Structuring assistance required

[debonair]

G'day everyone,

Some help would be much appreciated having spoken to a number of people and gotten differing opinions from all.


The scenario:
Group of 4 friends looking to buy a residential property up to 1.8m in Melbourne
Plan would be to renovate in the short-term if need be, rent out and hold.
Within the next 3-5 years, gets plans/permits for a development of either townhouses or apartments

All 4 of us have steady incomes and stable financial positions so default is not a major concern.
Asset protection and future borrowing capacity are our biggest concerns and we obviously would like to offset losses against income at some point but negative gearing every year as the losses are incurred, isn?t crucial.


The issues:

->What would be the best structure?
We have been told two options:
1) Unit trust with a nominee company and have each of us as unitholders

2) Partnership where nominee company is on title. Nominee company then holds property as bare trustee for partners who will actually be discretionary trusts. Respective trusts will not have any other assets besides property in order to limit liability.
The second option will provide ability to stream income from other trusts into our respective trusts which hold property in order to soak up losses during early years when property will be negatively geared. The first option being a unit trust does not provide ability to negative gear because losses can?t be distributed.

We believe second option is more beneficial but what are everyone elses thoughts?

-> Land tax? Will land be taxed higher for option 1 or option 2? (Personally don?t think it makes a difference because land tax can increase where there are more assets grouped within a trust. Whether we have unit trust or trust partnership will not matter because either way only asset being held in trust will be the property.
-> Stamp duty if one member wants to sell/transfer their portion? What are ramifications for option 1 vs option 2?

-> Will our borrowing capacity be affected by different structures i.e. will banks look at one structure more favorably over another

-> What are the implications for CGT down the track with either option?

Looking for some advice/expertise and any input would be greatly appreciated

 

[Paul@PFI]

The reality is that each owner will desire a fixed share of entitlement to income and also to their capital invested ?

A unit trust would be a first consideration however there needs to be certain aspects of that trust receive legal advice to ensure it is appropriately structured.
1. How will the trust deed deal with a right to redeem units ?? It may be impractical or unfair for a unitholder to demand redemption. Should there be a % vote of the trustee ? Should it be unanimous (2/4) or majority (3/4) ?
2. The trust deed should be a reliable and robust deed that addresses valuation carefully. Many do not.
3. Each borrower is to borrow personally ? Or does the trustee borrow ? How will guarantees be applied?
4. Voting in the event of deadlock...If 2 disagree how will decisions be made ?

The discretionary trusts as unitholders may be impractical or a waste of money. The issue of offsetting losses may be unavailable if you use a disc trust between the trust and the individuals with the tax to pay.

Why do I favour a unit trust over the impractical partnership approach. Stamp duty alone. You can add or remove unitholders without duty. Many benefits.

 

[Peter_Tersteeg]

Outside of very close family members, every deal like this I've seen has been done via a unit trust arrangement of some description. In some cases, the units have been owned by discressionary trusts behind that, but the unit trust is always the primary owner of the property.

With 4 individuals, this type of project, you need to approach it very cautiously. You need to get specialist advice on the ownership structure. Lots of contingencies need to be worked out. If you plan for the worst, you've actually got a better chance of getting the best outcome.

 

[Terry_w]

Some things to consider:

1. Loans
All those on title will need to be on the loan.
All directors of a company will need to be on the loan.
Some times shareholders may be required to be on the loan.
Unit holders maybe too ? especially majority unit holders.

Do all need to be on the loan, what effects will this have on subsequent loan applications. What are the effects of not being on the loan ? loss of control etc.
2. Documentation
You will need various documents such as company set ups, constitutions, shareholder agreements. Advice on who should be directors, shareholders.
Trusts set up a structure. Terms of the trust, positions in the trust and who should fill. Each party may need their own advice. Maybe unit holders agreements too.
Loan agreements may also be needed for the money going into the trust.

3. Estate planning
Plan for the 4 Ds. What if any of these happen to any party or spouse of the party:
a) Death
b) Disability
c) Divorce and
d) De bankrupty

Then advice on all the usual things:
a) Stamp duty on subsequent changes
b) Land tax now and in the future
c) Income tax, including CGT if it applies.
d) Social security impact (on family maybe)
e) Control
f) Losses, ongoing and potential capital loss
g) Cashflow
h) etc

Then when you seek advice consider who the adviser is advising. What is best for you may not be best for the company or the trust or your mates.

 

[debonair]

Thank you for input Paul, Peter & Terry. Much appreciated.
Looking more likely to go with a unit trust, getting this structuring stuff out of the way and commence looking for the actual money-maker, the property itself!

Cheers

 

[Terry_w]

Thank you for input Paul, Peter & Terry. Much appreciated.
Looking more likely to go with a unit trust, getting this structuring stuff out of the way and commence looking for the actual money-maker, the property itself!

Cheers

Now you have to consider the structure of the unit trust and separately the trustee