Buying shares - Trust vs Pty Ltd

Discussion in 'Accounting & Tax' started by ionic, 11th Jun, 2008.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    Best? Difficult to tell - depends on so many things.

    I personally like simple ... and although many people may well argue that a trust+corporate trustee is far from simple - it is a tried-and-tested mechanism that has been in use for a very long time in Australia and a lot of case history behind it.

    It's not perfect - but I personally think it gives the best flexibility for the least risk - but if you only ever plan on buying cashflow negative property, you may well find it difficult to justify a trust!

    Yes you do want to aim to have your trust be profitable as soon as possible, but if you take a long term view - then wearing a few years of losses when the figures are relatively small is a small price to pay for the longer term flexibility once your trust is eventually profitable ... especially if you ever sell assets and have capital gains tax to pay!

    It is worth checking out land tax if you intend to buy property - with some states not giving a tax-free threshold to trusts, it can add a lot of cost compared to owning in your own name. Not necessarily a reason to avoid trusts - but something you need to take into account.

    Just watch out that the ATO doesn't look too closely at the arrangement and declare that since you were operating the account as if it were your money - then it may as well have been and lump you with the tax bill.

    One of the biggest problems with doing anything in your own names (eg buy cashflow negative assets in high income earners name and cashflow positive assets in low income earners name) ... is that things can change.

    I earned twice as much money as my wife did until I got retrenched and decided to become self employed - and then my income dropped to practically zero for a while. I'm only just now catching back up to my wife in income level. This financial year my trust will be distributing to me rather than my wife like it has previously. And my previous tax planning for cashflow negative investments in my own name are now a pain in the backside because I get no real benefit from them (compared to when I was in the top tax bracket).

    Situations can change unexpectedly - and for this reason, I personally value flexibility above contrived schemes.

    These are all just my personal thoughts and opinions. At the end of the day - structuring your investments is an extremely complex decision process, but something that is worth getting right early on. You really do need to rely on professional advice which takes into account your unique situation and goals.
     
  2. Nodrog

    Nodrog Well-Known Member

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    Great post Sim showing just how things can change and the flexibility of the trust comes into its own.

    Cheers - Gordon
     
  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    As previously mentioned, I've now published the podcast from Nigel which deals with this topic: Landlords Liability
     
  4. ionic

    ionic Member

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    Hi

    Consider this scenario for a Hybrid Trust:

    A hybrid trust buys a property say $200,000, and Mr A takes out a loan to buy 200,000 units in the Hybrid Trust. 1 unit = $1. SO the property is bought by the hybrid trust.

    Then Mr A gives $20,000 to the hybrid trust to invest in ASX shares. The trust does not issue anymore units to Mr A.

    1) If the property is negatively geared, can Mr A still get tax deduction from his personal income?

    2) If after 2 years, the ASX shares grows and becomes $50,000, and the trust sells it. Does Mr A have to pay CGT? Or can the hybrid trust act like a discretionary trust and distribute the profit to beneficiaries and still get 50% discount on tax? (while it has 200,000 units issued to Mr A for the $200,000 property?)

    I'm asking this scenario is because, could the ATO see it as Mr A owns 100% issued units from the hybrid trust, therefore he has to bear all the CGT while he holds those units?

    3)If the property is sold, I assume Mr A has to pay CGT on his personal tax is that correct?

    4)Say if the property grows to become $300,000, and the Hybrid Trust gets a loan of $200,000 from a bank, and pay back Mr A his $200,000 and buys back the 200,000 units. Then when the trust sells the property, it can act like a disctrtionary trust and distribute the capital gains to beneficiaries. Is this scenario correct?
     
  5. Rob G

    Rob G Well-Known Member

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    All this depends on whether the trust deed is drafted correctly and also the Commissioner not applying any anti-avoidance provisions

    * BIG suppositions ... *

    Basically your most obvious NO NO is redeeming units at their issue price, this will prevent anybody negatively gearing their units. Check your trust deed.

    Also, all benefits from the underlying property held for the unit holders must flow to those same unit holders - this includes capital gains. Check your trust deed.

    In fact ... PAY somebody to check ALL your specifics BEFORE you act.

    Cheers,

    Rob
     
  6. ionic

    ionic Member

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    im using a MGS hybrid trust deed.

    It seems the ATO says the MGS deed is 'safe'? So how does the MGS hybrid trust deed relate to the scenarios and questions I asked above?

    See the thing about hybrid trust is that there is not 1 book or publication about it that clearly states what it can do or cannot do. The books I read about hybrids are all very general, but never talk about how they really work.
     
  7. Rob G

    Rob G Well-Known Member

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    I would be very interested to see any ruling from the ATO regarding specifics of any HDT deed.

    I have only seen "letters of comfort" from the vendor's specialists.

    Cheers,

    Rob
     
  8. ionic

    ionic Member

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    Hi ROb,

    In scenario 1), I meant the property is negatively geared, as this is what most people use hybrid trusts for - so that they can deduct from their personal tax the interest for the property homeloan.

    So if this is the case, the person can claim tax deduction when he does his tax return, since he owns the 200,000 units from the hybrid. BUt the issue is, mixing shares into this hybrid which has units issued for the property, I do not know how the ATO looks at how the shares investment will be handled. WIll they say "ok since you own 200,000 units in the trust, so if the hybrid trust sells the ASX shares and makes a capital gain, then you personally have to pay CGT for the gains from the shares"? Or will the shares be a separate asset since there was no units issued for the shares, because Mr A gifted the money to the trust to buy the shares, instead of buying units.

    ANyway, i now think hybroid trusts are really a headache, maybe discretionary trust is the way to go....
     
  9. Nodrog

    Nodrog Well-Known Member

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    I may be wrong but I don't think the ATO has said that MSG deeds are safe. I thought that it was MSG's legal advisor who stated this.

    Cheers - Gordon
     
  10. Rob G

    Rob G Well-Known Member

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    Horses for courses ... HDTs are very good for collective business/investment under certain circumstances - e.g. as an alternative to a partnership of discretionary trusts.

    Get some professional advice, there are plenty of options to consider.

    Cheers,

    Rob
     
  11. NickM

    NickM Well-Known Member

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    Guys,
    just to clarify - the ATO will not come out and support one trust deed over any other. So if some providers are saying that the ATO has given them clearance on all their deeds, i would be asking for a copy of that document.

    What the ATO may do is give you the OK with a PBR for a particular transaction that utilisies a particular trust deed.

    I also do expect them to release a Practice Statement addressing HDTS very soon.

    The reason why it is difficult to find a book that addresses HDTs, is that each HDT deed is different, whereas most DT's are very similar.

    Hope this helps
    NickM
     
  12. ilori

    ilori Well-Known Member

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    Hi,

    I notice there is sometimes a question over whether a Trust Deed is worded correctly.

    I can appreciate that if someone is setting up a particularly convoluted structure then it may be difficult to word and cover all the permumations... but for a run-of-the mill Trust with Pty.Ltd. Trustee, what would be difficult?

    Reason I ask, is that I have a Trust (HDT) already but not sure I 'trust' that the Trust deed is a good one (sorry, poor pun). This is mainly because a planner just poached a Trust from somewhere and hacked it a bit and hey presto, I had a Trust. (Due to this lack of confindence, I've not really used it for anything serious in case of glitches.)

    I'm thinking of getting another Trust formed and would like to have some assurance that it is a good one... any suggestions as to how I go about it please?

    I would have thought that normal Trusts were so common (and used for hundreds of years) there should be a good template to follow and a checklist that is has all been done correctly. Is anyone aware if there is? I know there are some books that provide examples, but probably if I plonk such a book down in front of accountant/lawyer he'll dismiss it as a load of rubbish - is there a recognised source of truth for such things?

    Should I use an accountant or a lawyer?

    Any tips on getting a good Trust set up would be much appreciated.

    Thanks and regards,
    Ilori
     
  13. Saskatoon

    Saskatoon Well-Known Member

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