Simple Structures Question - Just Starting Out

[prandsa]

A mate and I are looking to do something on the side of work. We both have solid jobs plus our own personal interests (PPR / investment properties / investments etc) which we need to keep separate.
We are planning on doing development plus passive investing primarily in property. I’ve been talking to a lawyer and am still looking for a good accountant (Sydney based?). So far, we’ve had some suggestions of setting up a discretionary trust with a company over the top or a Unit Trust type arrangement so we can bring in others if needed or sell down later when it gets big – fingers crossed! I’m a bit confused as to the structure side of things so am hoping to get some good opinions.
Can anyone provide any suggestions as to how you buy / sell / operate within a trust. Is there a better structure to use??? Flexibility is a key outcome.

 

[josko]

Hi prandsa,

You may need to set up a Hybrid trust. A hybrid trust is a cross between a discretionary trust and a unit trust.

If you place your property within this trust under a company name then you may forego any 50% CGT benefits and you will not be able to distribute any losses to offset your income.

The banks are pretty picky when lending to trust structures and you will find you have to fork out money (@$250) for a SOlicitor to sign documents etc. You will also have to be careful of the name you write on the contract.

You really need to speak to an accountant about this as it is quite detailed. If done correctly it can be beneficial. If not, it can be damn painful. Either way, expect it to be costly!

In the end, as you say, you are entering into a partnership and need flexibility. It's my experience that a Hybrid Trust should do this for you.

Regards JO

 

[Corsa]

Dear Prandsa

Josko is correct a Hybrid Discretionary Trust (HDT) is beneficial for these types of structures particularly if you have different parties investing in differing proportions who may be coming in and out of each deal.

Banks that I understand are lending to a HDT are CBA and Heritage (potentially more lenders known by the brokers). However it is difficult to get a HDT loan through compared to a Unit Trust.

If you think that your friend and yourself will be partners for awhile, then it may be easier doing a Unit trust where you can change the unit holding between you at any time and also add new shareholders in as well.

Accountants in Syd worth exploring this with is Nick Moustacas of Strategic Wealth - http://www.strategicwealth.com.au. He has helped me get started in appropriate structures better than other accountants that I have interviewed and he understands property investing which really helps.

Good luck with the JV's!

Best Wishes

Corsa

 

[AVD]

Hi!

Had you thought about trialling one in your own names 50/50 to see if its something you can work together on? You might spend all ths money setting up a joint venture and then find out that it doesnt work for you both or that you dont work well together.

Just a thought.

Alysha

www.gatherumgoss.com

 

[bene313]

Hmmm, a few SS members have recently expressed regret in regards to setting up and investing through HDTs due to a lack of case law underpinning what the structure is actually allowed to do. Search the forum and do your own research on this one.

 

[Qlds007]

Other issue could be the difficulty in having much of a range of finance options when it comes to a HDT.

 

[prandsa]

Thanks for the tip on the accountant. Will definitely try them.
I thought finance would be a little more difficult in a trust however it sounds like it could be a major hurdle. Do you know if interest rates are the same or they charge a premium?
I'm thinking maybe just doing the first thing in joint names could be the way to go. Would definately be easier come tax time and financing!!

 

[Piston Broke]

What many people do is set up a company to do the business.
Then work out what the best structure for each individual is to hold the shares in that company.
Of course those shares can be held by another company as well.

As for keeping things "separate", it's still almost impossible unless you have no loans.

 

[klublok]

The easier structure would be to have the company and the discretionary trust.

The company is the trustee (ie: the thing that controls the trust). The trust is the entity that does the development. When you profit from the development, the trust will distribute all the profits to "beneficiaries" (which are the people who receive the money). Because it is a "discretionary trust", the company trustee can basically distribute that money to anyone.

The money would then be taxed according to each recipient's marginal tax rate and may be eligible for the CGT discount as well.

You and your mate would be the shareholders and directors of the company. So you control the thing that controls the trust. If you want others to join your development, then you can just issue new shares in the company and appoint that new partner as a director.

If you do it this way, you do not have to change the ownership of the asset (which will trigger stamp duty and CGT).

Just make sure you have an agreement between the partners - otherwise things will turn ugly. Also make sure that you have provisions on what happens if one party dies during the development (most people dont think of that -but happened to a lot of my clients) so that there are instructions to the surviving family members on what to do.

 

[Mry]

I don't recommend hybrids as they have problems when it comes to justifying interest deductions against income units and the way the capital gains are worked out when the units are redeemed. More info here -

http://www.ntaa.com.au/media/associationatwork/Usinghybridtrusts.html

The use of a discretionary trust with a corporate trustee will allow a distribution of profits and, depending on the type of property development engaged in, will allow the 50% capital gains discount. Unfortunately as you are involved in passive and active development, you may require different structures for different activities depending on your situation.

It has been my experience that funding when hybrids or unit trusts are involved can be more difficult than with a straight discretionary trust. Another 'fun' issue to deal with when looking at structures.

Alysha's advice on trialing how you work together is good advice. Quite a few developments nowadays aren't quite working as intended and it might be better to see if you can make a few bucks on a project before sinking serious money and time in. I would put your first build and flick project into a partnership of 2 Discretionary Trusts since you are planning on making profits.