unit trust trustee to buy the property. Consider asset protection and tax deductibility of interest. Consider the succession issues - if you die and have gifted this money it is not your and cannot be left in the will. If it is a loan is it to be repaid to your estate - what could the effects on cashflow be...

If you take cash out of your offset you will be paying non deductible interest. How do you avoid that? easy

Consider potential of losing control of the trust. Other family members could have the trustee replaced. What if you go mad? bankrupt?

 

[omni]

Thanks again Terry. All quite confusing tbh

You should look at the land tax laws in QLD in relation to individuals and trusts. Possibly one property per trust, or may be even 2 trusts per property may be a strategy.

Do you mean 2 property per trust, or 2 trusts per property? Is there a difference between having the property in a UT or DT for land tax threshold?

Also consider how you will get the initial deposit into the trust - gift or loan, who from, who to. eg. Do you gift to a discretionary trust which then lends to a unit trust trustee to buy the property. Consider asset protection and tax deductibility of interest. Consider the succession issues - if you die and have gifted this money it is not your and cannot be left in the will. If it is a loan is it to be repaid to your estate - what could the effects on cashflow be...

Wouldn't you always loan to the DT or UT in terms of the initial deposit, so the initial deposit is deductible?
If we ignore asset protection (i am not in a high risk profession and unlikely to be sued) and say we want to optimise for tax (with less priority on asset protection), how would you structure the trust(s), assuming holding cost of a trust is $1k a year more, and 2k to set up for a $400k IP.

 

[Terry_w]

Thanks again Terry. All quite confusing tbh

Do you mean 2 property per trust, or 2 trusts per property? Is there a difference between having the property in a UT or DT for land tax threshold?

Depends on the property - could be either.

In QLD no difference in land tax, but in NSW huge difference in treatment of land in a fixed unit trust v discretionary turst

Wouldn't you always loan to the DT or UT in terms of the initial deposit, so the initial deposit is deductible?
If we ignore asset protection (i am not in a high risk profession and unlikely to be sued) and say we want to optimise for tax (with less priority on asset protection), how would you structure the trust(s), assuming holding cost of a trust is $1k a year more, and 2k to set up for a $400k IP.

No, you wouldn't always loan money.
I can't advise you on how to structure as I don't know anything about your situation. It is more complex than you think.

 

[RPI]

We see a lot more DT's compared to UT's in QLD because of the flexibility associated with them and no difference in the land tax threshold between them.

The UT's I see tend to be most often used for unrelated parties.

DT's are an issue if you need to negative gear.

Corporate Trustee almost everytime.

I regularly see DT deeds that are invalid. If you going to use an online place to setup yourself (not recommended) ensure you read up on the requirements.

 

[Paul@PFI]

There cetainly are benefits for a DT in QLD however it comes with a warning few understand. And tragically many of these changes arent "legal" changes so they often dont get oversight by a solicitor. Its often a nieve accountant who can trigger a stamp duty concern. QLD has a indirect duties rule in the Duties Act which is very different to other states. The rules can make a trust inflexible and liable to significant stamp duty

Changes to a trust can trigger this...Its a vague concept at times too. So for example introducing new beneficiaries, changing appointor and even adding an additional appointer, changing the trustee can make the property subject to review and potential stamp duty. A common issue is a family trust and old grandpa was a beneficiary etc and now property is used by next generations etc (ie a farm). Grandpa is pension age and family seek to exclude him as a beneficiary to satisfty Centrelink. Thats a trust surrender. Potentially dutiable. But its not black & white either.

Part 8 of Duties Act 2001 is complicated ! Just s59 alone should be carefully understood by all parties to any trust. And to remove all doubt the beneficiaries are ultimately liable NOT the trustee.

QLD is a state where it is essential that legal advice be obtained before forming a trust and then therafter NO CHANGES are made to the trust without revised advice. DIY trust establishment should be avoided....I'm referring to a trust that owns QLD land.

Bear in mind too that a DT / Hybrids etc prevents involvement of SMSFs at any time. This may be contrary to retirement objectives and generous tax concessions at some point.

 

[omni]

Thanks guys for your opinion/advise. Useful questions I've asked my accountant. We should be good to go now with our set up