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Hybrid Trusts

Discussion in 'Accounting, Tax & Legal' started by Enough Tax, 16th Sep, 2008.

  1. Enough Tax

    Enough Tax Member

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    Hi

    I am after some info regarding hybrid trusts. I was reading this

    'There are some specialist Trusts out there (not a standard hybrid Trust, but a tailored hybrid Trust particular customised for owning property) which may allow Trust losses to be offset against personal income. Some people are already doing this; I'm waiting on a ruling by the ATO. (Not their general ruling on all hybrid Trusts, which may take forever, but a private ruling that my accountant is seeking on their particular form of hybrid trust.)'

    Can someone give me some info about this?

    Also how do you prevent a trust from making a profit? Can it use any profits to purchase more assets or does it have to distribute them?

    We do plan on seeing an accountant once my hubby returns home.

    TIA:)
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Why do you need a trust?
     
  3. Enough Tax

    Enough Tax Member

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    A work colleague of hubby (both RAAF, both on same pay level)was telling him on the weekend that his recordable income was only half what hubbys is through the use of trusts. We looked at trust 10 years ago but hubby didn't like the idea of paying stamp duty or loosing CGT exemptions so we didn't do it. But this new piece of info seems worth checking but I came up with Part IVA which seems to suggest he can't do it.

    Can trusts use there earning to buy more assets such as shares and property and not pay distributions or must it be distrubted as income every year?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Trusts generally need to distribute all net profits (income + capital gains) each year, otherwise the profits will be taxed at the highest marginal rate if retained within the trust.

    Trusts don't directly allow you to minimise tax - the tax benefits usually come from streaming profits from investments to the lowest income earner. But this isn't going to reduce your recordable income (it will actually increase it - since you are making money).

    What you are looking for is negative gearing - buying growth assets which have negative cashflow, which the government allows you to offset against other personal income (eg salary), thus reducing the amount of tax you pay on your income.

    You don't need a trust to do this - indeed trusts make it somewhat more difficult to achieve (hence the need for complicated HDT structures which do allow this somewhat).

    Trusts are first and foremost an asset protection vehicle. Any tax benefits you get are largely incidental, and as previously mentioned, trusts can sometimes work against you from a tax point of view.

    Unless you are in an occupation with a high risk of litigation or you are the director of a business, then there's probably no need for the asset protection offered by trusts (you'd need professional advice for your own circumstances) ... buying negatively geared growth assets in your own names will achieve tax savings more efficiently than using a trust.

    Remember that you need to be making money overall or else it's not worth it. Negative gearing means you are actually losing money - so you need to make sure the growth in the assets is more than enough (over time) to cover those losses, otherwise you are actually going backwards financially. You should never invest just for the tax benefits - the investment has to be sound in its own right.
     
  5. Enough Tax

    Enough Tax Member

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    Thank you for the info. We are postive geared (hubby doesn't like negative gearing for the reasons you state) but everything is in hubbys name so tax is an issue. Every time we seem to get a break it's taken away. Such as SS into super. I stay at home with the kids. We have 5 and come next year we won't qualify for any govt assistance. From what you say it might be better to sell off some of the houses and just put shares in my name for the tax benefit without the additional costs of running a trust.

    Although the other thought was we would put the next house in the trust also and rent it ourselves, which would make it tax deductable?

    Another question regarding PPOR, I understand it remains for up to years if you move. We were posted away and had hoped to return but out next posting is somewhere new. We plan to build, do we need to sell existing PPOR prior to moving into new residence to retain CGT exemption or can we not claim new residence as PPOR and when we sell it just pay CGT?

    As I said we do need to see an accountant but the last one we saw didnt offer us much assistance. He said family trust was an idea, this was 10 years ago.

    Did you put some links for other threads regarding trusts on this page? I am reading through those which is helpful.

    Cheers
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I wouldn't be selling assets if they are fundamentally sound investments ... that will only make your tax situation worse (in the short term)!

    If you are paying lots of tax, it means you are making lots of money ... this is generally a good thing :D

    However, I do believe that our tax laws are unfair to families where one partner works and the other one doesn't - I'd much rather see family income pooled and then split in half - so you pay tax as if you had both earned the same amount ... would be much more equitable in my opinion.

    If you acquire more assets in the future to minimise tax, they should probably go in your name (or at least the majority ownership in your name) ... or be held via a trust (an ordinary discretionary trust will do the job if the assets are cashflow positive ... no need for a HDT, although you may still want to investigate that as an option since you can operate a HDT as an ordinary trust as well). Of course, situations change, and if you can conceive that you may one day be the highest income earner, then it may well work against you - you'd have to make that judgement call after doing the sums.

    Definitely need good advice on that - there is a lot of conflicting advice around about whether this will work or not.

    Generally the CGT free status of your PPOR is potentially worth more in the long term than some short term tax benefits. You also need to be very careful how you structure it to ensure the ATO doesn't just consider you to be avoiding tax.

    Yes, if you move out and don't buy a new PPOR immediately, your property retains its PPOR status for up to 6 years. This is only for CGT calculations and doesn't affect income/expenses declared if you rent it out while you are gone, nor land tax etc (check on the land tax - it varies from state to state).

    If you then move into a new PPOR, you get to choose which property is your PPOR ... you'd need to do the sums on whether you think keeping the existing property as a PPOR before you sell is going to be worth more than having your new property as your PPOR. It would come down to your plans for the new property and how long you are likely to be keeping it - and to a degree, it also depends on the state of the property market and how much growth you are likely to see.

    If you keep the existing property as a PPOR for the remainder of the 6 year period and then sell, while living in your new property - when you eventually sell your new property, you would just pay CGT on the growth which occurred for the period it was not your PPOR (you'd get the new property valued when it becomes your PPOR). In most cases I'd think the amount of CGT for this period would be a relatively small amount compared to the growth in value over the longer term - unless you expect to be selling the new property anytime soon, which makes it all more difficult to know!

    Generally, tax saved now is worth a lot more to you than tax saved in 10+ years time - but you do need to take other factors into account (such as growth in the market and the timing of the capital gains based on how it will affect your incomes, etc), and any potential change in plans.
     
    Last edited: 17th Sep, 2008
  7. Enough Tax

    Enough Tax Member

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    I won't ever be the highest income earner, and hubby will retire in less than 10 years now. He's already served 30 almost 31. He will receive a pension from defence which is pretty good thing. At some point we need to get some assests in my name (espeically fully paid ones)because we need to split the income. I agree totally about the income splitting, perhaps it will be considered in the Rudd Govts tax review? I would like to keep putting in super through SS (I don't have a large super and we don't put into it because I'm 7 years younger than hubby). Our other problem is we will be supporting 4 kids while hubby is 66 -70 as they won't turn 25 until then and our assets and indeed income is too high for them to recieve any assistance. Yes it high tax does mean highish income but that income is supporting 7 which makes it more difficult. Hubby said his friend must be making HUGE losses to halve his income, but he even has rents a car from his trust. We have never liked SS lease car arrangements and we are in the top tax bracket. I am putting together all the info to present to the accountant once hubby comes home next week. Our properties all have CGT exemptions (we recently sold the one without that to build the next house)due to various reasons so the ability to free up the capital and put into bargain buying stocks atm would be fantastic. I don't mind paying tax but at least I would get the benefit of going up through the brackets which does save.

    So many aspects to consider, including how do we find a good accountant
     
  8. AsxBroker

    AsxBroker Well-Known Member

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    When did you lose salary sacrificing?

    Your husbands can salary sacrifice up to $100,000 pa if he is over 50, each year until 30th June 2012. With Age Based Limits this was about $103,000
    Anyone under age 50 can salary sacrifice up to $50,000 pa.

    Does his employer (Defence) let him salary sacrifice?
    You can boost your super by using spouse splitting, which means you can transfer his superannuation contributions into your superannuation fund.

    If the assets are tax free you won't have to worry about tax when you sell and move the funds into super, in a pension which are tax free to him being undeducted contributions. Which won't add to your taxable income!

    I think you should be reading about transition to retirement. That'll reduce tax down substantially (15% on the first $100,000). That'll more than have the tax (assuming standard $100,000 tax Marginal Tax Rate being 40%).

    From what I see, your in a fantastic position...

    Cheers,

    Dan

    PS Before making an investment decision to buy, hold or sell any assets you should speak to your FPA registered Financial Planner.
     
  9. Enough Tax

    Enough Tax Member

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    QUOTE=AsxBroker;65567]When did you lose salary sacrificing?[/I]
    Not SS as such but with the Govt changes next July we will loose the FTB we get through SS into Super currently. We will still probably have to SS some but we will be out of pocket and still have 5 kids.

    Your husbands can salary sacrifice up to $100,000 pa if he is over 50, each year until 30th June 2012. With Age Based Limits this was about $103,000
    Anyone under age 50 can salary sacrifice up to $50,000 pa
    .

    He is 47 so only up to $50k which he did last year and this.

    Does his employer (Defence) let him salary sacrifice?
    You can boost your super by using spouse splitting, which means you can transfer his superannuation contributions into your superannuation fund

    I'm 7 year younger than him and he gets his pension (well he's entitled now)in 9 years when he'll retire. He has already served over 30 years.

    If the assets are tax free you won't have to worry about tax when you sell and move the funds into super, in a pension which are tax free to him being undeducted contributions. Which won't add to your taxable income![/I]

    His Defence Super is a pension and is classed as income, the second super we have we plan to use as an allocated pension. That will have additional funds from his defence super through commutation. The reason we need extra is as stated previously we have 5 chidlren aged 12, 6, 5, 3 and 21 mths.


    I think you should be reading about transition to retirement. That'll reduce tax down substantially (15% on the first $100,000). That'll more than have the tax (assuming standard $100,000 tax Marginal Tax Rate being 40%).

    Hubby planned retirment from the day he started work.


    From what I see, your in a fantastic position...

    I think we are okay, it would be fantastic if we didn't have a large family.
    Cheers,

    Dan

    PS Before making an investment decision to buy, hold or sell any assets you should speak to your FPA registered Financial Planner.[/QUOTE]

    We do plan to see an accountant to see whether a family trust would suit us or just putting assets in my name.

    Thanks for the info though:)