Unit Trust to purchase the property to live in

[Obaba]

We are planing to purchase the property (around $700,000) to live under unit trust. Originally we thought having Wife as 100% unit holder and borrow 80% plus 20% equity but even we might be able to claim the interest (we are aware of TR 2002/18) against her personal income its effect is minimum as her income is low. Husband income is higher but he is in risk occupation so we can't use his name.

The reason to purchase under unit trust is to have flexibility as the property will be developed later on and possible to have SMSF involved.

The option we are now considering is:

Wife is 100 % unit holder but only purchase the unit of $140,000 (20% of $700,000) using equity of another IP.
Unit Trust then borrow the lest. After taking out expense and interest from the rent the Unit Trust has the loss of $$.
Unit Trust is also a beneficiary of another trust (Discretionary), which Husband income goes. Therefore the loss can be offset via that income.

The benefit of new structure is that Wife can still claim the interest against her personal income. At this time the loan is entirely secured by the separate property it won't be the same as the case referred in TR 2002/18 (the loan is secured by the property to purchase). Hence we escape ATO radar or it is just wishful thinking?

Also as the loss will be off-set indirectly by Husband income, it s more tax effective without losing asset protection side (assuming wife doesn't do anything silly to get sued).

Is this new structure workable? Any comment would be appreciated.

 

[Marty McDonald]

I can't help but think this would be deemed an avoidance scheme but is just my laymans opinion. How is the trust earning it's income is my sticky point, rent from an owner occupied home? Hmmm

 

[Peter_Tersteeg]

I'd question the assumption that you get good asset protection from a unit trust. The units of ownership are essentially assets against each unit holders name and can be part of an estate. If you're looking for asset protection, a discressonary trust is far better.

I'd also question if you actually need asset protection. Some people do, most don't. It's worth really thinking about.

Negative gearing via the unit trust is also a little grey in this case. You're planning to live in the home and negative gear the interest and other expenses, but this isn't exactly 'arms length'. I believe it can be done, but you definitely want to get advice from a tax specialist before going down this route.

Finally, if you purchase via a trust of any kind, you won't get any capital gains concessions when you sell.

I think perhaps you're trying to be a little too creative in this case. 100% ownership in wifes name also provides a possible level of asset protection. I wouldn't bother trying to deduct interest for a PPOR at all.

 

[Aaron_C]

finance for unit trusts is a pain - please reconsider.

 

[Terry_w]

We are planing to purchase the property (around $700,000) to live under unit trust. Originally we thought having Wife as 100% unit holder and borrow 80% plus 20% equity but even we might be able to claim the interest (we are aware of TR 2002/18) against her personal income its effect is minimum as her income is low. Husband income is higher but he is in risk occupation so we can't use his name.

The reason to purchase under unit trust is to have flexibility as the property will be developed later on and possible to have SMSF involved.

The option we are now considering is:

Wife is 100 % unit holder but only purchase the unit of $140,000 (20% of $700,000) using equity of another IP.
Unit Trust then borrow the lest. After taking out expense and interest from the rent the Unit Trust has the loss of $$.
Unit Trust is also a beneficiary of another trust (Discretionary), which Husband income goes. Therefore the loss can be offset via that income.

The benefit of new structure is that Wife can still claim the interest against her personal income. At this time the loan is entirely secured by the separate property it won't be the same as the case referred in TR 2002/18 (the loan is secured by the property to purchase). Hence we escape ATO radar or it is just wishful thinking?

Also as the loss will be off-set indirectly by Husband income, it s more tax effective without losing asset protection side (assuming wife doesn't do anything silly to get sued).

Is this new structure workable? Any comment would be appreciated.

Wife may only be able to partially claim the interest.

I am confused where you say wife is 100% unit holder but will only own 20% worth of units?? Could you please clarify this?

 

[Terry_w]

I can't help but think this would be deemed an avoidance scheme but is just my laymans opinion. How is the trust earning it's income is my sticky point, rent from an owner occupied home? Hmmm

The theory is that the tenants would rent the home at market rates from the trust. The ATO seems to think similar arrangements are domestic arrangements and wants to deny the interest.

 

[Obaba]

I think perhaps you're trying to be a little too creative in this case. 100% ownership in wifes name also provides a possible level of asset protection. I wouldn't bother trying to deduct interest for a PPOR at all.

PT _bear
Yes I feel the same that I am getting too creative
We have PPOR currently living under wife's name only and we keep it to rent out using 6 year rule. The litigation against husband has happened before (still is as settlement has not reached).

If this is the rental property there is any benefit to purchase under Unit Trust or as Aaron_C said it is just anything but pain?

Obama

 

[Rolf Latham]

finance for unit trusts is a pain - please reconsider.

HDTS are worse : )

Most lenders will do units to a moderate LVR

ta

rolf

 

[Mick C]

If this is the rental property there is any benefit to purchase under Unit Trust or as Aaron_C said it is just anything but pain?

Obama

not to mention the CGT rules are diff under a trust...

 

[Aaron_C]

If this is the rental property there is any benefit to purchase under Unit Trust or as Aaron_C said it is just anything but pain?

I don't favour it at all unless there is a good reason. I have a unit trust but that is for a commercial project where the stakes are bigger. For residential properties I hardly think it is worth it.

 

[Obaba]

Wife may only be able to partially claim the interest.

I am confused where you say wife is 100% unit holder but will only own 20% worth of units?? Could you please clarify this?

That's a part I am confused myself. I though the trust also borrow directly from the bank, instead of unit holders to purchase the units to fund all. Or if wife purchase $140,000 worth units it should say wife is 20% unit folder? If that's the case who has the other 80%.? Unit Trust itself?

Or only way to fund is either the trust borrow 100 % (80% + 20% deposit) or the unit holders fund via purchase the units 100% ?

I really like to understand more about how the unit trust work.

 

[redwing]

Who's or what's steered you down this path, an Adviser, something you read or heard about?

 

[Terry_w]

That's a part I am confused myself. I though the trust also borrow directly from the bank, instead of unit holders to purchase the units to fund all. Or if wife purchase $140,000 worth units it should say wife is 20% unit folder? If that's the case who has the other 80%.? Unit Trust itself?

Or only way to fund is either the trust borrow 100 % (80% + 20% deposit) or the unit holders fund via purchase the units 100% ?

I really like to understand more about how the unit trust work.

Maybe think of the unit trust as a company as they are similar in some respects (but many important differences).

$700,000 property

Wife can borrow to buy $700,000 units (similar to shares). Or

Trustee (similar to Company) can borrow to buy a $700,000 property with the wife owning units in the trust. Trustee borrows $200,000 from Obaba and then $500,000 from the bank using the property as security. The borrowings are in the name of the trustee and the trust claims the deduction.

or the other method:
Obaba borrows from the bank to buy units the trust. The trust offers the property as security and the bank just see this as the individual is borrowing but the trust is owning. The $200,000 can still be borrowed from Obaba and she can be issued with 700,000 units worth $1 each.
This method will be difficult to finance because the loan and the ownership is in different names. I would advise great caution in entering this structure without getting credit advice first - in addition to legal and tax advise.

 

[nathank]

I don't favour it at all unless there is a good reason. I have a unit trust but that is for a commercial project where the stakes are bigger. For residential properties I hardly think it is worth it.

I also use a fixed trust to get the land tax exemption in NSW.

 

[Marty McDonald]

or the other method:
Obaba borrows from the bank to buy units the trust. The trust offers the property as security and the bank just see this as the individual is borrowing but the trust is owning. The $200,000 can still be borrowed from Obaba and she can be issued with 700,000 units worth $1 each.
This method will be difficult to finance because the loan and the ownership is in different names. I would advise great caution in entering this structure without getting credit advice first - in addition to legal and tax advise.

yeah hard like a Hybrid / PIT

 

[Terry_w]

yeah hard like a Hybrid / PIT

I think the real problem with these sorts of structures with getting finance is not the terms of the deed itself, but the fact that loan and legal ownership are in different names.

 

[Obaba]

Maybe think of the unit trust as a company as they are similar in some respects (but many important differences).

$700,000 property

Wife can borrow to buy $700,000 units (similar to shares). Or

Trustee (similar to Company) can borrow to buy a $700,000 property with the wife owning units in the trust. Trustee borrows $200,000 from Obaba and then $500,000 from the bank using the property as security. The borrowings are in the name of the trustee and the trust claims the deduction.

or the other method:
Obaba borrows from the bank to buy units the trust. The trust offers the property as security and the bank just see this as the individual is borrowing but the trust is owning. The $200,000 can still be borrowed from Obaba and she can be issued with 700,000 units worth $1 each.
This method will be difficult to finance because the loan and the ownership is in different names. I would advise great caution in entering this structure without getting credit advice first - in addition to legal and tax advise.

Thank you TerryW

I must be thinking along the line of the last option but I got too creative. Our accountant came back with his advice today ( with invoice off course) after our meeting last week. His advise is to buy it under wife's name since we can not claim the deduction (because of TR 2002/18) there is no real benefit for acquisition within the Unit Trust.

I guess we have to go back to the drawing board ( or find new accountant?).

Thank everyone for your comments.

 

[Terry_w]

Thank you TerryW

I must be thinking along the line of the last option but I got too creative. Our accountant came back with his advice today ( with invoice off course) after our meeting last week. His advise is to buy it under wife's name since we can not claim the deduction (because of TR 2002/18) there is no real benefit for acquisition within the Unit Trust.

I guess we have to go back to the drawing board ( or find new accountant?).

Thank everyone for your comments.

Hi Obaba

But, if you buy it under the wife's name you won't get a deduction anyway.

So if you buy in the unit trust it will be the same if you don't claim the interest.

You will then have the added benefit of:
1. slightly better asset protection
2. ability to transfer to a SMSF later on
3. ability to transfer units with lower stamp duty (or possibly no stamp duty in some states)
4. access to the refinancing principle.