Unit trust advantages

It seems common practice to sell a private property to a unit trust which may mean more deductible interest.

Other than maximising tax deductions, what are the other advantages/purposes of holding a previously private property in a unit trust?

I believe asset protection is NOT one of those advantages. Estate planning is mentioned but I'm not sure how that applies.
 
Plenty of advantages of using a UT v using an individual to own property

1. ability to transfer part of the property without changing title. You can transfer the units.

2. The transfer of units can be done at reduced stamp duty or no stamp duty. In NSW it is currently 0.6% of the value of the units. Compare this to transferring ownership of the property. NSW is still saying that stamp duty on the transfer of units will be abolished at a later date too.

3. Ability to save CGT by transferring the units in stages. ie. instead of selling all the property this year you could sell half now and half next year to reduce CGT. (this could be done in personal names but more cumbersome).

4. Ability to get a residential property into a SMSF. Normally prohibuted by the SIS act, but there is an exemption for the transfer of units from a person or a DT to a related SMSF, SIS Reg 13.22C.

5. Ability to borrow indirectly for private expenses and have the interest deductible. e.g. You own units in trust, equity builds up, you sell units to a DT or spouse who borrows to buy the units. Interest deductible to the borrower. Cash used to pay down private debt. stamp duty may be payable depending on state and CGT would be payable too.

6. If the unit trust is a fixed unit trust then ability to access the land tax free thresholds in NSW and Vic, not sure about other states.

7. Ability to keep the ownership of the units secret. Ownership of the land will be the trustee and this is publically searchable, but ownership of the units is a private arrangement and not searchable. Compare this to a company - all shareholders are recorded and their DOBs and home addresses is searchable by the public.

8. Ability to negative gear by the unit owners borrowing to acquire the units. Interest can be deductible against their personal income.

9. Ability to improve loan serviceability. say you owned a property and it had build up heaps of equity, but you couldn't access it because of a major credit default, or because you were not working. You would be stuck. But, with a unit trust you could just insert a new director to the trustee company and use their income to service.

10. Estate Planning. It may be easier to leave control of the in the trust property to someone by making sure they control the trustee company. This can be done without probate, and even bypassing probate. You can do this via shareholdings of the unit trust corporate trustee. Either have these shares owned by a different trust or pass them on to someone while you are alive.

11. Asset protection. Trust assets don't fall into the hands of trustee in bankruptcy, but units will if you personally own them. More asset protection than owning in your own name, but much less than a discretionary trust. Terms of the trust can also slow down the trustee in bankruptcy taking control and selling property.

12. Asset protection in death. Generally trust assets do not form part of your estate, so less chance of the UT assets being affected by a challenge to your will, such as Family provision challenge. But in NSW this is NOT the case.

13. Ability to jointly purchase a residential property with a SMSF as tenants in common.

14. Ability for a SMSF and a related party to each separately own units in a unit trust which owns residential property. The units owned by the individual could gradually be sold over to the SMSF as it builds up more cash (from contributions and earnings etc).

15. Ability to extract money from your super, indirectly. eg. imagine you had a UT which owned property purchase for $100,000 but now worth $300,000. You also had $300,000 in super. Your SMSF could buy the units from you and give you $300,000 cash (think i covered this above??_)

16. Ability to pledge the units as security under the Personal Property Security Act.


These are just off the top of my head and no one should try these at home without supervision by a lawyer as there are many regulations and laws surrounding this sort of stuff and easily to get things wrong.
 
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Disadvantages

There are none. (only joking).

1. Tax complexity

2. Legal complexity

3. Set up costs

4. Running costs

5. Loan app fees can be higher - bank reviewing deed etc

6. Interest rate can be higher - may not get same professional package discounts with some lenders, such as ANZ

7. Can be more difficult to get finance sometimes.

8. In some states, such as NSW, there may be more stamp duty payable on the mortgage.
 
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Love your work Terry.

Seems mostly a person vs UT viewpoint though. Care to share more of a DT vs UT viewpoint?
 
A DT...

Can't do most of what a UT can.

Cannot transfer a residential property to a SMSF for example (if related parties).

No access to the refinancing principal

Control could be passed to another beneficiary, but hard to pass to a stranger who does not come under a class of beneficiary

The greatest thing about a discretionary trust is, depending on the deed, is that no beneficiary has any interest in the trust that amounts to property. So if a beneficiary were to go bankrupt, their trustee in bankruptcy will 'stand in their shoes' but not be able to get directly at the trust assets. (plenty of indirect ways though).
 
Oh wow, thank you very much for your description Terry. I was expecting 1-2 answers but wasn't expecting an answer that takes 2 posts! Thank you again for sharing your expertise, and I take your advice re: seeking adult supervision.
 
14. Ability for a SMSF and a related party to each separately own units in a unit trust which owns residential property. The units owned by the individual could gradually be sold over to the SMSF as it builds up more cash (from contributions and earnings etc).

15. Ability to extract money from your super, indirectly. eg. imagine you had a UT which owned property purchase for $100,000 but now worth $300,000. You also had $300,000 in super. Your SMSF could buy the units from you and give you $300,000 cash (think i covered this above??_)

Hi Terry, wondering if the in-house asset rules for the SMSF will come into play as well here? limited to < 5%of the fund assets.
 
Plenty of advantages of using a UT v using an individual to own property

1. ability to transfer part of the property without changing title. You can transfer the units.

2. The transfer of units can be done at reduced stamp duty or no stamp duty. In NSW it is currently 0.6% of the value of the units. Compare this to transferring ownership of the property. NSW is still saying that stamp duty on the transfer of units will be abolished at a later date too.

3. Ability to save CGT by transferring the units in stages. ie. instead of selling all the property this year you could sell half now and half next year to reduce CGT. (this could be done in personal names but more cumbersome).

4. Ability to get a residential property into a SMSF. Normally prohibuted by the SIS act, but there is an exemption for the transfer of units from a person or a DT to a related SMSF, SIS Reg 13.22C.

5. Ability to borrow indirectly for private expenses and have the interest deductible. e.g. You own units in trust, equity builds up, you sell units to a DT or spouse who borrows to buy the units. Interest deductible to the borrower. Cash used to pay down private debt. stamp duty may be payable depending on state and CGT would be payable too.

6. If the unit trust is a fixed unit trust then ability to access the land tax free thresholds in NSW and Vic, not sure about other states.

7. Ability to keep the ownership of the units secret. Ownership of the land will be the trustee and this is publically searchable, but ownership of the units is a private arrangement and not searchable. Compare this to a company - all shareholders are recorded and their DOBs and home addresses is searchable by the public.

8. Ability to negative gear by the unit owners borrowing to acquire the units. Interest can be deductible against their personal income.

9. Ability to improve loan serviceability. say you owned a property and it had build up heaps of equity, but you couldn't access it because of a major credit default, or because you were not working. You would be stuck. But, with a unit trust you could just insert a new director to the trustee company and use their income to service.

10. Estate Planning. It may be easier to leave control of the in the trust property to someone by making sure they control the trustee company. This can be done without probate, and even bypassing probate. You can do this via shareholdings of the unit trust corporate trustee. Either have these shares owned by a different trust or pass them on to someone while you are alive.

11. Asset protection. Trust assets don't fall into the hands of trustee in bankruptcy, but units will if you personally own them. More asset protection than owning in your own name, but much less than a discretionary trust. Terms of the trust can also slow down the trustee in bankruptcy taking control and selling property.

12. Asset protection in death. Generally trust assets do not form part of your estate, so less chance of the UT assets being affected by a challenge to your will, such as Family provision challenge. But in NSW this is NOT the case.

13. Ability to jointly purchase a residential property with a SMSF as tenants in common.

14. Ability for a SMSF and a related party to each separately own units in a unit trust which owns residential property. The units owned by the individual could gradually be sold over to the SMSF as it builds up more cash (from contributions and earnings etc).

15. Ability to extract money from your super, indirectly. eg. imagine you had a UT which owned property purchase for $100,000 but now worth $300,000. You also had $300,000 in super. Your SMSF could buy the units from you and give you $300,000 cash (think i covered this above??_)

16. Ability to pledge the units as security under the Personal Property Security Act.


These are just off the top of my head and no one should try these at home without supervision by a lawyer as there are many regulations and laws surrounding this sort of stuff and easily to get things wrong.

What a great post.
 
A DT...

No access to the refinancing principal

Hi Terry

Fantastic posts.

Not sure what you mean here though? There is nothing to stop a DT tapping the equity in a property and using it elsewhere?

Also, DTs of course have the benefit of being able to stream income to low income beneficiaries, as well as protect assets from potential gold-digging spouses of beneficiaries.
 
Hi Terry

Fantastic posts.

Not sure what you mean here though? There is nothing to stop a DT tapping the equity in a property and using it elsewhere?

Also, DTs of course have the benefit of being able to stream income to low income beneficiaries, as well as protect assets from potential gold-digging spouses of beneficiaries.

Yep, but with a unit trust the units could be sold to another related party who could borrow do buy. Cash released could be used to pay down PPOR loan, for example. Interest would be deductible as purpose is to buy income producing assets.

With a DT you could borrow, but interest wouldn't be deductible if using money to pay down private debt of a beneficiary.
 
Oh wow, thank you very much for your description Terry. I was expecting 1-2 answers but wasn't expecting an answer that takes 2 posts! Thank you again for sharing your expertise, and I take your advice re: seeking adult supervision.

Thanks. My post will be on some accountant's blog under their name in no time...
 
3. Ability to save CGT by transferring the units in stages. ie. instead of selling all the property this year you could sell half now and half next year to reduce CGT. (this could be done in personal names but more cumbersome).

Is this easily done? Or does this require special conditions and some specific structuring etc with very adult supervision?
 
Is this easily done? Or does this require special conditions and some specific structuring etc with very adult supervision?

Transferring units is done privately. Just need to follow the rules in the deed, enter a transfer agreement and issue certificates to the unit holders.

However it is tricky, and many issues involved, so you should seek legal and tax advice on:
1. Values of the transfer
2. deductibility of interest
3. CGT and income tax consequences
4. stamp duty consequences
5. land tax consequences
6. legal consequences of disposal of assets to another entity such as
asset protection
estate planning
effect on loan agreements
mortgaging or security arrangements
etc etc

Remember, you don't know what you don't know. If you didn't you woudln't know you didn't know it.
 
Unit Trust

Terry gave great summary but I will add:

1. In NSW a standard unit trust shouldnt own property (on land) as terryw mentioned but there is a solution. A unit trust which is not a "fixed" trust would lose the land tax threshold so be taxed on every $ of unimproved value. ie a homeunit with $50K of land value is taxed on each $. A NSW Land Tax Unit Trust should be used.

2. Duty ?? No. Units can be redeemed first and new trust units reissued. This can avoid a stack of duty. Transfer of unitholding is dutiable however. So why do it ?? Its not avoidance to redeem and reissue units. Its a normal trustee role and contained in the deed. Ditto a unit trust should be settled ith nomial units first THEN issue more units to avid OSR assessing duty on trust value rather than on basic deed.

3. The double CGT issue can bite...Whats that ?? Its complex but a unitholder has to be careful that trust income arising from the trust capital gain and the CGT event on units is correctly done or double CGT can occur. Strategies that span multiple years could be affected - I have seen some commenty suggesting this as a "new" SMSF strategy to get around the proposed (???) $100K income exempt limit. I'm not convined it would always work...Some deeds, how resolutions made etc....

4. SIS Reg 13.22 comes with a long long long time of conditions. For example the unit trust should own NO OTHER INVESTMENTS other than one property and one bank account. No CMTs. Why one IP ??? Two or more properties can trigger a serious CGT problem. I saw a taxpayer once make a cap gain when he sold property for a loss......Think about it.


Paul
www.pricefinancial.com.au
 
thanks Paul,

And re you last point, that is why it is a good idea to hold one property per unit trust.

Another reason is the land tax thresholds in some states and land rich provisions - holding more property means potentially more stamp duty. eg. in NSW it is $2mil in land holdings.

It is a pity the NSW Government has delayed the abolition of stamp duty on the transfer of units/shares 2 years in a row.
 
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