Tax Structure - Trust or Personal Name?

[JWR]

Hi everyone,

I am pretty new to the game but look to build a substantial portfolio over time (hopefully > 100 properties ). I am wondering for all who have multiple properties - which kind of structure do you use?

Buying in a personal name or in a discretionary trust - or something else entirely?

There are benefits to both methods but I think buying in personal names are better because you can claim depreciation (which you cannot do in trusts I think?)

The reason I may look to trusts is due to protecting assets (though I am thinking that if you get the right insurance you should be pretty much covered in the unlikely event you are sued?)

I think the best way would be to buy properties with higher depreciation in personal names and those with low/no depreciation in trusts?

Any advise would be greatly appreciated,
James

 

[Terryw]

The best thing to do is to do some sums and projections.

Trusts can claim depreciation too.

 

[devank]

Trusts can claim depreciation too.

If it is cash-flow +Ve??

 

[wobbycarly]

If it is cash-flow +Ve??

Assuming you mean +ve geared, the depreciation will reduce the income (increase the expenses) and reduce the tax payable.

 

[Aaron_C]

For your first few purchases and if you're PAYG then just keep it in personal name.

 

[Terryw]

If it is cash-flow +Ve??

regardless, depreciation would still be an expense to be claimed.

 

[JWR]

Hi guys,

Thanks for the responses.

I went to a Dymphna Boholt seminar yesterday and got quite concerned with my strategy (which was to buy in personal names at first) because she said she has seen people who have been sued for a burglar entering the house and breaking their leg - and losing everything.

I read a Margaret Lomas chapter though today and saw that she thinks the risks are very minimal and the benefits non existent. So I am torn. I want maximum return but do not want to lose everything in a few years if I put my future purchases in personal names.

 

[Aaron_C]

Are you PAYG? If so, what are you going to be sued for?? Let's not get carried away by ridiculous antectodes that don't have any real chance of happening.

 

[JWR]

Yes, PAYG. I don't plan on getting sued haha but it could happen (the two examples she gave were the one above and another person who was playing golf, accidentally hit someone on the head who subsequently got brain damage and sued - resulting in him having to sell lots of houses and going almost bankrupt.)

I know the chances are low but asset protection has to be key one would think?

 

[Aaron_C]

You cannot get negative gearing via trusts unless it is a fixed/unit trust. However, this doesn't have asset protection benefits because the units are still 'assets' that are part of any bankruptcy that can be reached by creditors.

You can get asset protection through a discretionary / family trust. However, a family trust cannot be used for negative gearing unless the trust has exterior business income (which you presumably do not have).

However, each year you have to fork out fees for your accountant, added complexities, not to mention that you limit the amount of lenders who will actually lend you money (As trusts are more complicated and require a thorough review by the banks' legal teams). Why bother for the small, miniscule chance that you may hit someone with a golf ball? Ridiculous scaremongering.

 

[Terryw]

Golf Ball Incident

This is probably the case referred to re the golf ball

Ollier v Magnetic Island Country Club Incorporated & Shanahan [2003]. QSC 263
http://archive.sclqld.org.au/qjudgment/2003/QSC03-263.pdf

and the appeal
Ollier v Magnetic Island Country Club Inc & Anor [2004] QCA 137 (30 April 2004)
http://www.austlii.edu.au/au/cases/qld/QCA/2004/137.html

 

[JWR]

Thanks for the reassurance Aaron. With my aim though I may just need that protection!

 

[Aaron_C]

Since the Chan & Naylor books everyone wants a trust/asset protection etc...but for your average investor it is overly complex and unnecessary. Trusts just generate fees for accountants and lawyers and I think they should only be used for a significant amount of assets - because at the end of the day if you are a PAYG worker the chances of you needing asset protection are extremely small.

 

[Terryw]

I am a lawyer with an interest in asset protection and I think that getting sued won't really become an issue for most people. But, for someone involved in buying multiple properties or getting into a business then asset protection needs to be considered well before starting. Once you have property in your own name there is little you can do to protect yourself.

And don't forget that asset protection is only one aspect of a structure. Others are tax planning and estate planning issues.

 

[Aaron_C]

Agreed Terry. For the average joe though this is likely to be unnecessary

 

[coastymike]

The only issue is that holding the property in your own name or names provides no flexibility re the future.

Let's say you hold in a unit trust (asset protection isn't a major issue) and want to transfer the property to your son. Lower stamp duty on the transfer. Own names higher duty rates.

Or maybe you want to transfer into your SMSF once it is positively geared and you are approaching retirement. In your own names. Can't do. In an appropriate unit trust structure. Can do.

Why I think holding in your own names is the worst structure. It doesn't provide one ounce of flexibility.

 

[Terryw]

The only issue is that holding the property in your own name or names provides no flexibility re the future.

Let's say you hold in a unit trust (asset protection isn't a major issue) and want to transfer the property to your son. Lower stamp duty on the transfer. Own names higher duty rates.

Or maybe you want to transfer into your SMSF once it is positively geared and you are approaching retirement. In your own names. Can't do. In an appropriate unit trust structure. Can do.

Why I think holding in your own names is the worst structure. It doesn't provide one ounce of flexibility.

There are also potential tax advantages by having the unit trust borrow to buy back some units and claim a deduction for it too (the refinancing principle).

 

[lpool05]

The best thing to do is to do some sums and projections.

Trusts can claim depreciation too.

Hi guys,

I am in the same situation as coastymilk. I am also a PAYE. I already got some properties under my name, prop and 3 investment properties.

I have been thinking of creating a trust but I cant justify the cost. I went to my accountant and he advised it would cost me around $3k to create a trust and trusty company. And ongoing cost of around $900 for a single property. Ongoing cost will rise as I keep buying the properties under the trust structure.

Do the setup and ongoing cost sound correct?
I am planning to buy two more properties towards the end of the year, if I can top up my loans obviously I am keen to also sort the structure. I am also reaching the land tax threshold in NSW and most of my buys are in NSW. I might end of putting the next 2 properties under my wives name but the problem with that is when she stops working.

Terry which sums and projection are you referring too?

Understanding trust is created for asset protection but now the rules have changed and isnt it true that law can get into the trust if need be?

I am keen to hear your views and thoughts....

 

[Terryw]

Hi guys,

I am in the same situation as coastymilk. I am also a PAYE. I already got some properties under my name, prop and 3 investment properties.

I have been thinking of creating a trust but I cant justify the cost. I went to my accountant and he advised it would cost me around $3k to create a trust and trusty company. And ongoing cost of around $900 for a single property. Ongoing cost will rise as I keep buying the properties under the trust structure.

Do the setup and ongoing cost sound correct?
I am planning to buy two more properties towards the end of the year, if I can top up my loans obviously I am keen to also sort the structure. I am also reaching the land tax threshold in NSW and most of my buys are in NSW. I might end of putting the next 2 properties under my wives name but the problem with that is when she stops working.

Terry which sums and projection are you referring too?

Understanding trust is created for asset protection but now the rules have changed and isnt it true that law can get into the trust if need be?

I am keen to hear your views and thoughts....

Using a trust is likely to cost more in running as you may have to pay more accounting and other fees and may not result in tax savings against your personal incomes. This would be the situation especially in the early days, but once it starts making a profit the tax savings should appear. So you should do scenarios running it in personal names v a trust and see what the figures show.

 

[knightm]

i find this tricky too. im paye low risk employment but if i fully intend to hold say 10-12 ip's in 10 years then is a trust justified?

ppor in wifes name and invest in my name - is that enough asset protection?

im thinking 1 or 2 in several states in own name to use the land tax thresholds then start a trust and plonk a few in there too, but not till im ready to buy maybe 3 in one year and 3 the next for eg to justify the cost?

still not sure...