advice on investment property

I am a medical GP. I own a medical practice in melbourne, and im the solo practitioner. When i bought the practice 3 years ago, my accountant asked me to use a discretionary trust structure to run this practice with a corporate trustee as well.
My wife stays at home with kids and works part time at the local supermarket.
Our PPOR is in her name only. I've worked hard for the past 3 years and manage to pay off the practice and our PPOR. We do not have a lot of knowledge about investing.
My accountant had since retired.
Currently we are looking at purchasing our first investment property.
We're in a dilemma of whose name we should put the property under for best tax benefits and asset protection. I was told since the income from the practice is solely derived from my personal effort, the trust is not allowed to distribute the income at its discretion, all the income has to go to me.
Our dilemma is
1. if it is placed under the trust that runs the practice, it is at risk if the practice gets sued
2. if it is placed under my name, it is also at risk if i get sued.
3. if it is placed under my wife's name, she will not benefit that much from negative gearing since she earns a lot less than me.
4. if we create another trust and place it under that trust, the losses from negative gearing will be quarantined.
Has anybody faced the same problem?? please advise

 

What happened to all the budding Financial Planners in other threads who are so keen on sharing their assignment case study tips ?

I think you have about summed it up.

Some people would advocate the high income earner borrow to buy units in a HDT to achieve negative gearing, but again there is no asset protection while units are issued, and no income splitting opportunities for the property.

Similarly you do not want to loan your wife or trust any money since this is a personal asset at risk to creditors/litigation.

Other possibilities is to use the equity in your home to arrange a neutral geared property for your wife or another discretionary trust.

Negative gearing involves holding assets in your personal name, however if you arrange to mortgage over your property to a discretionary trust, there is no net equity at risk to others. This could involve gifting/assigning the finance etc. and the financing for the trust can be difficult.

You need to talk to Accountants & Financial Advisors who specialise in medical practice issues before embarking on any futher investments. There is extra due dilligence required in your case.

Cheers,

Rob

 

As a medical GP you are probably earning a "Professional Services Income" (PSI) (like me), which just gets more and more confusing to manage (a lot of accountants don't seem to be able to work it all out).

What is earned through you efforts, as PSI, must be attributed to the person who earned it, you. Non-attributed income (not PSI) coming into your trust can be distributed differently, but that doesn't really help in a -ve gearing situation. The trust can't pay the loans when the income is less than the expenses, and it can't take that which is attributed as PSI for anything other than paying you, your super and tax - you'd have to pay it out (full tax) first, at least on paper - so there's little point. Given the issue of protection, there's little reason in putting it in the trust with your business.

We have used a discretionary trusts and a HDT for different long term plans. For example, with the HDT the distribution is in proportion to initial ownership of 'units' but as the value grows, the amount in proportion to the increase in capital value becomes discrtionary - so over time you can allocate that portion, bit by bit. to the lower income earner. It's a long term approach but will be helped by rising prices. Ask a trust specialist instead of a hack like me!

Another tactic has been to invest post-tax dollars in warrants in the Narva Retail Fund as an income producer for the lower income earner. This then can be fed into property if you're after capital growth ... worked well until the GFC, so you need a buffer / plan B. There are other options like this, depending on whether you're after income or growth. Hope this helps.

Cheers, Dave

 

Any gains in relation to property over which units have been issued is not discretionary ... at least not if you want the beneficiary to negative gear their units.

Perhaps you mean subsequently acquired property in a discretionary capacity ?

Cheers,

Rob

 

Not all units bought with a loan. Cash equivalent to deposit was 'from' lower income earner. One becomes less negative geared, one becomes positive as rents increase, interest decreases. CG re-used, 2nd IP cross-collatoralised on CG of first but servicing costs and increases in rental growth limit the discretionary amount - takes time.