Trust and Finance HELP!

[alex9050]

My business partner and I are organising the structure for our first property.

We have a company and unit trust structure set up, as directed by our accountant, but I'm beginning to think that she has given us a wrong turn.

Here's our situation;

-I am a full time student graduating this year,
-My business partner works full time.

Obviously as a student my income is not enough to service a home loan in the banks eyes, so when we apply we want the bank to only assess him in terms of serviceability.

Upon graduation and in the near future, both our incomes are likely to go into the highest tax bracket.

Here's what we want out of our structure;


- Ability to apply for a loan in my business partners name (we need finance of 90 - 95% LVR)

- CG reduction if sold at a later date (Not available in a company structure with no trust)

- When the investment/s turns positive, the ability to distribute this income to the company as my partner and I will most likely be on the highest tax bracket.

- Ability to distribute losses from the trust to my partner's income in the first year and some to my income in the second and subsequent years. (To save on our personal tax.)

- Ability to distribute losses/profits to the company when the investment/s turns positive, to take advantage of the lower tax bracket.

- Ability to claim business related expenses as part of the investment. (ie; home office space, internet, travel etc.) If we apply and invest personally, we miss out on a lot of available tax deductions



We've come across some hurdles in the structure we're currently in (which should have been foreseen by the accountant...);

- Banks won't lend anything more than 80% for our company/trust structure. If my business partner applies for a loan personally, they will go up to 95% no problem.

- Banks will lend 90% for a company without a trust. But then no CG reduction is available

- A unit trust is unable to distribute income/losses (?) To take advantage of who is paying the most/least tax



I've been researching a little bit into Hybrid Discretionary Trusts (HDT's).. This sounds suitable to what we want, apart from two things

1. We need 90% finance (Is it possible to get 90% finance in a trust structure at all?)

2. If we want to draw equity out to purchase another property what are the implications?


WHAT should we do? Everytime I ask the accountant, she seems to waffle and go on tangents, saying we could do this, we could do that. I just want someone to tell me what the most suitable and safest structure is for our situation.

Any help with the above and/or recommendations on accountants in Melbourne to help us?

 

[Rolf Latham]

My business partner and I are organising the structure for our first property.

We have a company and unit trust structure set up, as directed by our accountant, but I'm beginning to think that she has given us a wrong turn.

Here's our situation;

-I am a full time student graduating this year,
-My business partner works full time.

Obviously as a student my income is not enough to service a home loan in the banks eyes, so when we apply we want the bank to only assess him in terms of serviceability.

Upon graduation and in the near future, both our incomes are likely to go into the highest tax bracket.

Here's what we want out of our structure;


- Ability to apply for a loan in my business partners name (we need finance of 90 - 95% LVR)

- CG reduction if sold at a later date (Not available in a company structure with no trust)

- When the investment/s turns positive, the ability to distribute this income to the company as my partner and I will most likely be on the highest tax bracket.

- Ability to distribute losses from the trust to my partner's income in the first year and some to my income in the second and subsequent years. (To save on our personal tax.)

- Ability to distribute losses/profits to the company when the investment/s turns positive, to take advantage of the lower tax bracket.

- Ability to claim business related expenses as part of the investment. (ie; home office space, internet, travel etc.) If we apply and invest personally, we miss out on a lot of available tax deductions



We've come across some hurdles in the structure we're currently in (which should have been foreseen by the accountant...);

- Banks won't lend anything more than 80% for our company/trust structure. If my business partner applies for a loan personally, they will go up to 95% no problem.

- Banks will lend 90% for a company without a trust. But then no CG reduction is available

- A unit trust is unable to distribute income/losses (?) To take advantage of who is paying the most/least tax



I've been researching a little bit into Hybrid Discretionary Trusts (HDT's).. This sounds suitable to what we want, apart from two things

1. We need 90% finance (Is it possible to get 90% finance in a trust structure at all?)

2. If we want to draw equity out to purchase another property what are the implications?


WHAT should we do? Everytime I ask the accountant, she seems to waffle and go on tangents, saying we could do this, we could do that. I just want someone to tell me what the most suitable and safest structure is for our situation.

Any help with the above and/or recommendations on accountants in Melbourne to help us?

I think the biggest problem you are having here, is that you want just one thing..........



EVERYTHING


work out what your priorities are based upon your current situation and resources and work your structure towards that.

Banks will lend to 95% for a Company structure including unit trusts with corporate trustees, you are just severely limiting your options with such an expectation.

One of the core issues with something like what you are setting up, is that is your high lending LVR requirement a need (IE cannot do the transaction at a lower LVR at all) or is something that is nice to have so that you get more leverage, and retain a bigger buffer.

So, get off your accounts back , it is that they are too polite or chicken to let you know that you wish list is exactly that.

I am oftn wrong but never in doubt, and its quite possible that someone will come up with a way to give you everything you need.

thanks

Rolf

 

[alex9050]

I think the biggest problem you are having here, is that you want just one thing..........



EVERYTHING


work out what your priorities are based upon your current situation and resources and work your structure towards that.

Banks will lend to 95% for a Company structure including unit trusts with corporate trustees, you are just severely limiting your options with such an expectation.

One of the core issues with something like what you are setting up, is that is your high lending LVR requirement a need (IE cannot do the transaction at a lower LVR at all) or is something that is nice to have so that you get more leverage, and retain a bigger buffer.

So, get off your accounts back , it is that they are too polite or chicken to let you know that you wish list is exactly that.

I am oftn wrong but never in doubt, and its quite possible that someone will come up with a way to give you everything you need.

thanks

Rolf

We need the 90% LVR so we have enough to fund a reno and increase the equity to repeat the process again.

What do you mean by corporate trustees? Our broker was saying 90% was basically out of the question for a company/unit trust.

PS: Obviously we want everything ! Just haven't found a way to make it happen yet, haha.

 

[Marty McDonald]

IMO I thik you are over complicating your affairs before you need to.........everything you do in regards to finance is now going to harder and much more time consuming. Are you sure it's worth it? Doesn't sound like there is much to protect yet and it may be years before it turns positive. Accoutnat has 2 more tax returns to do each year though

 

[alex9050]

IMO I thik you are over complicating your affairs before you need to.........everything you do in regards to finance is now going to harder and much more time consuming. Are you sure it's worth it? Doesn't sound like there is much to protect yet and it may be years before it turns positive. Accoutnat has 2 more tax returns to do each year though

I think it will be worth it in the future. Obviously you guys understand what happens when it does turn positive, we save money in tax if we're at the highest tax bracket.

If, over the next 5 years we buy say 10 properties, which isn't a far stretch in our situation, then this could KILL us... And to transfer them from someones personal name to a trust structure at a later date gets very expensive.


Better to get it right now then to regret it later.

Ok, I've thought about it a bit more - Here are the most important things to us.

-Ability to distribute losses/profits in the future (to the company for profits, and to us for losses)
->90% finance
- CG reduction.

 

[Terryw]

I think you need to understand strucutres a bit more yourself.

A unit trust or any trust cannot distribute losses. What may be possible is that person A could borrow to buy units in a unit trust and if these units are income producing then person A may be able to claim a deduction on the interest for the loan they used to buy the units.

But if A owns the units then they will need to get the income from the trust in proportion of the number of units they own. There is little flexibility - or no flexibility. The trustee must give the unit holder the income of the unit holder could not claim a deduction. The units would also be property of A and since held personally then they are exposed to creditors.

This ends up very similar to owning in your own name, or in A's name. Same end result (with added complications).

But what is good is the flexibility to change things. Since the title to the property would be in the company name, the trustee, changes to the trust can be done without needing to change ownership of the land. This can be done by transferring units.

So, after a while the units held by A could be transferred to a discretionary trust or to B. If they are transferred to a discretionary trust then asset protection is strengthened (though still subject to clawbacks and weak overall) and the tax position is improved by adding the flexibility of a discretionary trust. So profits of the unit trust could flow thru to the DT and then out to the lowest income tax paying beneficiaries, including a bucket company if needed.

An added benefit is that the unit trust may be able to borrow to buy back the units and itself convert into a discretionary trust. The interest on this loan may be deductible.

A draw back is that units in a trust are dutiable property so the transfer may attract duty. Not sure about redeeming units. But if the trust is a VIC trust then there may be no stamp duty. If NSW duty would be 0.6% of the value of the transferred amount. But I think this is being abolished on July 1.

Another draw back is CGT on the transfer of units would be payable at market rates.

Sounds good in theory, but you will find it hard to get a loan that fits in and if you do then you will need to obtain permission from the mortgagee to transfer units etc.

 

[Aaron_C]

Oh man what a mess...

Stick to a SIMPLE structure and you will be OK. Go down this overcomplicated rubbish for such small money and you are seriously wasting your time.

 

[alex9050]

I think you need to understand strucutres a bit more yourself.

A unit trust or any trust cannot distribute losses. What may be possible is that person A could borrow to buy units in a unit trust and if these units are income producing then person A may be able to claim a deduction on the interest for the loan they used to buy the units.

But if A owns the units then they will need to get the income from the trust in proportion of the number of units they own. There is little flexibility - or no flexibility. The trustee must give the unit holder the income of the unit holder could not claim a deduction. The units would also be property of A and since held personally then they are exposed to creditors.

This ends up very similar to owning in your own name, or in A's name. Same end result (with added complications).

But what is good is the flexibility to change things. Since the title to the property would be in the company name, the trustee, changes to the trust can be done without needing to change ownership of the land. This can be done by transferring units.

So, after a while the units held by A could be transferred to a discretionary trust or to B. If they are transferred to a discretionary trust then asset protection is strengthened (though still subject to clawbacks and weak overall) and the tax position is improved by adding the flexibility of a discretionary trust. So profits of the unit trust could flow thru to the DT and then out to the lowest income tax paying beneficiaries, including a bucket company if needed.

An added benefit is that the unit trust may be able to borrow to buy back the units and itself convert into a discretionary trust. The interest on this loan may be deductible.

A draw back is that units in a trust are dutiable property so the transfer may attract duty. Not sure about redeeming units. But if the trust is a VIC trust then there may be no stamp duty. If NSW duty would be 0.6% of the value of the transferred amount. But I think this is being abolished on July 1.

Another draw back is CGT on the transfer of units would be payable at market rates.

Sounds good in theory, but you will find it hard to get a loan that fits in and if you do then you will need to obtain permission from the mortgagee to transfer units etc.

Thanks Terry, this helped a lot.

Aaron, I'm sure you understand the benefit of a couple of hundred dollars saved over multiple properties, over multiple years. It's the little things that separate the average and excellent investors.


I spoke to someone who knows what he's doing with this type of thing, if anyone gets into this position.

He said that the best thing to do with a business partner was have a pty.ltd. company, a unit trust beneath that and then a discretionary trust beneath that again. When purchasing a new house, you put it into a separate trust. You roll your losses forward, but that's the most appropriate and suitable set up.

To get finance (<90%) in this position you have to meet with a finance person from a bank and make them aware of your trust structure, in the sense that it's exactly the same risk on their part as a personal loan.

Thanks for the help guys

 

[Aaron_C]

Aaron, I'm sure you understand the benefit of a couple of hundred dollars saved over multiple properties, over multiple years. It's the little things that separate the average and excellent investors.

I do - which is why I think your entire situation is ridiculous. What's the point of getting such a complicated structure if you can't even borrow money to become an investor in the first place? You are putting the cart before the horse.

 

[Rolf Latham]

We need the 90% LVR so we have enough to fund a reno and increase the equity to repeat the process again.

What do you mean by corporate trustees? Our broker was saying 90% was basically out of the question for a company/unit trust.

PS: Obviously we want everything ! Just haven't found a way to make it happen yet, haha.

GANB

Ta

Rolf

 

[The Y-man]

- Ability to claim business related expenses as part of the investment. (ie; home office space, internet, travel etc.) If we apply and invest personally, we miss out on a lot of available tax deductions

Can you explain this?

Why can't you claim this off your gross personal income? If you have a trust that is not cashflow positive, you'll trap the expenses.

We didn't bother with home office space though - CGT implications on your PPOR can become a pain.

The Y-man

 

[The Y-man]

- When the investment/s turns positive, the ability to distribute this income to the company as my partner and I will most likely be on the highest tax bracket.
?

Please remember that the corporate beneficiary still gets slogged 30% flat from the first $ of profit.

Despite all the whoohaa about high personal taxes, to be at 30% (even with cashflow positive residential ip's) would need to gross over $180k per person.

I do know some people who have taxable incomes over the $500k pa mark (well over actually) and yes for them it starts to make sense.... BUT for many years they earned peanuts.

I suggest if you are going in that direction, you can set it up when you start earning that sort of money, and deal with it then.

The Y-man

 

[Terryw]

And don't forget the spousal transfer strategy in VIC whereby spouses can transfer interests in property between themselves free of stamp duty. Combine this with a main residence CGT exemption and it will work out extremely well financially by buying the frist one or two in your own names.

 

[Marty McDonald]

Please remember that the corporate beneficiary still gets slogged 30% flat from the first $ of profit.

Despite all the whoohaa about high personal taxes, to be at 30% (even with cashflow positive residential ip's) would need to gross over $180k per person.

I do know some people who have taxable incomes over the $500k pa mark (well over actually) and yes for them it starts to make sense.... BUT for many years they earned peanuts.

I suggest if you are going in that direction, you can set it up when you start earning that sort of money, and deal with it then.

The Y-man

Exactly! Well said

 

[alex9050]

Please remember that the corporate beneficiary still gets slogged 30% flat from the first $ of profit.

Despite all the whoohaa about high personal taxes, to be at 30% (even with cashflow positive residential ip's) would need to gross over $180k per person.

I do know some people who have taxable incomes over the $500k pa mark (well over actually) and yes for them it starts to make sense.... BUT for many years they earned peanuts.

I suggest if you are going in that direction, you can set it up when you start earning that sort of money, and deal with it then.

The Y-man

Setting it up when earning that sort of money could cost ridiculous amounts. That's just silly. Better to get the structure right now. I like to think long term for a long term investment.

 

[The Y-man]

Setting it up when earning that sort of money could cost ridiculous amounts.

Interesting - prices must have gone up. It cost us about $1,200 or less to set it up when we needed it

The Y-man

 

[Aaron_C]

Setting it up when earning that sort of money could cost ridiculous amounts. That's just silly. Better to get the structure right now. I like to think long term for a long term investment.

In your case it is better to think about making money first. Stop thinking like a lawyer and think like an investor.

 

[Melbournian]

We need the 90% LVR so we have enough to fund a reno and increase the equity to repeat the process again.

What do you mean by corporate trustees? Our broker was saying 90% was basically out of the question for a company/unit trust.

PS: Obviously we want everything ! Just haven't found a way to make it happen yet, haha.

if you going to need a 90% LVR to fund a reno - best to save up a bit more when you in the highest tax bracket which is a minimum of 180K a year.

 

[alex9050]

Interesting - prices must have gone up. It cost us about $1,200 or less to set it up when we needed it

The Y-man

Stamp duty to transfer from someones personal name to a company trust structure. You might say, well you don't need to transfer that house into a trust, just each subsequent house. Well, what if I intend to earn over 180k in salary from my job?

Long term investment - Long term outlook.

 

[alex9050]

if you going to need a 90% LVR to fund a reno - best to save up a bit more when you in the highest tax bracket which is a minimum of 180K a year.

220k house with 90% LVR is about 55-60k cash on start up including a 20k reno and all fees. Saving another 20k could take a while - not to mention reduce the rate of return on my initial investment.

And just an update - 90% finance is available in our structure through ANZ, and our offer was accepted.