Trusts and Negative Gearing

[Robert]

Reply: 2.1.1.2.1.1.1.1.2
From: Robert Forward


The post I put about transferring a property across and carrying finance can also turn a company into a neutral tax position.

And this way you have tens of thousands of dollars coming into your pocket tax free.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

 

[DaleGG]

Reply: 2.1.1.1.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Robert!

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

The tax office do not consider this as being at arm's length because you are would be in a position to influence the trust.

Therefore, the trust is deemed to have bought the property at market rates regardless of the contract price. Similarly, you would be deemed to have sold the house at market rates regardless of the contract price.

I'm sorry to be difficult and pedantic on this issue, but, it is important to clarify the issue.

Dale

 

[Owen]

Reply: 2.1.1.2.1.1.1.2
From: Owen .


On 3/13/02 2:24:00 PM, Dale Gatherum-Goss wrote:
>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


What if you are just a director of a company and not an employee of it? Can you still gift yourself small items?

This is a great thread, lots of ideas to absorb and run past my accountant. Thanks guys.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"

 

[Owen]

Reply: 2.1.1.2.1.1.1.1.2.1
From: Owen .


On 3/13/02 2:56:00 PM, Robert Forward wrote:
>The post I put about
>transferring a property across
>and carrying finance can also
>turn a company into a neutral
>tax position.
>
>And this way you have tens of
>thousands of dollars coming
>into your pocket tax free.
>
>Cheers
>Robert
>
>The Sydney "Freestylers" Group
>Leader.

I guess if the numbers are balanced properly then this would work well. Rental income balanced by interest costs on loan plus distribution to pay for vendor finance. As the rent goes up over time the balance of the income can be paid out as vendor finance repayments meaning no tax for the trust. Nice.

Owen

"I'm excited!!" - Big Kev

 

[Robert]

Reply: 2.1.1.1.1.1.1.1.1.1
From: Robert Forward


So that works even better for selling across to a trust at an inflated price.

Even if you agree to carry a portion of the finance for the trust on an overpriced property of lets say 50% you will still only pay CGT on the market rates.

Market value = $200k
Sell to Trust = $300k (50% markup)

CGT by ATO is on the profit made on the $200k, so lets say it was purchased at $160k after all costs etc and owned for over 12 months. You've made a personal $40k profit as far as the ATO sees it, and you pay CGT on whats left after your expenses (including purchasers costs of cause) so you may land with a bill of $5-10k tax rather then having to claim as much as possible to cover the inflated purchase price.

And stamp duty will be on the contract price of cause.

And you still personally carry the finance at a higher amount and thus can still claim the extra amount back from the company as "Principle Payments" tax free.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

 

[WebBoard]

Reply: 3.1.1
From: Gordon Austin


Dale,

While inquiring about trusts a number of sources have advised to wait until legislative changes become clearer.

There is always talk about cracking down on some of the benefits of trusts. But with so many politicians using them it will be interesting to see what happens over time. However it has often been pointed out to me that their purpose is for asset protection and this is one area that should always be safe.

But the legislative risk is a concern because just like Super the rules keep changing.

Gordon

 

[duncan_m]

Reply: 2.1.1.2.1.1.1.1.1.1
From: Duncan M


On 3/13/02 2:54:00 PM, Dale Gatherum-Goss >

>Partnerships are dangerous
>things!!!

OK, I'll bite again

Are partnerships dangerous because all partners are joint and seperately liable for the debts of the Partnership?

Regards,

Duncan.

 

[Owen]

Reply: 2.1.1.1.1.1.1.1.1.1.1
From: Owen .


>>> And you still personally carry the finance at a higher amount and thus can still claim the extra amount back from the company as "Principle Payments" tax free.<<<

So you charge yourself interest then (my next question). I assume the vendor finance must be P&I but what kind of rate do you charge yourself? Is it fixed for the term of the loan? I assume you can take extra principle payments if available.

I suppose it just comes down to balance again - how much can the trust afford, how much income do you want to receive etc.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"

 

[Robert]

Reply: 2.1.1.1.1.1.1.1.1.1.1.1
From: Robert Forward


Hi Owen.

If you charge your company interest then you will pay tax on the interest component. If you just contract it that the company/trust pays you "Principle Payments Only" then all that is happening is it's a return of capital and thus not taxable.

As far as I see it you don't have to make it a P&I loan at all.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

 

[WebBoard]

Reply: 4.1
From: Simon St John


Hi Sim and Dale

Thanks for the response.

I guess that's where the problem can lie with a trust rather than say trading though a company.

You gain protection with a trust, but are hamstrung with profit distribution.

Old saying is you can't have your cake and eat it to I guess but if you're already in the top bracket and don't have kids or lower income partner to distribute to the trust option looks less inviting.

I had a trading company in a trust and eventually sold it to the trustee company itself to avoid this problem and just didn't want the same problem again if I wanted to run a business trading properties, for example.

Interested to hear the experts view on this - I'm still trying to work out the best way to go...

Cheers, Simon

PS: An afterthought. Another option is to consider having high growth, -ve geared properties in your own name, and +ve geared property in the trust. income from the trust distributed to you as beneficiary can then be met with deducations on -ve geared property.

 

[DaleGG]

Reply: 2.1.1.2.1.1.1.1.1.1.1
From: Dale Gatherum-Goss


Hi

Yes, absolutely!! This would worry me as investment assets are then at risk and O don't like that at all.

Dale

 

[DaleGG]

Reply: 2.1.1.2.1.1.1.2.1
From: Dale Gatherum-Goss


Hi!

Yes, a director works as well as an employee. In fact, most of the tax office definitions show them in the same light.

I'm glad that you have found this discussion interesting and helpful. Just be prepared that your accountant may not share your enthusiasm, or indeed, your new found knowledge. Just coach them!

Dale

 

[DaleGG]

Reply: 3.1.1.1
From: Dale Gatherum-Goss


Hi Gordon!

This is an interesting issue. The Government have a dilemma on their hands. On the one hand, they wish to show the common man in the street that they are doing something to stop trusts being "abused" by the wealthy.

On the other hand, as you correctly pointed out, most of our politicians use trusts for their own wealth.

I'll share another thought with you too . . .

Most of the real wealth in this country is controlled through trusts. That's a fact!

Who makes the donations to the political parties?

I do not believe that any major changes will happen to trusts and since they have been used as asset protection vehicles for over a thousand years(yes, since the days of the crusades) I do not see that anything much will change.

All mooted changes are quite small and the serious tax commentators believe that these changes will only enhance trusts anyway!

As always, seek your own independent advice blah, blah, blah!

Dale

 

[paulzag]

Reply: 4.1.1
From: Paul Zagoridis


I've never heard of an trust income distribution problem that couldn't be resolved by some creative thinking. (doesn't mean there isn't a first!).

A unit trust or trading company can be a beneficiary of a trust. Different classes of units or shares can flow returns nicely.

Also you can fix many of the cashflow problems by leasing and/or subleasing arrangements.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/

 

[WebBoard]

Reply: 4.1.1.1
From: Gerard Caruana


Hi folks, just extrapolating from Paul Zags post- We have a discretionary trust that pays distributions to a Pty Ltd company which pays the 30% tax, then gifts back to the trust.
This has the advantage of not having to include other family members etc in the distribution/gifting back game, which all got a bit strange in our extended family - the tax saving gained by utilising their marginal rates didn't justify the hassle or accounting fees.

Cheers
Gerard C

 

[WebBoard]

Reply: 4.1.1.1.1
From: Simon St John


Hi Gerard

That's a good option indeed and deals directly with my concern.

That would mean having two companies though would it - the trustee company and another company that is the beneficiary.

I presume that the trustee company can't also be a beneficiary in its own capacity as well as being the trustee for the trust?

On the other hand, just anticipating a response, perhaps an individual is the trustee instead?

Simon

 

[WebBoard]

Reply: 4.1.1.1.1.1
From: Gerard Caruana


Simon, I don't think that the trustee company can also be a beneficiary, probably unwise even if it were 'legal' - My advisors have told me to avoid having personal trustees to limit liability for the trustees actions/failures, i.e. a corporate trustee that is sued which is a 2 bob shelf co would just liquidate, and you would appoint a new 2 bob shelf co as the trustee. If you were an individual trustee, then your personal assets are up for grabs.

Hope this helps.
Cheers
Gerard C.

 

[WebBoard]

Reply: 2.1.1.1.1.1.2
From: Terry Avery


Hi Robert,

I am having difficulty wrapping my mind around what you are saying. Are you saying sell an IP with a value of $200k to a trust for $300k. You tell the bank it is worth $300k and the trust will borrow $150k.

What does the contract price say? You say you would pay stamp duty on $300k so I assume the contract says $300k.

But for the tax office the price declared is market value of $200k?

OK I have several fundamental problems here. How do you convince the bank that an IP is worth 50% more than market value? Don’t they do their own valuation which would show $200k (or less) and then have an LVR of 75% rather than your 50%?

Secondly how on earth do you convince the tax office that the capital gain is only $40k and not $140k when the contract presumably says you sold for $300k?

I would suspect such action would fall into the tax avoidance category. My understanding is that if you sold at a huge loss (below market value) they would assess it at market value and charge CGT on the difference plus penalties if they thought you were manipulating figures. Perhaps I don’t understand how the tax system works if you can sell something for above market value but the tax office will allow you to say, hey the market value is only $X so I don’t have to pay the real capital gain I made.

Maybe you haven’t given enough details on how this works, could you please explain so I understand it a bit better?

Cheers

Terry

 

[Robert]

Reply: 2.1.1.1.1.1.2.1
From: Robert Forward


Hi Terry

Those extra bits about CGT etc were put in after Dales comments. It would be best for him to answer those questions actually.


>I am having difficulty
>wrapping my mind around what
>you are saying. Are you saying
>sell an IP with a value of
>$200k to a trust for $300k.
>You tell the bank it is worth
>$300k and the trust will
>borrow $150k.

Yes, this is correct above.

>What does the contract price
>say? You say you would pay
>stamp duty on $300k so I
>assume the contract says
>$300k.

Yes.

>But for the tax office the
>price declared is market value
>of $200k?

This is what Dale is stating, the ATO will only look at market value of the property. (Dale to answer further)

>OK I have several fundamental
>problems here. How do you
>convince the bank that an IP
>is worth 50% more than market
>value? Don’t they do their own
>valuation which would show
>$200k (or less) and then have
>an LVR of 75% rather than your
>50%?

The bank more then likely won't do a valuation as it is only a 50% lend. It will depend on a bank by bank situation. Rolf will be able to answer here further.

>Secondly how on earth do you
>convince the tax office that
>the capital gain is only $40k
>and not $140k when the
>contract presumably says you
>sold for $300k?

Dale to answer here further, hopefully.

>I would suspect such action
>would fall into the tax
>avoidance category.

I doubt it cause I know of quite a few people that are actively doing this.

>My understanding is that if you
>sold at a huge loss (below
>market value) they would
>assess it at market value and
>charge CGT on the difference
>plus penalties if they thought
>you were manipulating figures.
>Perhaps I don’t understand how
>the tax system works if you
>can sell something for above
>market value but the tax
>office will allow you to say,
>hey the market value is only
>$X so I don’t have to pay the
>real capital gain I made.

Dale to help again please.

>Maybe you haven’t given enough
>details on how this works,
>could you please explain so I
>understand it a bit better?

I hope that Dales' comments will be able to straighten it out for you.

Cheers
Robert

 

[DaleGG]

Reply: 2.1.1.1.1.1.2.2
From: Dale Gatherum-Goss


Hi Terry!

Please understand that I NEVER EVER break the law. It is not worth it to me as doing so would have me disbarred from being a CPA and a tax agent and this would destroy my principle income . . .

However, I have successfully used the law to my advantage for over 20 years now.

S. 112-20(1) of the 1997 ITAA says that market value is to be used instead of the contract price when:

1. there was no cost involved; or
2. the taxpayer did not deal at arm's length with the entity in connection with the acquisition.

This law was included after a case at law:
"Gutwenger v FCT (1995) 30 ATR 82.

I'm sorry to be technical, but, since you questioned the integrity of what I said, I feel it important to prove to you that I am merely applying the law.

This law was included to stop people selling property at greatly reduced prices, or increased prices, to their family, friends, or related business entities such as companies and trusts.

The next step in Robert's scenario would be to arrange a formal valuation so that the Tax Office cannot argue with the value applied in the CGT calculation.

I hope that this helps place your mind at rest and assures you that I, in fact, protected Robert rather than encouraged him to abuse the law.

Dale