Trusts and Negative Gearing

From: Even Steven


Hi gurus
Tell me, is it possible to have negatively geared properties held in a trust and still get the income tax benefits of negative gearing against your salary.
Thanks
 
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Reply: 1
From: Dale Gatherum-Goss


Hi

No, you personally cannot get a tax advantage from a negatively geared property held within a trust.

However, as so often happens, a few years down the track the property is no longer negatively geared and if it is held in a high income earner's name, we have a problem

The same goes for a time when the property is sold and CGT is payable.

The benefit of a trust is the longer term flexibility to structure your affairs so that your assets are protected and, you pay as little tax as possible both now and in the future.

I hope that this helps

Dale
 
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Reply: 2
From: KJL .


This may be going over old ground, but has anyone ever done a 'pros & cons' posting on (what I assume must be discretionary) trusts and why they're used in IP investment?

And if so, where does it live? I've looked elsewhere in the forum and can't see one.
 
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Sim

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Reply: 2.1
From: Sim' Hampel


From the "Apprentice Millionaire Guide" forum:

Topic: Business Entity (1 of 20), Read 667 times
Date: Thursday, March 01, 2001 11:28 PM
Outline: Asset protection, tax minimization and borrowing capacity are discussed IRT company/trust structures.
http://bne003w.server-web.com/~wb013/read?116,30


 
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Reply: 2.1.1
From: Dale Gatherum-Goss


Hi Sim!

I couldn't open that file . . . maybe I'm doing something wrong.

In a nutshell, the benefits of a trust are many fold:

Asset protection. If a trust is established properly, then it is virtually impossible for the assets of the trust to be taken away from you. This can be a very powerful "comfort" to anyone in business who wants to ensure that their wealth is protected from attack.

Flexibility. A trust allows income and capital gains to be distributed at the lowest possible tax rates.

Flexibility (again). A trust allows for essentially private expenses to be claimed as a tax deduction as we discussed at the pub crawl the other day.

Estate Planning: A trust allows assets to be passed between generations without tax and stamp duty applying.

I know that I am biased, but, I believe that they are wonderful structures in which to hold assets.

Dale
 
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Reply: 2.1.1.1
From: Owen .


Hi Dale,

Following on from Even Stevens post, what if the asset held in a trust is negatively geared?

If the trust is not making any money (initially) and a property held in it is in negative cashflow, then there can be no negative gearing tax benefits. No profit, no tax paid, no claim.

I assume that the trust accounts would have to be fed externally with cash (ie from personal incomes) in order to pay for the loan and this money can be recovered later. Do you see this as viable in the short term until the cashflow in the trust becomes positive or do you belive in positive cashflow only for a trust structure?

I guess a small LOC in the trust could cover the shortfall in cashflow without making too much of a problem if managed well. Just have to be careful of claiming interest on interest. I guess it depends on how much that interest on interest is before worrying about claiming it at all. Just thinking out loud here.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.1.1.1
From: Dale Gatherum-Goss


Hi Owen

If the trust owns an asset that is negatively geared, then the trust must either have a LOC in place to cover the shortfall; or, have a cashed up bank account to cover the shortfall; or, must borrow money from the people who control the trust.

Yes, this is viable!

Unfortunately, too many people take a short term approach to the issue and then wonder why they are stuffed later on when they either have a positive cashflow property, or, sell it for a nice capital gain.

A trust is like a new puppy. They both have settling in problems, and are both meant to be held for life.

Have fun and thanks for asking

Dale
 
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Reply: 2.1.1.1.1.1
From: Robert Forward


Here is a scenario that is out of the box that may help with these situations. Please DO NOT take this as advise, it is only posted as a suggestion and that you need to take this information to your accountant and have them work out the details properly.

You own a property worth market value of $200k (I'll use straight figures here) in your personal name. You want to move it across to a company/trust structure. You owe $150k on a loan and it rents for $300pw (so basically positively geared)

Yes, you will have to sell it across, so why not sell it over to your "protection" structure for $300k, there is no law stopping you from selling it at this price.

Your protection structure will need to take out a loan of more or less $150k to pay out the existing mortgage, then you personally carry the finance for the remainder of the principle (in effect you are vendor financing your company/trust). So your company trust owes you $150k, and in effect the first $150k that the company/trust earns can go straight into your pocket tax free as it is paying out the remainder of the "Principle" on the property.

Yes, you will need to pay Stamp Duty on he $300k, but so what? If you are going to be able to earn $150k tax free from your company in the future it will save you many times more dollars then a measly few thousand dollars in stamp duty.

Yes there is an issue of Cap Gains Tax. We'll you may be able to structure the contract so the VENDOR (you selling) pays all BUYERS (your company/trust) costs, whatever they may be. This should help lower your payable CGT that you need to pay and a good accountant should be able to lower your CGT efficiently enough.

Another advantage is that your company/trust then retains a low LVR, in this case it is 50%LVR and the banks are going to love you for that and future purchases should be easy for the company/trust structure.

Anyway, this is something I have done, but only with the guidance of my creative accountant.

Disclaimer: This is only a suggestion and be read as such. Do your own Due Diligence with your nominated accountant or other qualified persons as this is NOT ADVISE.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 3
From: Simon St John


Question for Dale....

Is it true that one problem of a trust is that any profit must be distributed?

If the trust makes a profit but you don't want to distribute it to the beneficiaries, what can you do?

Also, what is your view of Robert's very creative suggestion of loaning to your own trust?

Cheers, Simon
 
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Reply: 2.1.1.2
From: Duncan M


>Flexibility (again). A trust
>allows for essentially private
>expenses to be claimed as a
>tax deduction as we discussed
>at the pub crawl the other
>day.

Could you expand on this one a bit Dale?

Many thanks,

Duncan.
 
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Sim

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Reply: 4
From: Sim' Hampel


You don't have to physically distribute the cash... a "book entry" is sufficient indicating who it was "distributed" to. The money is treated like it was distributed and then reinvested (or loaned, or whatever) back to the trust. Of course the beneficiary would pay tax on the distribution as if they had actually received it.

(am I right Dale ?) ;-)

 
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Reply: 2.1.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Robert!

Great stuff!!!! The only issue that I have is that you would pay CGT on the market value of the house regardless of the contract price because the tax laws says that you are not dealing with the trust "at arms length".

This helps your thoughts though . . .

Dale
 
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Reply: 2.1.1.2.1
From: Dale Gatherum-Goss


Hi Duncan!

I wondered whether anyone would bite . . .

Yes, the trust (as can a company) can buy some things for the individuals such as:

movie tickets
alcohol
chocolates
sex toys (yes, I did say that!!)
etc etc etc

Basically, the trust can do this before tax (hello Kiyosaki fans!!) and to do so will allow you to keep more money in your own pocket because of paying less tax.

The rule here is that a small gift or reward is a tax deduction tot he trust that would not be tax deductible to the individual. Furthermore, the trust does not pay FBT because the gifts are given infrequently, and, each one is below $100.

Does this help?

Dale
 
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Reply: 2.1.1.2.1.1
From: Duncan M


Thanks Dale,

I see now.

Would it be true that this concept would apply to any non-individual entity correct?

Including Pty Ltd's and Partnerships?

ie, its not specifically a Trust thing is it?

Many thanks for feeding my bite.

Regards,

Duncan.
 
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Reply: 2.1.1.2.1.2
From: Ian Findlay


Dale,

Now we know why you are soon keen on trusts! Especially no 4.

Ian

> movie tickets
> alcohol
> chocolates
> sex toys (yes, I did say that!!)
> etc etc etc
>
> Basically, the trust can do this before tax (hello Kiyosaki fans!!) and to
do so will allow you to keep more money in your own pocket because of paying
less tax.
>
> The rule here is that a small gift or reward is a tax deduction tot he
trust that would not be tax deductible to the individual. Furthermore, the
trust does not pay FBT because the gifts are given infrequently, and, each
one is below $100.
>
> Does this help?
>
> Dale
>
>
>
> To reply: mailto:propertyforum.26388@bne003w.webcentral.com.au
> To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
> To login: http://bne003w.webcentral.com.au:80/~wb013
>
 
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Reply: 3.1
From: Dale Gatherum-Goss


Hi Simon!

I've commented on Robert's thoughts already.

As always, there is always more than way to skin a cat. We can not distribute the profit and allow the trustee to pay tax at 48.5% if we want.

Alternatively, as Sim pointed out, we can make book entries within the trust and keep the cash for another deal. The problem here is that the beneficiary pays tax on the distribution at their marginal tax rates and may not have the cash to pay the tax. Furthermore, the beneficiary can demand to be paid the full amount owing to them at any time, which can be a problem . . .

One way around all this is to pay the profit to the individual concerned and have them return most of the money to you as a loan out of love and devotion.

Bye the way, I distribute profit to my nieces and nephews every year. I then use this same profit to buy them presents for Christmas and birthdays and thus I can show that I have paid the loan in full.

Look closely at the trust deed, it will show quite a few possibilities if it has been drafted well.

Have fun

Dale
 
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Reply: 2.1.1.2.1.1.1
From: Dale Gatherum-Goss


Hi Duncan!

No, a trust and company can do much the same in this regard. However, a partnership does not allow the same flexibility because "mum and dad" are not employees of the partnership.

Dale
 
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Reply: 2.1.1.1.1.1.1.1
From: Robert Forward


Yep, that is fine cause you are selling the property at above market rates from your name to your company/trusts name.

At no stage should you be hit with that problem cause it's at arms length and above market values.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 2.1.1.2.1.1.1.1
From: Duncan M



>However, a partnership does
>not allow the same flexibility
>because "mum and dad" are not
>employees of the partnership.

I see.

In order to benefit from this concept if you're running as an indvidual or a Mum and Dad parternship is to move an amount of money out of the Parternship (or individual) into a structure such as Pty Ltd company in such a way that the money out is a deduction to the individual or partnership.. From their it could be whittled away as you described leaving the Company with a neutral tax position? Assuming no other income..

Would an annual comprehensive analysis of my investments by a company be an allowable deduction to me?

Kind Regards,

Duncan.
 
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Reply: 2.1.1.2.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Duncan!

Yes, an annual review of your investments is a tax deduction.

The cost of having both structures is cumbersome and probably not worth the hassles involved.

I would merely take the partnership and make it into a company or trust. Partnerships are dangerous things!!!

Dale
 
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