Trust questions

[goddessk]

Hi all, I feel like all I am doing lately is asking a million questions however I guess this is the only way one learns. So bear with me please.

I have a question that I couldn't really find an answer to searching through all of the threads. I've been to see an accountant (he is a new one for me) and he gave some advice however I would like to ask the opinion of those of you that have been doing this for a while.

Mr Accountant suggested that if I buy a -ve geared property (hoping for +ve but just in case I don't locate one) that I should buy it in my own name now as I pay the highest rate of tax so the -ve geared property will help to reduce that.

He then suggested that once the property becomes +ve cash flow to move it into a trust. I queried the stamp duty cost however he indicated that I would be missing out on the tax break in the mean time so it is more beneficial to get that now.

My questions are:

1. Does this sound feasible?
2. Assume that I would incur CGT when selling to the trust or is that not the case?
3. If I place it in a trust straight away then I lose the tax break and I incur the costs of maintaining a company/trust structure annually. I intend to buy more than one IP but will also go slowly at first. I also am not really clear at this stage what happens to a -ve geared property in a trust on its own. What happens to the shortfall between rent coming in and costs going out?
4. What is the implication of CGT when a property is in a trust and you sell the property? Do you get the 50% discount like buying it as an individual? Is it only if it is in a company that you don't?

When Mr Accountant and I sat and discussed all of this I felt clear I understood it however more questions have arisen for me as time has gone on and I research more.

Hoping some of you can help to clear up my confusion.

 

[coastymike]

Mr accountant obviously is not aware of the benefits of hybrid discretionary trusts. In my view buying an asset, other than your main residence, in your own name or a partner's name is one of the worst investment decisions. It does not provide any flexibility with respect to estate planning, asset protection or taxation.

A hybrid discretionary trust will allow you to achieve the benefits of negative gearing the property in your name (while you are the highest income earner) and then redeeming the special income units (note the refinancing principle may also be of benefit at this stage - it depends on the amount of prinicipal repaid on the original loan to purchase the special income units) and then distribute income to those on a lower marginal tax rate.

I would suggest you ask Mr Accountant about hybrid discretionary trusts and their application in your circumstance. If Mr Accountant stares blankly or says that trusts are the worst vehicle for negatively geared investments then it may be time to seek a different accountant.

I agree with you the stamp duty costs of this proposal could outweigh the benefits and would not be something I would recommend to any of my clients. Why pay double stamp duty when you don't have to. Does Mr Accoutant think that the NSW State Government is able to spend your money better than you can ? They seem to have done such a wonderful job with public transport, health, education, etc so maybe you should give them more money **note sarcasm**

Again you are spot on. You will also be liable for CGT when you transfer the property from your name into the trust. Even worse because you haven't even sold the property and so obtaining the cash to finance the capital gains tax payable on the transfer could be a challenge.

You have raised some good questions with Mr Accountant but in my view the advice only relates to a standard discretionary trust. Suggest you ask him about hybrids.

 

[Mry]

Coasty is spot on as usual.

 

[lizzie]

buy a copy of trust magic by dale gatherum-goss (sp?) from businessmall.com.au - is $99 but worth every cent. explains in simple language exactly what you need to know about the different types of trusts and their advantages.

lizzie

 

[Chilli]

Hi Coasty,
Do you know if a Disc. Trust can be "converted" to a HDT ?
Thanks.

 

[goddessk]

Thanks for the advice everyone. Will certainly pick up a copy of the book so that I can know what I am on about when I go back to Mr Accountant.

Speaking of which Coasty, I have just switched to this guy. The previous guy that has been doing my tax for ten years has never given me any advice to reduce the large tax amount that I pay so this one was recommended to me by a friend. I specifically set out to find a decent accountant to embark on my investing journey.

In my first meeting with him he seemed very helpful and explained things in a simple way to me. Obviously there is only so much you can ask (and retain) in a first meeting and I am discovering more things as I go along.

I've tried to locate a decent referral to an accountant that deals in property. Don't want to just pick anyone off the yellowpages. Have tried looking through the forums as well but to no avail. So in the absence of anyone else, Mr Accountant will have to do. Shame really as I don't know what I am doing yet and perhaps I may not get the right advice off him.

Anyone know a good accountant on the North Shore in Sydney?

 

[Mr. Fabulous]

goddessk,

http://www.strategicwealthmanagement.com.au/ - Nick is in Sydney

http://www.gatherumgoss.com - Dale is in Melbourne, but has clients all over. You don't necessarily need a local accountant. While I was in Melbourne, I went and saw Dale (who continues to be my accountant) twice. All other communication was via mail and email.

 

[goddessk]

Thanks Mark. Appreciate the help.

 

[bobby]

trusts

Coastymike,

What are your views regarding PPOR's inside a HDT????

Thanks

Bobby

 

[coastymike]

Goddess,

NickM would be your man. He is located in the City. This new accountant may seem nice but in my opinion if you want to become wealthy then you need good advisors. There are lots of nice accountants around who are inexperienced with hybrid trusts, demergers, small business cgt concessions, complex structuring advice, etc. Not that these people are not good for certain types of work but when things become more complex then you need to go to someone who understands these things.

As an example your GP might be a wonderful person but you wouldnt consult them for treatment of cancer, you would visit an oncologist.

If you are happy with the new person then stick with them. Just recognise that decision may cost you thousands to tens of thousands in tax. Good way to stay poor really.

 

[coastymike]

Bobby,

Im not a great fan of PPOR's in a trust for the following reasons :

1. You loose the main residence exemption;
2. You incur land tax; and
3. If you don't hold other properties in the HDT the ATO may apply Part IVA of the ITAA.

Unlesss they are structured similar to Janmor's case you really risk the whole arrangement being attacked.

 

[redwing]

CoastyMike..

Great post CoastyMike..enjoyed the read and your thoughts..


Goddessk..

I'd suggest going Direct to Dale's site and buying the book, also have a look at NickM's site and his opinions and Chris Battens on Trusts..



REDWING

 

[goddessk]

Thanks guys. Book is already ordered and on its way.

With regard to Mr Accountant, I would like to give him the benefit of the doubt as I haven't even asked him about hybrid discretionary trusts yet. Given that he didn't mention it, odds are he may not be familiar with complex structures however would like to see what happens before I bail out. If he looks blank, then I will go to the people suggested.

What happens to the shortfall between rent coming in and costs going out?

coastymike, I realised that you didn't provide advice on this particular question re trusts in the case of -ve gearing. Can you, or others, help me with this one please?

 

[Rolf Latham]

Hiya GK

In simple terms..............
With a HDT you borrow in your own name and the property is provided by the trustee as security for that loan.

The trust has no debt, but gets a rental income. Against that rental income we have all the usual expenses such as rates, insurance, maintenance, but not the interest. The trust therefore has an income to distribute.

The income is distributed to the income unit holder (you as the borrower) and the interest you have paid is then deducted against against your earnt and unearnt income. Voila - neg gearing in a trust.

Id say that your Acct is the same as 90 % of suburbans, they just dont know even though this type of structure is over 10 years old.

Often, accountants and brokers will even try to rubbish such a structure, because they are afraid of implementing and learning new things.

ta

rolf

 

[lizzie]

Hiya GK

Often, accountants and brokers will even try to rubbish such a structure, because they are afraid of implementing and learning new things.

ta

rolf

i had that problem with my old accountant - he set me up in a structure that was costing a fortune in tax as he didn't really understand trusts. unfortunately, at that time, i didn't either. once i read dale's book i tried to get him to change our structure but he was very resistant. i stuck with him for a while longer out of loyalty but at the end of the day, it's my money being lost ... so i am now with a new acct who is young, very dynamic, has his own property investments and knows exactly how things should be legally set up for best advantage.

the new acct is saving us a small fortune, so my advice is - if in doubt, move. don't persevere out of misguided loyalties or guilt. it is your money and needs to be cared for properly.

lizzie
all comments are my opinion only

 

[Aidie]

This has been great to read as it answers lots my questions.
I am in the situation where I have just realised that my accountant doesn't know the answers that I need in terms of HDT and general loan structure.
Not sure if it is appropriate to ask, but can anyone suggest someone in Brisbane. I understand that Dale and NickM are highly recommended and it is possible to communicate via email, but is there a face to face option for Brisbane?

 

[agent 86]

Aidie

Mry (post # 3 in this thread)
or Julia (Bantacs)

Click on the "members" link and check out all of Mrys & Julias posts (esp Julias website with her free booklets).

A86

 

[Mry]

Once i read dale's book i tried to get him to change our structure but he was very resistant. i stuck with him for a while longer out of loyalty but at the end of the day, it's my money being lost

The problem with changing structures once you realise what you should be doing is that it incurs stamp duty and capital gains most of the time, not to mention the time restrictions that currently exist in bankruptancy law for asset protection purposes. Sometimes changes are required to be made but the cost of doing so is too prohibitive and that traps the client into an atrocious structure that provides no benefit.

You should be starting out with the right structure from day one. It may be more expensive initially, more time consuming or requires more research, but it is worth it in the end.

 

[lizzie]

sorry myr - i may have been misleading - i meant he was very resistant to me trying to get him to change our structure for future purchases from that time. the ones we had to date have had to stay as is, as it wasn't worth moving them re stamp duty, but at least we got it right for the purchases since. better late than never.

lizzie

 

[Mry]

Nothing to apologise for Lizzie.