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Margin Loan, LICs + LPTs - trust or direct?

Discussion in 'Accounting, Tax & Legal' started by tetranomad, 13th Feb, 2009.

  1. tetranomad

    tetranomad New Member

    13th Feb, 2009
    Brisbane, QLD

    I am currently on $100K pa and partner on approx. $40K and we have a few month old child and hope to have one more in the next few years. We are in our mid 30's. Our current investment plan is to redraw some cash from our PPOR loan (approx. $20K) and use that to establish a new margin loan to buy into some large LICs and LPTs (A-REITs) for long-term holding, probably LVR ~ 50-60%. We hope to balance things so that it is cash-flow neutral or thereabouts, and keep it this way for the foreseeable future with further purchases with appropriate mix of our cash and further drawdowns against margin loan. We are not certain what my partner will do in the near future, so her salary could be anything from 0 to $80K, but it is likely that within 5 years she will be back to full-time employment ~$80K.

    For flexibility, particularly if the investments become positively geared in future, I am leaning towards setting up a family discretionary trust to hold the assets. I have heard that other trust structures are able to deal with negative gearing, but they sound too complex (and expensive to set up) to me, and as I said, we hope to be neutral geared, possibly positive in the medium-long-term future.

    So, my questions are:

    1) do people recommend a family trust for our plans?
    2) is the flow of franking credits and tax deferred distribution a simple matter?
    3) is establishing a margin loan through the trust a simple matter?
    4) are the ready-made family trust deeds, eg. Cleardocs, suitable, or should we see a local accountant/solicitor?

    Lastly, just to make things more complicated - if in the future we have larger amounts of capital (eg. inheritance or access larger amount of equity from PPOR) to start an aggressively geared property portfolio, will a family trust like that mentioned above be any hindrance to setting up a second asset holding structure for the properties, eg. something more complicated to work in with negative gearing and/or transfer to SMSF?


  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    For smaller amounts being invested and the potential amount of tax being saved, the cost of setting up and maintaining a trust can outweigh the benefits. However, if you are in a high risk profession then the asset protection may be worth the cost.

    I generally do prefer trusts myself, but only if you have plans in the short-medium term to acquire significant asset holdings and can live with the costs of maintaining them.

    I strongly recommend finding a good accountant who is familiar with trusts and investing (especially in real estate - many of them don't have much experience there). Don't try and set up a trust on your own ... getting the trust deed wrong now can have huge implications in the future when you have millions of dollars worth of assets held in trust - not all trust deeds are created equal.

    For an ordinary discretionary trust, I believe that franking credits and such just flow through to the beneficiaries - I'm not an accountant, so I'll defer to other's comments here.

    Margin loans and trusts are generally no problem - a little bit more documentation required, but not a big deal. Just make sure your deed allows you to borrow money and such!

    There is no negative gearing with an ordinary discretionary trust - you'd need some type of hybrid trust for that, and some of them can act as a discretionary trust until ready to use in hybrid mode - so this may suit you. Personally I prefer to keep things simple and don't use hybrid trusts myself, but it depends on your circumstances as to which is more appropriate.