Can anyone provide a worked example of purchasing and operating a rental property through a hybrid discretionary trust, with both a positively geared and a negatively geared example?
Thanks,
Kris.
Thanks,
Kris.
Worked Trust Investment Structure Example
- Thread starter Kris Sheather
- Start date
I might be able to help, depending on how detailed you want the examples.
I've just set up a hybrid and will be purchasing very shortly.
Most of my knowledge and understanding comes from Dale's book 'Trust Magic'. Have you read it?
Let me know if you think I may be able to shed some light.
Cheers,
Paul
I've just set up a hybrid and will be purchasing very shortly.
Most of my knowledge and understanding comes from Dale's book 'Trust Magic'. Have you read it?
Let me know if you think I may be able to shed some light.
Cheers,
Paul
Hiya Kris
This is a terrific question...I would love to see the 'working' also. I want to set up a trust and whilst having read Dales' Trust Magic (more than once) I think that a snap shot of both the purchase and usual transactions that occur during the life of a 'typical' neg & pos gearer would be great!!!
Any takers???
Pedro
This is a terrific question...I would love to see the 'working' also. I want to set up a trust and whilst having read Dales' Trust Magic (more than once) I think that a snap shot of both the purchase and usual transactions that occur during the life of a 'typical' neg & pos gearer would be great!!!
Any takers???
Pedro
Come on you brave souls, if no one volunteers then I will role out what I think should happen.
Thanks,
kris.
Thanks,
kris.
LOng rely (sorry)
Hi
Here is something:
For example, let’s assume the following:
1. Billy has borrowed $250,000 from a bank to buy units in a hybrid trust at a rate of say 8.5%.
2. The trust has bought an investment property for $240,000 that receives $240 per week rent.
The trust might show the following result:
Rental income 12,480
Less
Agents Fees 960
Council Rates 800
Depreciation 2,000
Insurance 320
Special Building Write Off Allowance 3,000
Water Rates 360
Total Deductions $6,720
Net profit $5,760
This profit is then distributed to Billy because he owns the units in the trust entitling him to all of the income of the trust.
So, Billy’s personal tax return would look like:
Income from Hybrid Trust 5,760
Less, Bank Interest paid 21,250
Less, Bank Fees paid 110
Net Loss $15,600
And, as a result of this situation, Billy could expect to get a tax refund of about $7,566 if he has an income of more than $60,000 a year.
Now if the figures were better . . . let's try the following:
For example, let’s assume the following:
1. Billy has borrowed $250,000 from a bank to buy units in a hybrid trust at a rate of say 6.5%.
2. The trust has bought an investment property for $240,000 that receives $280 per week rent.
The trust might show the following result:
Rental income 14,560
Less
Agents Fees 960
Council Rates 800
Depreciation 2,000
Insurance 320
Water Rates 360
Total Deductions $3,720
Net profit $10,840
This profit is then distributed to Billy because he owns the units in the trust entitling him to all of the income of the trust.
So, Billy’s personal tax return would look like:
Income from Hybrid Trust 10,840
Less, Bank Interest paid 16,250
Less, Bank Fees paid 110
Net Loss $5,520
And, as a result of this situation, Billy could expect to get a tax refund of about $2,677 if he has an income of more than $60,000 a year.
And lastly, if we change the situation to:
For example, let’s assume the following:
1. Billy has borrowed $125,000 from a bank to buy units in a hybrid trust at a rate of say 6.0%.
2. The trust has bought an investment property for $120,000 that receives $180 per week rent.
The trust might show the following result:
Rental income 9,360
Less
Agents Fees 960
Council Rates 800
Insurance 320
Water Rates 360
Total Deductions $1,720
Net profit $7,640
This profit is then distributed to Billy because he owns the units in the trust entitling him to all of the income of the trust.
So, Billy’s personal tax return would look like:
Income from Hybrid Trust 7,640
Less, Bank Interest paid 7,500
Less, Bank Fees paid 60
Net Income $80
And, as a result of this situation, Billy could expect to get a tax bill of about $39 if he has an income of more than $60,000 a year.
However, at this stage, Billy would have other options available to him.
I hope that this helps . . .
Dale
Hi
Here is something:
For example, let’s assume the following:
1. Billy has borrowed $250,000 from a bank to buy units in a hybrid trust at a rate of say 8.5%.
2. The trust has bought an investment property for $240,000 that receives $240 per week rent.
The trust might show the following result:
Rental income 12,480
Less
Agents Fees 960
Council Rates 800
Depreciation 2,000
Insurance 320
Special Building Write Off Allowance 3,000
Water Rates 360
Total Deductions $6,720
Net profit $5,760
This profit is then distributed to Billy because he owns the units in the trust entitling him to all of the income of the trust.
So, Billy’s personal tax return would look like:
Income from Hybrid Trust 5,760
Less, Bank Interest paid 21,250
Less, Bank Fees paid 110
Net Loss $15,600
And, as a result of this situation, Billy could expect to get a tax refund of about $7,566 if he has an income of more than $60,000 a year.
Now if the figures were better . . . let's try the following:
For example, let’s assume the following:
1. Billy has borrowed $250,000 from a bank to buy units in a hybrid trust at a rate of say 6.5%.
2. The trust has bought an investment property for $240,000 that receives $280 per week rent.
The trust might show the following result:
Rental income 14,560
Less
Agents Fees 960
Council Rates 800
Depreciation 2,000
Insurance 320
Water Rates 360
Total Deductions $3,720
Net profit $10,840
This profit is then distributed to Billy because he owns the units in the trust entitling him to all of the income of the trust.
So, Billy’s personal tax return would look like:
Income from Hybrid Trust 10,840
Less, Bank Interest paid 16,250
Less, Bank Fees paid 110
Net Loss $5,520
And, as a result of this situation, Billy could expect to get a tax refund of about $2,677 if he has an income of more than $60,000 a year.
And lastly, if we change the situation to:
For example, let’s assume the following:
1. Billy has borrowed $125,000 from a bank to buy units in a hybrid trust at a rate of say 6.0%.
2. The trust has bought an investment property for $120,000 that receives $180 per week rent.
The trust might show the following result:
Rental income 9,360
Less
Agents Fees 960
Council Rates 800
Insurance 320
Water Rates 360
Total Deductions $1,720
Net profit $7,640
This profit is then distributed to Billy because he owns the units in the trust entitling him to all of the income of the trust.
So, Billy’s personal tax return would look like:
Income from Hybrid Trust 7,640
Less, Bank Interest paid 7,500
Less, Bank Fees paid 60
Net Income $80
And, as a result of this situation, Billy could expect to get a tax bill of about $39 if he has an income of more than $60,000 a year.
However, at this stage, Billy would have other options available to him.
I hope that this helps . . .
Dale
Thanks for the explanation, at this stage it all looks VERY unprofitable!?!
It did confirm a few of my suspicions about how the income flowed around however.
How are all these people making their 'property fortunes' ?
It did confirm a few of my suspicions about how the income flowed around however.
How are all these people making their 'property fortunes'
?You really should get a hold of a book on trusts, "trust magic" by dale is one that I have.
there are expenses that can be paid for with the revenue held by the trust before it is distributed - effectively making it pre tax expenditure for the unit holder.
there is also the refinancing principle which allow equity to be drawn from the trust asset and distributed. In that case, if the trust has to borrow to finance the drawing of that equity, the loan would be tax deductible to the trust. You can't do that as an individual - you might want to check with professional advice as I may have this mixed up a little.
further on down the track, with a trust, you can distribute the income to yourself and other beneficiaries in such a way as to minimise your overall tax liability. If you own the asset, you own the income too and will be taxed accordingly!
Chris.
The main point that I wanted to get out of it was the negative gearing with the trust which was illustrated clearly, so I am happy
The key is that you are borrowing to purchase income producing units in an income producing trust, making those borrowings deductible.
You could also purchase units in a unit trust directly and achieve the same outcome.
Another structure that I have seen is that the property is purchased by a unit trust, with the units of the unit trust being held by various entities including hybrid discretionary trusts and super funds, companies and even individuals where appropriate.
The possibilities are limitless with a little creative thought
The key is that you are borrowing to purchase income producing units in an income producing trust, making those borrowings deductible.
You could also purchase units in a unit trust directly and achieve the same outcome.
Another structure that I have seen is that the property is purchased by a unit trust, with the units of the unit trust being held by various entities including hybrid discretionary trusts and super funds, companies and even individuals where appropriate.
The possibilities are limitless with a little creative thought
Hi all
I have read Dales books and I think I understand the various types of trusts.
Looking at Dales example in this post of the Hybrid Desc. Trust with properties that lose and make money, how would you account for both -ve and +ve geared properties in the one HyBrid Trust?
For example, the trust owns a property (loan in trusts name) that makes money so the trust would normally distribute this profit after all expenses (including trust running costs?) and you also have a -ve geared property as well where you have borrowed the money (in your name) and the trust has issued units to you. Do you account for them separately in the trust and split up the common costs for running the trust between them?
I hope this question is clear!
I have read Dales books and I think I understand the various types of trusts.
Looking at Dales example in this post of the Hybrid Desc. Trust with properties that lose and make money, how would you account for both -ve and +ve geared properties in the one HyBrid Trust?
For example, the trust owns a property (loan in trusts name) that makes money so the trust would normally distribute this profit after all expenses (including trust running costs?) and you also have a -ve geared property as well where you have borrowed the money (in your name) and the trust has issued units to you. Do you account for them separately in the trust and split up the common costs for running the trust between them?
I hope this question is clear!
In the negative gearing example shown the actual Trust was still showing a profit, because the borrowings were not an expense of the trust, but of the unitholder.
So it would appear difficult for the trust to make a loss in this circumstance, unless depreciation (paper expense) or maintainence costs (cash expense) were high.
If the trust lost $5,000 on one property but made $5,000 on the other then the income would be $0, and there wouldnt be a problem. Someone please confirm this as I need to ensure my understanding is correct.
So it would appear difficult for the trust to make a loss in this circumstance, unless depreciation (paper expense) or maintainence costs (cash expense) were high.
If the trust lost $5,000 on one property but made $5,000 on the other then the income would be $0, and there wouldnt be a problem. Someone please confirm this as I need to ensure my understanding is correct.
Re: Other advantages
but don't forget if you want the negative gearing benefits of the loan to be outside of the trust, ie with the issuing of units, then the income has to be to the unit owner for the interest expense to be personally deductible. If the income can in any way be directed elsewhere, I doubt from my understanding that the interest expense would be deductible.
...and...
the owner being the trust....
Chris.
but don't forget if you want the negative gearing benefits of the loan to be outside of the trust, ie with the issuing of units, then the income has to be to the unit owner for the interest expense to be personally deductible. If the income can in any way be directed elsewhere, I doubt from my understanding that the interest expense would be deductible.
...and...
the owner being the trust....
Chris.
A further advantage of a Hybrid Disc Trust :
Following on from Dale's example,
property purchased for $240,000
5 years later sold for $340,000
Units redeemed to special income unit holder at $1 each = $240,000
Capital gain to trust of $100K
50% General CGT exemption - Taxable Gain = $50K
This can now be distributed to lower income earners through the discretionary clauses of the trust.
EG if owned in indiv name with inc > $60K, tax = Approx $25K
If distributed to non working children or spouse, tax = $12K
This may be further reduced depending on incomes of other family members.
NickM
Following on from Dale's example,
property purchased for $240,000
5 years later sold for $340,000
Units redeemed to special income unit holder at $1 each = $240,000
Capital gain to trust of $100K
50% General CGT exemption - Taxable Gain = $50K
This can now be distributed to lower income earners through the discretionary clauses of the trust.
EG if owned in indiv name with inc > $60K, tax = Approx $25K
If distributed to non working children or spouse, tax = $12K
This may be further reduced depending on incomes of other family members.
NickM
