Trust questions

[A95]

Coastymike, Mry

I have a HDT. The trust owns two properties. One property I rent to myself.

Basically exactly the same situation as described by Rolf...
.................................................

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

..........................

When I went to my accountant he was very adamant that I shouldn’t claim any deductions against my other income for the losses on interest payments made on the loan which was taken to purchase the units in the HDT.

He has no problem with the other IP.

Should I worry that the ATO may apply Part IVA of the ITAA?

I also have two IPs outsde the trust in my own name.
What should I do??http://www.somersoft.com/forums/images/icons/icon11.gif
Red face

Thank you.

 

[Kiwi Investor]

Goddesk, will this be your first IP ?

If so I would not bother with any kind of structure until I had 2-3 properties.

Also ask yourself why I am purchasing this investment ? To minmize tax should not be the only consideration.

Cheers

 

[coastymike]

A95,

If you are receiving income from the HDT and the funds were borrowed with the purpose of acquiring income producing units then the interest would be deductible. Refer IT 2684.

Maybe your accountant is concerned that your main residence is also in the hybrid trust and you are negative gearing against your main residence. The problem with the main residence being in the trust and the loan taken out by yourself to acquire income producing units makes it very similar TR 2002/18 where the Commissioner argues that the interest is not deductible.

Whilst I do not recommend holding your main residence in a trust if the arrangement is structured similar to Janmor nominees, i.e. the trust borrrowed the funds in Janmor and NOT the individual as in TR 2002/18, then the deductions may not be disallowed. However Part IVA may certainly apply if the sole or dominant purpose is to gain a tax benefit. You would probably try to argue that you intended for the property to be rented at a future stage and therefore wanted flexbility with respect to estate planning and asset protection so acquired it in the trust.

I also would be concerned with your current arrangement if the trust holds your main residence and you are negative gearing against your main residence. You will need to argue Part IVA strongly with the ATO. If you try to argue asset protection they will simply come back to you and say there are other strategies for protecting your main residence so therefore the dominant purpose was to obtain a tax benefit. I don’t recommend this strategy to any of my clients.

However as stated im not a proponent of holding your main residence in a trust as

1. Loss of main residence exemption
2. Possible land tax implications
3. If rent exceeds deductible expenses then assessable profit being derived from non assesable amounts and
4. If using a discretionary trust then losses are trapped in the trust.

 

[A95]

coastymike,

Thank you very much for your clear explanation.
A while ago I was advised that renting a house from your HDT was one of the best structures one could have. Now it appears that's not necessary the case.

Well, probably it is safer not to play with fire!

 

[coastymike]

AD95,

Hybrid Trusts are excellent vehicles for holding investments but not for holding your main residence. If you are looking for asset protection then other strategies are available for protecting your main residence.

 

[redwing]

Structure

Are there any structures you can recommend or know of for this type of investment then Coasty Mike ? (renting an IP from another entity) such as having a company own it with a nomineee director (who you can appoint i.e solicitor/accountant) and dismiss as you see fit with appropriate paperwork completed.

Or then there's the way that's illegal and definetly not recommended
<edited>

I look at the points this way, am i wrong?

A95,

However as stated im not a proponent of holding your main residence in a trust as

1. Loss of main residence exemption
Dont sell and if you move into anotherproperty, the first becomes another one of your IP's rented to different tenants
2. Possible land tax implications
I look at this as the cost of doing business in Real Estate
3. If rent exceeds deductible expenses then assessable profit being derived from non assesable amounts and
Refinance and get another IP ?
4. If using a discretionary trust then losses are trapped in the trust.
Use the HDT rather than a DT for the - Gearing benefits ?

REDWING

 

[coastymike]

Redwing,

The problem with the company owing that asset is that you dont get the 50% CGT discount so you end up paying tax on the whole profit. If the company is a trading entity then you also have fringe benefits tax issues. Part IVA is also a consideration when trying to claim the main residence as a tax deduction.

1. The main residence exemption is in my view too valuable and one of the greatest concessions available to homeowners.
2. The value of land on my main residence is around $2M so that would be land tax of around $34K a year. Very costly.
3. Agreed
4. Same Part IVA issues and definitely problematic in light of TR 2002/18.

 

[thedude]

Great thread, a lot of q's answered for me personally. I too am after an accountant who knows what theyre talking about in regards to Hybrid Discretionary Trusts.

Can anyone recommend a good accountant in Adelaide?

Cheers

Damon

 

[redwing]

Thanks..

CoastyMike

Thanks for answering my posts on what must be basic issues for you, It's a complex issue for me that I'm trying to get my head around and that you obviously understand pretty well.

I appreciate your time and imput.

REDWING

 

[tubs]

Goddessk

Unfortunately, when you move the property into a trust you will occur stamp duty and CGT. Whatever you are likely to save in taxes while in your own name you will probably lose many more times in CGT and stamp duty costs. A $250k house could cost you up to $20k + to move in a few years time.

Tubs

 

[zed]

Can anyone recommend a good accountant in Adelaide?
Damon

It's easier to tell you who not to use, but I'd get in trouble!
I've spent a lot lately on getting specialist advide from the wrong people Expect to pay $200-300/hour for advice, even if it's useless)

Recommended:
Paul Sallis - also an investor & recommended from other posts
Jarrad Dunn from Perks - very competent with property issues

Good luck

 

[Renovice]

A very interesting thread indeed.

Coasty,
Learnt a lot from your posts. I note you are not a great proponent of having one's principle residence in a trust. I intend to purchase my first IP under a HDT to ultimately subdivide and develop. In the meantime, I would rent the existing dwelling to myself during the time it takes to obtain development approvals plus perhaps 3yrs till I start building. Would you still have reservations that you expressed earlier.

Cheers!!

 

[Philboticus]

I too am looking for an accountant, based in Melbourne. I recently contacted Gatherum-Goss but as luck would have it they cant take on any-more clients right now, due to being understaffed (must be popular!). I’ve been lurking around the forum for a little while now, and have decided to take the IP plunge but am in need of some serious guidance (in the next year I’ve also got to pay for a wedding/honeymoon and am in desperate need to buy a new(ish) car).

Does anyone know of someone else in the accounting field that fits the bill?

Great thread, great Forum!

 

[coastymike]

Yes my response would be different.

If you purchased the property with the intention on making a profit on sale as opposed to making a gain as a result of a mere realisation of a capital asset then the asset will be trading stock and subject to being on revenue account as opposed to being on capital account.

A HDT will provide a higher degree of flexibility with respect to the distribution of profits on sale of trading stock.

Need to discuss the implications of this being trading stock and how to account for it during the various phases. Re development and subdivision consider :

1. Capital vs Revenue
2. Deeds of Partition
3. Rights to occupy
4. Ultimate holdings for subdivided and developed land
5. Consider a separate entity for undertaking the construction if you are doing it yourself and a separate entity for the land holdings.

 

[ggumpshots]

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.

Hi CoastyMike,
AS an overseas resident are there additional rules / complications/ concerns I may have imposed if I setup a HDT for property investment?

 

[kmranu]

I too am looking for an accountant, based in Melbourne. I recently contacted Gatherum-Goss but as luck would have it they cant take on any-more clients right now, due to being understaffed (must be popular!). I’ve been lurking around the forum for a little while now, and have decided to take the IP plunge but am in need of some serious guidance (in the next year I’ve also got to pay for a wedding/honeymoon and am in desperate need to buy a new(ish) car).

Does anyone know of someone else in the accounting field that fits the bill?

Great thread, great Forum!

Coastymike himself is a very good accountant well versed in IPs and various trust structures. NickM is another, as suggested in earlier in this thread.

 

[redwing]

Coastymike himself is a very good accountant well versed in IPs and various trust structures. NickM is another, as suggested in earlier in this thread.

However, I dont think either is a proponent of the PPoR ( read IP as it no longer becomes a PPoR per se as 'you' dont own it) structures used to rent from a trust?? I may be wrong..

REDWING

 

[Mry]

However, I dont think either is a proponent of the PPoR ( read IP as it no longer becomes a PPoR per se as 'you' dont own it) structures used to rent from a trust?? I may be wrong..

REDWING

If they aren't proponents, that should tell you something. hehe.

 

[D.T.]

Hi,

When Dale GG used to post on here frequently he was a proponent of having a PPOR in a trust. Predominantly to keep it away from creditors, but I guess the tax breaks are good too

 

[JamesGG]

Hiya!

As I understand it, one of Dale's main reasons for keeping a PPOR in a trust (beyond the obvious asset protection) is simply that so far, most of the PPOR's have been bought with the intent of them becoming IP's a few years down the track when we moved house (again).

So, the CGT issue really is irrelevant, and the other tax benefits are nice, too

And more often than not, we'd rather an IP in a trust than in one's own name.

Enjoy!

James.

Hi,

When Dale GG used to post on here frequently he was a proponent of having a PPOR in a trust. Predominantly to keep it away from creditors, but I guess the tax breaks are good too