Purchasing property - Trusts - Discretionary vs Hybrid vs Own name

[gavsam]

Hi,

I am after a trust where I will have all the benefits as if I was purchasing a IP in my own name,

My new accountant mentioned this as a feasible strategy..... basically he explained it as follows:

set up a Discretionary Family Trust

ie: The legal owner (in name only) - trustee
The assets (business or other assets, such as a home) - trust fund
The beneficiaries
The individual who hires / fires the trustee - appointer or guardian (can be yourself and your spouse)
The trustee can be you and your spouse, just you or your company

So you - Borrowing money in your own name from bank and then providing that loan amount to the trust is much the same as borrowing money to invest in shares which is used for investment purposes and can be used as negative gearing against your personal wages, ie same for borrowing investment property......
The bank can still hold your title for the investment property as security against the loan for the investment property - even though its owned by the trust (thus making it easier to get the bank to approve the loan)......
As your paying the bank back the loan in your name, the trust is making very little in the way of losses, (perhaps maintenance, rental management fees etc) but by and large you are reaping the bulk of the rent, (so no losses are quarantined in the trust).

Pull the rent out of the trust as it comes in - then use that to help with your loan repayments etc
- CGT is still the same at 50%

Is this correct, it sounds to good to be true, I fear setting this up and finding that i cannot claim neg gearing against my own wage?

Anyone able to clear this up for me???

 

[coastymike]

so you borrow from the bank and lend the money to a discretionary trust. OK.

But then ATO looks at purpose for which funds are put. If on-lent to the trust at a commercial rate then again should be ok but the trust will have losses as it has an interest expense to you instead of the bank. You get interest income less interest expense which means no gearing at your level. It moves it back to the discretionary trust.

Now if the accountant is suggesting you lend to the trust at a rate lower than the commercial rate with the purpose being that you will receive a trust distribution then probably not deductible or deductible only to the amount of income you receive as a preference which again removes the negative gearing aspectrefer PBR http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/78825.htm.

On the surface sounds like bad advice.

 

[SMSFAccountants]

I agree with coasty mike, this doesn't sound like great advice. For one thing you are going to have to have enough security for the bank in your own name without using the new property.

Discretionary trusts really are not the best structure for negatively geared investments unless there are also positively geared assets in there as well.

We use hybrid trusts or unit trusts if required for asset protection, i would not go to this lenght though unless you intend to build a large portfolio as there is substantial cost in setting up and operating these structures

 

[Terryw]

hi Gavsam

you are comparing this to investing in shares, but there is one crucial difference between investing in shares and 'investing' into a discretionary trust.

With share you will be getting income from dividends or capital gains. If there is an income you will get it, no discretion involved.

With the trust you are only one of many beneficiaries and whether you can get an income from the trust is totally at the discretion of the trustee. If he chooses to distribute to you ok, but if not you cannot complain about it.

This is why beneficiaries cannot claim a deduction for interest on monies borrowed to invest in discretionary trusts.

If it was a unit trust then its a different story as you will have a fixed entitlement.

 

[Piston Broke]

I don't understand where people get the idea that a family trust is the right structure for buying property?

but...

We use hybrid trusts or unit trusts if required for asset protection

Nothing like clear unambigous communications is there

 

[Terryw]

I missed that.

How do unit trusts and hybrid trusts provide asset protection?

 

[Shaneelastic]

I agree with coasty mike, this doesn't sound like great advice. For one thing you are going to have to have enough security for the bank in your own name without using the new property.

Discretionary trusts really are not the best structure for negatively geared investments unless there are also positively geared assets in there as well.

We use hybrid trusts or unit trusts if required for asset protection, i would not go to this lenght though unless you intend to build a large portfolio as there is substantial cost in setting up and operating these structures

Dear Mr Tax Accountant.
Are you a bookeeper or an accountant. The websearch states your a bookeeper.
Great Advice that.
I hope you dont give that advice to your customers
You have held out via your name and signature taht your a professional, now please can you tell me how a unit trust provides asset protection. When i did corporate law 101 that wasnt the case, has something changed in the past 8 years.
Regards

 

[Rob G.]

Hi,

I am after a trust where I will have all the benefits as if I was purchasing a IP in my own name,

My new accountant mentioned this as a feasible strategy..... basically he explained it as follows:

set up a Discretionary Family Trust

ie: The legal owner (in name only) - trustee
The assets (business or other assets, such as a home) - trust fund
The beneficiaries
The individual who hires / fires the trustee - appointer or guardian (can be yourself and your spouse)
The trustee can be you and your spouse, just you or your company

So you - Borrowing money in your own name from bank and then providing that loan amount to the trust is much the same as borrowing money to invest in shares which is used for investment purposes and can be used as negative gearing against your personal wages, ie same for borrowing investment property......
The bank can still hold your title for the investment property as security against the loan for the investment property - even though its owned by the trust (thus making it easier to get the bank to approve the loan)......
As your paying the bank back the loan in your name, the trust is making very little in the way of losses, (perhaps maintenance, rental management fees etc) but by and large you are reaping the bulk of the rent, (so no losses are quarantined in the trust).

Pull the rent out of the trust as it comes in - then use that to help with your loan repayments etc
- CGT is still the same at 50%

Is this correct, it sounds to good to be true, I fear setting this up and finding that i cannot claim neg gearing against my own wage?

Anyone able to clear this up for me???

Hmmm .... ley me see if I have this correct.

You want the asset protection and income sharing benefits that goes with not having an interest in an asset.

Yet on the other hand you want all the tax deductions of an owner.

You might find that you have to compromise a little bit somewhere.

Cheers,

Rob

 

[Mry]

Where precisely does the accountant say you make the tax savings? I can't see any. It sounds like the accountant was suggesting the last thing Coasty mentioned, getting a discretionary distribution and claiming an interest deduction against it, which is not possible.

It could be that you misinterpreted what the accountant said or that your situation allows for some tax savings using a Discretionary Trust but on the face of it, I have my doubts.

 

[Rolf Latham]

from a finance POV most lenders wont touch a HDT.

not because there is much wrong with the strcture per se, but they dont fit the sausage factory processing

ta
rolf

 

[reeco]

from a finance POV most lenders wont touch a HDT.

not because there is much wrong with the strcture per se, but they dont fit the sausage factory processing

ta
rolf

Hey Rolf,

What would change there mind? A higher LVR? Know any of the big 4 that would open there doors? Or the names of the lenders that do?

Cheers

Cheers

 

[Rolf Latham]

Hi Reeco

Current bigger lenders that still do them are ( as of last week)

NAB ( NAB not homeside)
St George
ANZ
WBC retail if the trustee is PERSONAL


ta
rolf

 

[Terryw]

Hey Rolf,

What would change there mind? A higher LVR? Know any of the big 4 that would open there doors? Or the names of the lenders that do?

Cheers

Cheers

Possibily the legal risks and complications. When a person uses a hybrid trust the property is owned by a company and the loan needs to be in a person's name. This means the title holder (the legal owner) and the borrower are different.

Try getting a loan in your name on your mum's property - it is just as hard.

 

[Rolf Latham]

Try getting a loan in your name on your mum's property - it is just as hard.

Hi Terry

Thats a real tough one..............and regarded as a true 3rd party security. With Most trust structures there is at least some direct commercial benefit to the beneficial owners of the security.

This is just my view, but most lenders dont like HDTs because

1. No Capiche
2. Dont fit sausage factory
3. Relating to point one, that there will be some issue with the ATO, and the ATO might end up with control of the security.



Truth is, that many lenders are clueless about how most trusts work, and thus dont want to know. Some of the silly requests are


1. Asking for adult beneficiary guarantees, and not locking down the appointor.

2. Not forcing a RMD or FFC on the company so they can prevent a change of trustee

3. Asking for benficiary guarantees in general. A bene of a FT has no ( read zero) entitlement to income or capital under most deeds unless the trustee says so. This means we are asking the bene to provide a guarantee with NIL commercial benefit.

ta
rolf

 

[reeco]

Hi Reeco

Current bigger lenders that still do them are ( as of last week)

NAB ( NAB not homeside)
St George
ANZ
WBC retail if the trustee is PERSONAL


ta
rolf

Thanks Rolf,

You must have seen a few deeds in you time what do reckon constitutes a well written deed? I'm looking to have mine merely as vessel to purchase IPs and simply value add by refurbing them or tacking on a granny flat. Sounds silly but I need a quality capital loss. Working in the mines is a pain right now. Mr tax man has me bent right ova at the mo

 

[Terryw]

Thanks Rolf,

You must have seen a few deeds in you time what do reckon constitutes a well written deed? I'm looking to have mine merely as vessel to purchase IPs and simply value add by returbing them or tacking on a granny flat. Sounds silly but I need a quality capital loss. Working in the mines is a pain right now. Mr tax man has me bent right ova at the mo

Using a trust won't help you with tax deductions against your income. Unless, maybe, you are employed under a trust.

 

[redwing]

Looks like a pertinent thread to throw this in

see page 2

Family Trust& negative Gearing

Yes! Negatively gearing your
home is possible
This is done by establishing a
discretionary family trust with a shelf
company to act as trustee. You and your
family then rent the house at a proper
market rental on a long-term lease.
Be aware, however, that if the
home is owned by a trust, any capital
gains exemptions may be lost and
you also may be liable to pay land
tax. But your lease on the house will
be valued for capital gains tax and,
meanwhile, you can claim any interest
payable, insurance, rates, repairs and
depreciation as tax deductions.
Once you have established negative
gearing on the property you can, if
you wish, provide your employer with
a PAYG Variation Certificate. This
allows your employer to give you
reduced PAYG deductions, providing
for the losses that are being incurred
on your property.

Goes against most of what I thought about discretionary trusts?

Curious as to the above...

 

[reeco]

Dales advice on hybrids is incorrect? Trust magic the book is wrong? Negatively geared IP and no tax deductions on my income? You sure about that terryw? Dales book notes it VERY clearly... Hmmm maybe I should get a refund

 

[Terryw]

Dales advice on hybrids is incorrect? Trust magic the book is wrong? Negatively geared IP and no tax deductions on my income? You sure about that terryw? Dales book notes it VERY clearly... Hmmm maybe I should get a refund

Yes you could use a unit of hybrid trust. You borrow money to buy units and then you personally claim the interest. This may result in you being able to claim the losses from interest initially.

But, what is the point? Why not buy in your own name instead.

 

[Terryw]

Looks like a pertinent thread to throw this in

see page 2

Family Trust& negative Gearing



Goes against most of what I thought about discretionary trusts?

Curious as to the above...

Doesn't make sense. How can you claim a tax deduction for something owned by someone else?