I’m reading a book by a well known author and investor who argues that trusts are not necessary.
Below is an outline of the authors arguments. I would appreciate Dale or Nick or whoever else commenting on these.
DTs
1…. I am often told by readers that they are worried that their tenants may sue them, but I remind them that public liability is included in all land lords insurance. This is usually around $10mill of cover & there is a cap on claims for anyone injuring themselves well below this.. So unless you are in the medical profession or involved in unscrupulous business dealings it is unlikely you would need that level of cover.
2. If you are sued and your assets are in a trust, this does not necessarily mean they are protected. Both ASIC & the Family law court have the power to unwind a trust to reach the assets in the invent that creditors, litigants or spouses need to be paid.
3. A trust pays no tax. Positive cash flow from a property is a result of making tax claims, the benefits of which make up the margin in your cash flow and give you extra money each week. The higher the tax bracket you are in the more tax you get back from your claims and the higher likelihood of seeing a positive cash flow from your investments. Property in a trust means that the entity that owns the asset ( the trust) cannot enjoy the tax benefits (as it pays no tax) and the entity that receives the income ( the beneficiaries) has no access to tax benefits to offset the extra income received. …. In later years as debt reduces and income increases, the increased income must be distributed and will be tacked on top of other income earned pushing the recipient into the higher tax bracket.
4. While it is true when you retire you may be in a lower tax bracket and the trust can distribute as it sees fit to those who pay the lowest tax, the facts are that most trusts are only set up with one or two beneficiaries-usually spouses or partners. By the time they retire they may have many properties earning a lot of income & having the income flow through a trust will do little if anything to change the amount of tax you ultimately pay when it ends up in your hands. If your children are also beneficiaries, this means you can also give them an income ( why would you do that as you have retired and need it?) or you can distribute it to them and they give it back to you and as by this stage they are probably already earning other income so their income tax may be levied at a higher rate.
If the unlikely event they are still under 18 when you retire they have a very small tax free threshold.
In conclusion the author goes on to write the following.
.. The realities are that if you build a substantial property portfolio, you are going to pay a lot of tax regardless of whether you receive the income in the hand or through a trust. I cannot see any real benefit in buying property in a trust. It fails as an asset protection tool, it fails as a tax shelter, & as I said before it does remove those tax benefits that are so important in the early years in helping you build a bigger portfolio ( as they give you important cash flow today when you need it most.
HDTs
Without boring you all with about three paragraphs of intro, the author outlines what a HDT is and then goes onto the following
…..so far I have not found anything in any legislation to support the HDT theory. Lets assume for a minute that there is a loophole that can be accessed by setting up this complex srtucture- always remember that if you take advantage of these unteseted arrangements, you may be exposing yourself to harsh penalties under the general anti avoidance provisions of tax legislation(PartIVA)
Companies ( buying property through them)
….If you wish to buy positive cash flow property, often the cash flow is negative until you receive the tax breaks. By using a company structure, you are intentionally setting your max tax breaks at 30%. when it may be possible as an individual you may be in a higher bracket than that……if the income received has already paid 30% company tax & you withdraw funds from the company you must still pay the difference when the money hits your hand….So as the properties go onto make real money ( by reducing debt and increased rents) you will want to have the cash and you have no choice but to draw it down and pay whatever tax is due on it.
Lastly companies lose the concession on CGT and of course there are additional compliant costs with running a company
A lot of the above is not word for word as this post is already a long one and I tried to summarize where possible without changing the vibe
Cheers
PP