Unit Trusts & property

[thesuperman]

I've got some questions about Unit Trusts owning investment property in them, mainly from a tax perspective:

1. How does it work with the borrowing when a Unit Trust buys a property? Does the unit holders borrow the money, the property gets mortgaged & the interest get charged to the unit holders personally, therefore the interest & all costs are personally deductible by the unit holders?

2. If it's the unit holders that can get tax deductions, what happens if you later convert the Unit Trust to a Discretionary Trust? Any tax implications?

3. If the Unit, Discretionary or Hybrid Trust converts to a NSW Land Tax Unit Trust, are there any tax implications like CGT, Stamp Duty, etc?

4. Are there any differences between transferring units in the Unit Trust rather than selling property to new owner?

5. What's the difference between transferring units or redeeming & reissuing units to someone?

6. If units in a Unit Trust are owned by a discretionary trust or hybrid trust, are there any tax differences, or flexibility differences?

 

[Terry_w]

very broad questions.

1. individual would borrow to buy income producing units

2. yes. probably cgt and stamp duty

3. yes. possibly stamp duty and cgt depending on a few things.


4. yes. heaps of differences. legal ownership of property wouldnt be changing for one thing. stamp duty would be different too.

5.lots of differences with various implications.stamp dut may be one.

6. differences compared to an individua? yes. income and capital would be distrbuted according to the deed of the trust that owns the units

 

[thesuperman]

4. yes. heaps of differences. legal ownership of property wouldnt be changing for one thing. stamp duty would be different too.

5.lots of differences with various implications.stamp dut may be one.

Thanks for your response Terry. Could you please elaborate more on the 2 points quoted above? Anything else besides legal ownership staying the same?

Point 4: Would the stamp duty be less by transferring units in the Unit Trust rather than selling property to new owner?

Point 5: Could you please elaborate more on this one, about difference between transferring units or redeeming & reissuing units to someone.

 

[Terry_w]

Thanks for your response Terry. Could you please elaborate more on the 2 points quoted above? Anything else besides legal ownership staying the same?

Point 4: Would the stamp duty be less by transferring units in the Unit Trust rather than selling property to new owner?

Point 5: Could you please elaborate more on this one, about difference between transferring units or redeeming & reissuing units to someone.

The transfer of units in a unit trust in NSW is currently charged at a rate of 0.60% of value of those units. This would be much less than paying duty on the transfer of title to the property. NSW duty on the transfer of units is set to be abolished as of 1 July.

I don't know much about the redeeming of units, but suspect this was done to get around the stamp duty issues previously.

 

[thesuperman]

The transfer of units in a unit trust in NSW is currently charged at a rate of 0.60% of value of those units. This would be much less than paying duty on the transfer of title to the property. NSW duty on the transfer of units is set to be abolished as of 1 July.

I don't know much about the redeeming of units, but suspect this was done to get around the stamp duty issues previously.

1. Yes, that's significantly less. I guess a strategy could be if you want to sell a property to a buyer is that you sell them all the units in the Unit Trust & get the trustee to be changed to themselves or a company they control, then you could split the stamp duty savings 50/50 to benefit both parties. So if it was a $500k property, stamp duty would normally be about $18k, but if they just bought the units in the Unit Trust, the stamp duty would be $3k, a saving of $15k. They would then take over the Unit Trust as well. Would this strategy work, or not really because the Appointors of the trust would be the same?

2. Is it 100% that NSW duty on transfer of units will be gone as of 1st July? Or we don't really know 100% until the 1st July comes?

3. When initially setting up a Unit Trust, usually the unit holder(s) gets issued 10 x $1 units, with a value of $10. Is it possible to issue 100,000 x $1 units, with a value of $100k instead, then once a property is bought & if the units were sold (eg. $300k property bought), then the CGT & stamp duty would be less? Or if this is done, then $100k needs to be physically given by the unit holder to the Unit Trust to put in the Unit Trust's bank account?

 

[Terry_w]

1. There will be a few issues. Need to seek legal advice.

2. Not 100%. Was supposed to be abolished last year too.

3. Units would be the value of the assets held by the trust.

 

[AXXO]

1. Yes, that's significantly less. I guess a strategy could be if you want to sell a property to a buyer is that you sell them all the units in the Unit Trust & get the trustee to be changed to themselves or a company they control, then you could split the stamp duty savings 50/50 to benefit both parties. So if it was a $500k property, stamp duty would normally be about $18k, but if they just bought the units in the Unit Trust, the stamp duty would be $3k, a saving of $15k. They would then take over the Unit Trust as well. Would this strategy work, or not really because the Appointors of the trust would be the same?

2. Is it 100% that NSW duty on transfer of units will be gone as of 1st July? Or we don't really know 100% until the 1st July comes?

3. When initially setting up a Unit Trust, usually the unit holder(s) gets issued 10 x $1 units, with a value of $10. Is it possible to issue 100,000 x $1 units, with a value of $100k instead, then once a property is bought & if the units were sold (eg. $300k property bought), then the CGT & stamp duty would be less? Or if this is done, then $100k needs to be physically given by the unit holder to the Unit Trust to put in the Unit Trust's bank account?

Can I add a few other points to clarify things for you?

A unit trust has no Appointor only unitholders & trustee. It's set up by paying an initial sum to the trustee, say $10 being 5 units of a dollar each for 2 unitholders.

When a property is purchased by the unit trust, say a $300000 property another 300000 units are issued and purchased by the unitholders who borrow individually to buy the units. This becomes the unit trusts cost base of the property. It distributes its rental profits to the unitholders who then claim a tax deduction for the interest on their loans against this rental income.

Transferring the property to a discretionery trust, other than having CGT & duty implications, would make the interest claim non deductible as then there is no guarantee of income as any distribution is at the discretion of the trust.