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Help - How to untangle loans/assets into HDT

Discussion in 'Accounting, Tax & Legal' started by seaview, 24th Jan, 2007.

  1. seaview

    seaview Well-Known Member

    8th Jun, 2006
    Hi everyone,

    We are about to set up a HDT through Nick M for managed funds, with a company as trustee.
    The problem is how to get existing managed fund assets into the trust and maximise tax deductions for existing loans. We already saw Nick for a one hour consult but did not get down to nitty gritty problems in setting up trust. Before I bother Nick again, I thought I would see if anyone here can shed some light on several problems.

    It is probably easiest to start at the beginning:

    We obtained 3 loans (total $310k) against IPs held in my husbands name (highest income earner with good IP deductions, tax rate is down to about 14% now). One extra loan for $125k was taken over one of his IPs in both our names. We had no choice whose names these loans were in, due to lo doc rules.

    But as the money was used to purchase Managed Funds in my name (lowest income earner with IP losses and negative gearing to use up), I was able to deduct all the interest against the income.

    I also took out new margin loans (with BT and LE) to buy the Navra units. Very recently we bought some high growth funds in my name too.

    Problem 1:
    How to get all these assets into our new HDT trust, and how to keep/maximise tax deductions? Apparently if we transfer funds to the trust, the stamp duty works out at $600 per $100k, or .6%. which adds up to a lot when portfolio is near $1 million.
    I figure it would be cheaper to redeem the Navra units, and have the trust rebuy them. This would only cost .3% (buy/sell spread) which would save several thousand dollars in transfer stamp duty.

    Most of the growth funds ($285k)are probably not so cheap to redeem and buy back with higher buy/sell spreads, and there has not been much growth yet, so we would not pay much CGT etc. Anyway, I am thinking we will have to just transfer the growth funds into the trust, and wear the transfer cost.

    But how does this effect tax deductibility - goodness knows which original bank loan the growth funds came from. Actually, they were just bought with margin loan funds I think.

    Problem 2:
    Once we redeem Navra units and put the money back into the margin loans, it will still be my money, or will it (for trust/tax purposes ?). I could pay down the bank loans and redraw them to loan the money to the trust. That way the loans would be clearly from my husband to the trust. But that is a pain to have to do, though not impossible. Would it really be necessary?

    Problem 3:
    We don't really want all these bank loans being from my husband to the trust anyway. If this happens, his portion of income, assuming margin loan is kept in my name, would be about one third, which - assuming a trust income of about $120k, would give him an income of $40k, with interest deductions of only about $27k, giving him extra taxable income of about 13k (even more if Navra does better than 15% and growth funds give more than 5% dividends).

    BIG QUESTION: Is there any way husband can loan (on paper) all the bank money to me so I can then loan it to the trust. Tax wise that is far better, as I would get all the income, plus all the deductions for the next few years. (I have about $60k of IP losses to use up). That would make me the major income unit holder ??
    Does hubby have to have any income units?
    It would suit us better (I think?) if he did not get income units until after he retires in about 2 years, (he is too young for pension/super strategies so no need to suggest them), and his taxable income will be much lower then (defence force tax-free reserve work, plus small RAAF pension). He will also have about $100k lump sum in 2 years to pay tax on, so we don't want to be increasing his income with managed fund income until after that if possible.
    Later on he could get more income if necessary from the HDT. We plan to keep buying more growth funds which should enable the trust to buy back some income units in a few years. That would enable it to distribute income more freely, wouldn't it?

    Sorry this is so long, but things just seem so messy and I am not quite sure where to start. (Would you believe even Steve Navra was unable to put our finances up on his white board, much to his frustration :) - they are just too complicated, and he was only trying to follow all the IPs / loan trails.)
    Anyway, any thoughts / suggestions would be very welcome.
    Many thanks in advance.
  2. seaview

    seaview Well-Known Member

    8th Jun, 2006
    I just had another idea.
    Perhaps we could initially keep the Navra units in my name, and just transfer the high growth funds to the trust,. That way my husband could loan all the bank money to the trust to use for high growth funds but would actually make a loss as income from these funds is lower than the interest paid.
    I would be able to offset the larger Navra income against all my losses. So I would then have little if any income units in the trust.
    A potential problem with this is whether I can hold both trust assets and my own assets in the one margin loan. How would one separate the interest deductions, especially if interest is capitalized? Could this be done at all? It is preferable to keep all lending in the one margin loan as we get a volume discount. But if really necessary I suppose we could split assets over two loans.
    Thanks for your thoughts