What structure for next purchase?

[lizzie]

yes, we're looking again ... but due to past complications (that most of you know about) we have had poor structure setup in the past and even with my new accountant being on the ball, i don't know whether the advice really was the best for us .... so .... i'm after some opinions.

we're looking again in nsw because it's our backyard, we know it intimately and we have a great nsw team in place which will benefit us immensely in the long term.

but all our other properties are in nsw too, which leads to land tax problems. currently paying around $8k/yr but expecting that to go up.

currently we have one large ip property in both our names (ex ppor) which will already more than suck up our personal threshold. even tho it is still considered our ppor for cgt purposes for another 5 years, because it is rented we are supposed to pay land tax.

we have other ip properties held in two trusts so there is no threshold at all. the trusts were set up in anticipation of future cashflow positive income.

hubby is 7 years off minimum retirement age of 55 and has super dating back from inception, so can start drawing down on his unpreserved portion at 55 if he wants.

we want to "retire" from paid employment sooner rather than later.

we're looking at buying another 4-6 development sites over the next 3 years and have the property throw off around $200,000/yr within 6-8 years.

i'm wondering whether to proceed by buying each new development site in a new company - or in hybrid trust - or in personal names.

each has advantages and disadvantages.

- a separate company for each would mean no land tax bill, but initial losses couldn't be claimed against income. tax on profit would be limited to 30c in the dollar - but that would be from the first dollar, not on a sliding scale.

- hybrid trust would allow 100% losses to be claimed against the highest current income, and convert to normal discretionary trust when property is positive cashflow, reducing our tax payable when split over both of us on a sliding scale - but we would have land tax with no threshold. banks do not like lending to hybrid trusts so financing could be difficult.

- personal names would allow losses to be claimed and positive cashflow to be split reducing our tax, but again we would have land tax problems and could only claim 50% of the losses against the high income. but borrowing wouldn't be an issue

- we could buy in smsf, but that would mean we couldn't access the income until hubby hits 60 (assuming they don't change the laws in the next 12 years!) - and we want to be financially independent way before that.

i know trying to avoid land tax sounds silly - but with land increasing in value and no threshold with trusts, we'd be looking at around (in today's dollars) a bill of around $3,000/yr per development site. so, prior to retirement, if we have 7 sites it will cost us $21,000/yr - and - once we sell down to clear debt if we have 5 sites (4 townhouses per site) at retirement we'd be looking at an annual bill of $15,000 - or the entire rent from one property - every year.

... but ... on the other side ... it would be tax deductable and we'd have the entire rent from the other 19 townhouses as taxable income - and once depreciation deductions are bought into play ...

hmmm - this was a good exercise to work thru. i think i'm leaning towards the hybrid trust structure, even if the land tax in the short term will be painful and we've had potential financing problems. it does mean we can claim full losses to offset and eventually would end up with a better structure for retirement.

land tax was supposed to be abolished when gst came in - wonder if anyone remembers that!?

i'm am fully open to comments, criticism, stories and advice ...

 

[skater]

My thoughts are with you Lizzie. Again, we are in the same boat.

We're starting to look again, but still have Trust issues. I've just set the wheels in motion to purchase 2 of the Trust properties and place one in each name. Hopefully that will kerb the evil land tax on those two properties. Still more to come out of the Trust too.

Looking for a new PPOR, but when that has all been wrapped up, I would like to split a couple of other properties, if possible, into singluar names, rather than joint names to fully utalise the individual thresholds. The stamp duty payable on those transfers is only half as you are only purchasing half of each property.

 

[kaf]

Thanks for the detailed post Lizzie, we've got similar issues so it was good to see your reasoning.

one question:

- hybrid trust would allow 100% losses to be claimed against the highest current income, and convert to normal discretionary trust when property is positive cashflow, reducing our tax payable when split over both of us on a sliding scale - but we would have land tax with no threshold. banks do not like lending to hybrid trusts so financing could be difficult.

The conversion to a normal discretionary trust will cost you CG tax when the unit holder sells the units. In your calculations would that still make sense (eg. CG tax vs tax saved due to discretionary split)? Especially with developments where the increase in CG will be (hopefully) quite dramatic quite quickly?

Cheers

kaf

 

[lizzie]

thanks for that kaf - didn't think of that side of things and will ask the accountant re this.

we are looking at doing a couple of developments under the same hybrid trust to keep it in negative territory until we are ready to finish with paid employment, so it might be worth considering paying out the unit holder "before" the final development is complete - at a period where build expenses have been paid out but valuation doesn't reflect this yet - to reduce the final value of the properties.

i don't think there is any simple, or all round beneficial solution - hubby is a high income earner, and i am a next to nothing income earner (but chief researcher, project manager and bottle washer). if we put property only in hubby's name to be able to claim the losses at the begining, then we'd have a tax problem at the other end.

if we put some in mine for future tax benefit then we wouldn't be able to claim the losses and costs against the high tax paid by hubby - so skater's plan wouldn't work for us.

i think, at the end of the day, hybrid will work for us - especially if we convert at the right time. when hubby's income is down due to leaving work, and the final development isn't quite finished.

but - we are encountering problems already ... the mb is trying to work out a way to finance because banks are starting to reject hybrid trust applications, due to a small portion being questioned by the ato because they were doing the wrong thing.

 

[JoannaK]

hmmm, maybe you should look at a company structure then. the losses are rolled over each year and offset against any profits you make in the future....

By the way....i don't know if you've figured this into your equations on land tax, BUT don't be suprised if when you've finished your townhouses and strata'ed them off your land tax bills increase.

a couple of years ago i had a block of land, that we'll say was worth $100,000. i paid land tax on that accordingly. i built a few properties on it...same parcel of land, just a different building on it....the land value for tax purposes went up to $200,000, so my land tax bill doubled.

 

[lizzie]

hmmm, maybe you should look at a company structure then. the losses are rolled over each year and offset against any profits you make in the future....

looked at that - two problems being can't claim the losses until making a profit so cashflow becomes a problem, and when positive one would be paying 30c in the $$ from the first dollar of profit, instead of on a sliding scale ... unless profit paid as a dividend, which could work.

but it's the claimability that holds us back ... means we can buy/build/amass wealth faster.

 

[Piston Broke]

Keep in mind that a company may pay wages, directors fees, and pay or recieve management fees, consultant fees, bookkeeping fees etc etc, which are all tax deductions / deductable expenses.

I would put dividends last on the list. Infact there's not much point for them.

 

[Gee Cee]

Structures

I tend to like wooden frames
Although I also do steel frame structures.
And Tilt Up Concrete is quite good


Hope this helps

Gee Cee

 

[nonrecourse]

hmmm, maybe you should look at a company structure then. the losses are rolled over each year and offset against any profits you make in the future....

By the way....i don't know if you've figured this into your equations on land tax, BUT don't be suprised if when you've finished your townhouses and strata'ed them off your land tax bills increase.

a couple of years ago i had a block of land, that we'll say was worth $100,000. i paid land tax on that accordingly. i built a few properties on it...same parcel of land, just a different building on it....the land value for tax purposes went up to $200,000, so my land tax bill doubled.

Company structures are the worst option as you get no capital gains relief when you sell.

 

[lizzie]

hmmmm - wondering if to buy/finance half the developments in hubby's name direct (all the tax deductable benefits, and no cgt due to paying out unit holder), and half in the hdt so that when the unit holder is paid out (hubby), and cgt is paid then the income comes to me ....

then we have the 50/50 split for future tax reasons without only half the cgt issues.

this is so complicated.

 

[fernfurn]

I am in a similar boat. Partner high earner, me income from rentals only. We have one PPR together. Recently started thinking about buying an IP together. Both of us will have land tax problems. I gather though, that they will only add half the property value to our land tax bill? Even though he would gain most from having the interest taken fully against his income, I still want half the property in my name and want to claim the interest against my income if possible (see other post)
To complicate things I have an IP I would like to develop into 2 or 3 townhouses in the next 2/3 years, but dont want to interrmingle our finances as I would be able to finance this myself. Actually. like you, writing this down clears my head and I realise this would stand alone.
So, I too am wondering if there is a better tax structure I could set up

 

[skater]

Both of us will have land tax problems. I gather though, that they will only add half the property value to our land tax bill?

Think again!

You would think that a couple would have double the allowance that a single has, but alas that is not the case unless you have the properties in single names.

I'm just pulling 2 out of a Trust so that we can both have 1 in each name to avoid some of the Land Tax.

 

[Bluegoose]

I have a few properties in individual names - not enough to worry about land tax - YET. But mine are in Qld which is pretty good for land tax anyway.

I am however considering a standard type family trust for my next purchases as they should be +'ve cashflow from day 1 - my wife is stay at home mum and we have 2 kids so family trust seems good to distribute income.

HOWEVER, can anyone tell me from experience how banks react to lending for a family trust as opposed to individuals??. And also Lenders Mortgage Insurers??. I am going to try and keep some cash aside so will be trying for 90% LVR loans and not sure how the banks/LMI companies will react to a trust structure.

Any info appreciated.

 

[Qlds007]

Blue Goose

It is the same as anything.

Loan to a Trust will be fine and welcomed by many lenders however frowned upon by other who merely dont or dont want to understand Trust structures.

 

[lizzie]

banks are okay with discretionary (family) trusts - but currently hate hybrid trusts due to a few yobbo cowboys trying to rip off the ato.

 

[Bluegoose]

Thanks guys - I need to do a lot more homework and will be seeing a specialist property accountant to learn more.

I have always stayed away from trusts but could be a prudent move - also asset protection might come in handy one day.

Cheers

 

[PrimeCommercial]

Think again!

You would think that a couple would have double the allowance that a single has, but alas that is not the case unless you have the properties in single names.

I'm just pulling 2 out of a Trust so that we can both have 1 in each name to avoid some of the Land Tax.

mmmmm food for thought, I didnt think that you would be able to do this. Splitting properties into seperate names to double your land tax threshhold.

Guess I didnt think too hard about it. I'll keep that one in the memory banks for later