Worked Trust Investment Structure Example

[Kevmeister]

Originally posted by alpina
the owner being the trust?

Yes, if you look at Dale's example the Trust has claimed the depreciation. The nett income is then passed onto the unit holder.

Interesting observation/question to be made here:

What happens with a Hybrid Trust in the hypothetical situation where the depreciation and other expenses exceeds the income? For example, what about a protracted vacancy. The trust itself would have made a loss, even ignoring the interest bill.

I presume in this situation the loss would still be quarantined inside the trust, or can it be accounted for by the unit-holder? (You obviously can't give a "negative" to the unit-holder, can you).

 

[Kris Sheather]

I believe the loss would be 'carried forward' to be offset against future income of the trust.

 

[jonte]

Trust Losses

Kris is correct - the loss would be 'carried forward' to be offset against future income of the trust.

 

[MattT]

What is the situation under a hybrid disc trust? Can income be distributed from the trust partly to other lower income beneficiaries and partly to the lender to the trust and the total interest expense claimed by the lender to the trust?. In that way the tax loss can be maximised for the highest income earner (the lender) - is that the way income flows can work or am I off the mark here.


MattT

 

[Kris Sheather]

Considering the fact that the units held in the hybrid trust buy an entitlement to the income attributable to those units the income that is attributable to the units held would need to be distributed to the unit holder.

The loan used to purchase the units in the hybrid trust would be held by the high income earner to gain the greatest tax advantage on the deductible interest of the borrowings.

 

[hwd007]

Does a trust allow you to claim your net loss at a higher tax rate due to its structuring of its profit calculation which is the added to your gross income ? to make total gros income ? or does it not matter whether you are in a trust or not from this point of view alone ?

Or is all income simply added from all sources to make total gross income and then less total deductions from all sources to get total taxable income ?

I'm still a little unclear on the way income is deemed and then how the deductions are taxed in relation to that.

If I have two IPs producing 20K of rental income and I add this to my 60K salary then do my tax deductions work against an 80K tax base ? rather than the 60K base.

 

[MF35]

I understand how a Hybrid Disretionary Trust operates and can have the benefits of allowing negative gearing by the individual outside the trust through the issuing of income units (or similar). I also understand how trusts work with positively geared property.

It would seem however that the benefits of this type of trust are different for each different property. EG - if the property is negative you want the units issued and if the property is positive you want to use the discretionary aspects of income distribution of the trust to reduce tax paid on profits.

The question here is can you have both operating within the same trust at the one time??

That is, can you have income units against one or more negatively geared properties on issue AND at the same time have other properties within this trust that are positively geared (but with no income units issued against them) so that for these positively geared properties you can distribute profits to beneficiaries at the trust's discretion?

MF

 

[Kris Sheather]

I believe that you can nominate that certain classes of income can be distributed to different beneficiaries in order to get the greatest tax advantages possible.

 

[djsherly]

Originally posted by MF35
I understand how a Hybrid Disretionary Trust operates and can have the benefits of allowing negative gearing by the individual outside the trust through the issuing of income units (or similar). I also understand how trusts work with positively geared property.

It would seem however that the benefits of this type of trust are different for each different property. EG - if the property is negative you want the units issued and if the property is positive you want to use the discretionary aspects of income distribution of the trust to reduce tax paid on profits.

The question here is can you have both operating within the same trust at the one time??

That is, can you have income units against one or more negatively geared properties on issue AND at the same time have other properties within this trust that are positively geared (but with no income units issued against them) so that for these positively geared properties you can distribute profits to beneficiaries at the trust's discretion?

MF

I might throw in me tuppence here. When you buy units in the trust, your are buying units in the trust. This may sound obvious, but by my understanding, you are not buying units in the property. That is to say, one cannot assign a unit to a piece of property held by the trust. Consequently, as long there are units outstanding, the income must be directed to the owners of those units.

I'd love to be wrong however, as what you are suggesting opens up a whole world of possibilities.

Chris.

 

[MF35]

Chris,

I was of the belief that you could link units to a particular property when negatively gearing. Eg - If I borrow 250k and purchase units to that value in the Trust, and the trust then invests all that money in a particular investment (an IP), then any profit from that investment must be distributed to me. And if there were two or more loans from different beneficiaries taken out and each amount of cash raised by the trust through the sale of these units was used to purchase a particular IP then it would be the same for each. IE - each person would be distributed the profit from the particular IP their money was used to purchase. I think this can be done buy issuing type specific units. IE - units "A" relate to investment "A" (that particular IP) and so on.

I guess you could also do the opposite and buy units that are only linked to the trust in general. So that the overall profit of the trust would be divided up amongst all unit holders proportionately according to the amount of units they hold and not be specifically linked to the investment your money was used for.

BUT my guess is that if you do either or both of these you cannot use the discretionary income distribution benefits of the trust until all the units are bought back and the trust reverts to it's discretionary characteristics.

So am I correct in saying you can NOT have units outstanding against one investment through the trust and still be using the discretionary income distribution aspect for profits from other investments?? Eg - some neg geared IPs funded by units and other positive geared ip's purchased through the same trust, by the trust (not with units), at the same time.

I would have thought you would have to set up two seperate trusts if this was going to be the case. One for neg geared and for positive geared properties.

Of course as discussed you can change the use of an individual trust to favour either with the issuing or buying back of units depending on your properties / portfolio, goals and personal situation.

Dale and Nick ??

MF

 

[the_duck]

Re: MF35's question. I would also like to hear how positive geared and -ve with units issued works in a Trustl. I tried to ask the same question earlier in this thread but it came out much more confusing than MF's post!

Look forward to more info on this.

 

[alpina]

ok, now i'm seriously confused!

julie

 

[pjb89]

Hmmmm

Same here

Pedro

 

[Kris Sheather]

Seems completely logical to me.

 

[WillG]

Hi Guys,

IMHO I believe the answers you are looking for are in the wording of the trust deed.

Cheers

 

[Kris Sheather]

WillG, seems to me that if you have a trust, you can pretty much write your own rules!?!

 

[WillG]

Hi Kris,

I'm not sure what happens during the registration of the trust. I would assume it is important to get the wording correct otherwise certain government organisations may ask some probing questions

Dale - Do you know of the legal steps must be taken to ensure the wording of a trust deed is acceptable ?

Cheers

 

[Nominees]

I find it easier when you draw a few pictures.

A lot of the questions are obvious if you start drawing pictures, cashflows etc...!

A more confusing point is whether the income from a hybrid disc trust can be distrubuted to beneficiaries that are NOT unit holders and the answer is YES!

I made double sure that this is correct. And I was told "Absolutly". I am using a hybrid discretionary trust from MGS.

I am lead to believe that not all deeds are the same.

Dale can you confirm this please. (A third opinion is always good

Cheers,
Nom

 

[MattT]

Nominees

I'm with you about pictures. I hope you are right about the income distribution. That was the question I was trying to ask a while back.

If income from a hybrid disc trust can be distributed as you say, are the interest and other costs of the loan used to purchase the IP through the trust deductible in full to the borrower, even though that person receives only partial distribution from the trust? Or are the loan costs apportioned along the lines of the trust distributions?

For example, and to keep the numbers simple, investor A borrows $100,000 @10% to purchase an IP through a hybrid disc trust. Net income of the trust from the property is $5000 distributed to 5 beneficiaries including investor A ($1000 each). Can the Investor A claim a loss of $9000 for tax purposes (ie $1000 share of trust income less $10000 interest costs)?

MattT

 

[Kris Sheather]

If the unit holder borrowed $100,000 to purchase 100,000 income units in the trust, at $1 each, the trust then used those funds to purchase a $120,000 investment property.

I beleive that 10/12th's or 5/6ths of the income from that property would need to be distributed to the unit holder, the other 1/6th could be distributed at the trustees discretion.