Company & Unit Trust Question(s)

Hi all.

Since I am going to be starting my own company (Pty. Ltd.) soon, I've been researching company and trust structures for a few weeks. I've just finished reading "How to Legally Reduce Your Tax" by Melvin & Chan. With my understanding, I have come up with a 'structure' that I'd like to run past you guys and get some opinions.

My goals are:
1) Protect my assets (primarily my PPOR right now, which is mortgaged)
2) Pay of my mortgage asap
3) Minimise my taxes

So with that in mind, here is the structure.

1a) Create a Unit Trust (with me as the Trustee, and my wife and I as equal beneficiaries).
1b) Transfer my PPOR to the Unit Trust

2a) Create a company and rent the house from the Unit Trust
2b) Claim the rental fee as a business expense

3a) The Unit Trust receives the rent as income (and puts it towards paying off the loan), but incurs losses due to depreciation, bills, repair & maintenance, etc. Overall the Unit Trust incurs a loss for that financial year.
3b) Since Unit Trusts do not "quarantine" losses, the losses are passed down to the beneficiaries (my wife and I) who can then use them to reduce our taxable income for the financial year.

4) The company puts a percentage of its net income towards paying off the house loan.

That's the structure. My primary concern is that because my home has now become my business address, can I still live there ? I haven't searched extensively, but I don't know of a law that prohibits anyone from living at their business address ?

I'm meeting with my accountant this week to discuss this structure. Any opinions and feedback would be very much appreciated.

Thanks

 

You would have to pay stamp duty on your PPOR to transfer it over to the trust...ouch. We were contemplating doing the same thing until we realized that "little" hitch.

 

Thanks for the response.

I assume that stamp duty is the same as Land Tax ? I checked the State Revenue Office (VIC) site and the current rate for our land value bracket (250K to 600K) is $926 + 0.575% of the amount > $250K. For us it's roughly a $2000 fee.

Unless I've screwed up the calculations, I think that's a worthwhile expense for asset protection and long-term tax benefits ?

Was the stamp duty the only factor that deterred you from going down that path ?

 

Losses are trapped in trusts.

Stamp duty on transfer.

Units are assets accessible by beneficiaries' creditors, eroding asset protection.

Units are CGT assets, which are eroded by any non-assessable capital amounts returned.

Living in the property that is supposedly owned by your trust has Part IVA tax avoidance issues to consider.

Where your company is claiming dedictions for "rent" (also at a lower tax rate than you !) and you are living in it as well requires FBT consideration, otherwise maybe even deemed dividends problems.

Hopefully your "business" is not caught by personal services income provisions.

Book a long appointment with your Accountant !

Cheers,

Rob

 

Thanks for your response Rob.

I was under the impression that Unit, Hybrid and Bare Trusts do not trap losses, and are therefore used by property investors to negatively gear property purchases and use the losses to reduce their taxable income ?

Good point. I should put all the units in my wife's name. Since she isn't associated with the company, the asset is protected I assume.

Does that mean their incur CGT if they are sold ? No plans to sell the house or units so that may not affect us. I wonder if we incur CGT when we transfer units to our children.

I'll need to check out Part IVA ! Thanks !

That's a biggie. Didn't consider FBT. Not sure why there would be dividend issues, but I'll ask my accountant.

No worries there thankfully. I pass the ATO test for a PSB.

Thanks again for your feedback Rob. Like you said, there's much to discuss with my accountant !

Cheers

 

Stamp duty is very different to land tax. Stamp duty would be paid on the total price of the place (not just land) and varies by state. Paid at the time of the transfer. For example for a $460k place in NSW it is about $16k. For a 900k place it is $36k!

Regards,

Jason

 

The stamp duty can be very hefty, in our case we were looking at a good $20K.

The other reason we didn't proceed was that when we eventually did sell our PPOR if it was transferred to the trust, it would then be subject to Capital Gains Tax.

Two slugs we didn't want to deal with.

 

CGT

While sometimes one can justify shifting an invesmtent property to a trust and wearing the stamp duty for a debt restructure I am yet to see a case where moving the PPR is a wise decision. Losing the CGT exemption unless you have another property to use it on could be a very costly mistake in time far outweighing any short term benefits. Even if you don't move in your life time your trusts ultimate beneficiaries will wear the tax eventually on sale.

Consider selling of gifting your half of the house directly to your wife and that would have the same asset protection benefits. Depending on your state you may find theire is a stamp duty loop hole here you can wiggle through relating to transfer of ownership between spouses. (Not sure if this still exixts but get your accoutant to check it out). Worst case is you will only pay duty on half the transfer.

Regards

Jason

This is not advcie and you should seek licensed professional advice before acting on any ideas given here.

 

Rick,

You haven't considered the clawback provisions of the Bankruptcy Act either. Since you are doing this with the aim of asset protection if you later go bankrupt the trustee in bankruptcy could be able to clawback the house and unravel the transaction. If this is done to defeat creditors there is no time limit for this.