More on HDTs

Julia Hartman has more information in her latest newsletter:
http://www.bantacs.com.au/newsflash/current_issue.pdf

A lot of good info. on her site!

 

That's a good read. I think some of these articles leave you with the impression all HDTs are bad news which is plainly inaccurate.

I think their statement "The possible tax benefits you may receive from a Hybrid are just not worth the risk" is ill-informed and I am surprised they would make such a comment with no knowledge of the reader's personal circumstances.

My understanding is the "risk" is nil if you get your structure organised by a professional who knows what they are doing, and in many circumstances the benefits well and truly justify the effort involved in setting up and maintaining the Trust.

I think the focus on problem HDTs comes from the number of dodgy deeds in the marketplace promoted by so-called experts. Presumably once the ATO identifies a 'problem' deed they'll do a practice audit of the Accountant/Expert who set it up, to identify the other Deeds they have out there. When that happens I agree there is good reason to panic for the people operating investment activities using their deeds.

Time will tell ... hopefully it will lead to some property buying opportunities

 

Ok Give me a HDT "benefit" according to your particular circumstances and I will give you as good a benefit or better by ATO approved methods. Lets see who is ill-informed.

 

Hi Julia,
May be you could try my case.

We are both employees (with the Government) earning similar salary approx100K each. We own our PPOR. We already have IPs under our own names with value up to the land tax threshold in Qld. They are neutral to +ve.

With the new IP also in Qld, we want to be able to -ve gear now but later on have it under a DT for all the standard benefits of a DT such as income distribuion flexibility and can pass it on to our children without incurring transaction costs. Asset protection is also important but we are willing to ignore it during the first few years when the IP is still +ve geared.

We think we could opt for a HDT (Batten's deed), in the first few years when it is -ve we each purchase SIUs 50/50 and use the -ve gear-ability of the HDT. We think in 4 years the IP will become neutral/positive. Then, the HDT can slowly redeem the units during a period of 2 years, HDT will have to pay for the units at market value (assuming the IP's value has gone up, it may not be) hene we will have some capital gain $$. But during those " 2 redeem years" we will arrange our affiars so that we do not have any other income , hence the capital gain can be absorbed by us without much tax incurred to us. So overall the cost of redeeming the units if any is small.

Anything above is not within the legal tax rule in your view ?
What would be your suggestion ?
Thank you.

 

Have a read of PBR 77937 and consider owning the property 1% in your name and 1% in your spouse and 98% in a discretionary trust. Then you and your spouse salary sacrifice half of the rental property expenses each. The otherwise deductible rule means your employee does not pay FBT on the payments they make. You don't pay income tax on that portion of your salary so it is as good as getting a tax deduction for the expenses yet the DT gets 98% of the rent and capital gain if you ever sell. This profit can be distributed as you see fit each year depending on the situation with your children. Other benefits include that your employer would get the GST back on any expense that include GST, something you couldn't so your salary package would not be reduced by as much as the actual cost. As there is no rental loss Centrelink don't add anything back. Asset protection immediately acheived for 98% of the asset and the negative gearing benefits are much larger than if in your own name because you are getting all the expenses and only 2% of the rent which means it will never get to be positively geared to you and your spouse, even when you own it outright.

 

Wow, i must say that is quite creative... Saves CGT as well

HOWEVER why wouldnt that be picked up by part IV? There is no real commercial reason that you would do that? In the future, would you be able to sell the 1% to the DT from your personal name so it can be totally owned by the DT?

I hope your book is full of ideas like that. If so it seems $25 will be an absolute steal....

 

Hi Julia,

Very interesting - thanks for sharing.

Cheers - Gordon

 

Part IVA does not apply to the simple choice to salary sacrifice. The only place this particular reader may run a risk of Part IVA is the changing of the deed after buying it. Not normally a problem if you know about this before you buy. Did you read the PBR? The ATO have agreed but you should get your own ruling for your particular case.

The book is $29.95 and yes well worth it. Lots of other tricks but this would have to be one of the best. It is out next week and can be ordered on
Ban Tacs Accountants - Rental Property Tools

 

I just had a read of pbr 77937...

Couple of key points -
the pbr was a 50/50 share in the venture. Do you think 98/1/1 would still get the same opinion.
Why would you have 1/1 for 2 people. Why wouldnt you just have a 99/1 share with one person sacrificing the whole amount?
It also said the applicatant was a joint appointor and a joint trustee? What would happen if you had a corporate trustee? Would you have to be a director of the corp trustee for this to work?
What do you think would happen if you werent an appointor? (and your spose was due to potential asset protection reasons)

Thank you very much for sharing. I wonder if HDT's would be so popular if this was more common knowledge...

 

PBR 78388 has 95:5 split

If only one spouse had all the negative gearing then it might push them down to the next tax bracket (the next threshold is $80,00) so split over 2 they can have up to $40,000 in losses and still be in the 41.5% bracket ie bigger refund. Yes such a large loss is a consideration when you only get 1% of the rent.

The trust must be your associate for it to work.

 

So do you only have to be a capital benficary for it to be associated or do you have to control the trust by controlling the trustee/appointer?

Would the corp trustee be able to have duel roles? ie being the trustee of your property DT and share DT?

Cant believe Part IVA wouldnt apply, they have gone to all this effort to stop HDT's but have no power to stop this one from IVA. Atleast its great to win a round with the ato... Just hope they dont close the lophole.

Thanks for sharing

 

Thanks Julia I have to read your response many more times to see if I can understand the mechanism. I would never have thought I could salary sacrifice the whole retal expense of an IP eventhough I only own 1% of it !
I am not sure if the QLD public service as an employer would let me salary sacrifice IP rental expense ? Do you know it is possible ?

Could Julia (or anyone) please explain what "The trust must be your associate " means ?
Also where can I go read PBR77937 please ? (I have tried searching for the string "PBR 77937 " in "Precedential ATO View search" , no ? ).

Many thanks.

 

From PBR 77937 which you can get off the ATO web site by going to ato.gov.au/rba/content.asp?doc=/rba/content/77937.htm

Subsection 318(1) of the ITAA 1936 provides :

…the following are associates of an entity (in this subsection called the ‘primary entity’) that is a natural person (otherwise than in the capacity of trustee):

(d) a trustee of a trust where the primary entity…benefits under the trust.

On the facts given the employee will benefit from the trust. The employee and the trust are therefore associates.

So you just have to be a beneficiary under the trust. In that particular case the employee was a capital and general beneficiary of the trust, a joint appointor and a joint trustee. The employee’s family are also beneficiaries of the trust.

If you really want to be sure just make sure you distribute a few dollars a year to the high income earner.

 

Julia,
I have read it very intersting. Thank you.

Do you know if the Qld Gov, as an emloyer, would allow its employees salary sacrifice IP rental expenses ?
Thanks

 

Salsa,

You will probably have some work in persuading them. To help people explain the concept to their employer and their employer's accountant we have put together a kit. It is also a very simple way for your employer to apply for an ATO ruling so they don't have to worry about it coming back to bite them The kit at $150 is a lot cheaper than them paying their accountant to start the research from scratch. If you go to
bantacs.com.au/fbt_rental.php
there is a letter you can print up and give to your employer to start the ball rolling

 

Thank you Julia.
If says the Qld Gov won't allow salary sacrificing rental expenses (I think this is likely the case unfortunately), would my proposed solution still works and within ATO tax rules ? Thanks

 

What is the difference between using a HDT in your case or just holding it in your personal names and when it becomes positively geared transfering it to a DT or the people you then want to own it. Same amount of CGT but you would have stamp duty costs. You need to weigh up the stamp duty costs compared with the risk of the ATO not approving and the cost of setting up and running a HDT all those years. Further being in your own name is handy if you ever want to give it your main residence exemption. You can also hand it down to your children through a testamentary trust which will have great tax benefits for them. You may find in a few years you don't want to transfer it anyway. All minor considerations. This is really where I am saying why take the risk?

 

the risk of the ATO not approving

Thanks Julia. Just to make it clear for myself, you were saying this because you saw some potential issues in using HDT for my case as I have descrbed above (if so which points ? ) or because there has not been any ruling examples that favoured a case siimilar to mine ? or because of reasons I have not thouht of ?
A bit more on my situaton, the IP is a group of units so PPOR exemption is not likely, it is in the 2 M so stamp duty for transfer is quite big, also more land tax if owned by our names as we already up our threshold limit for land tax.

(All what I have said re my case are true facts I have not invented anything to challenge you or anything like that).

Thanks

 

Salsa,

I am far from thinking you are inventing things. You have given me an excellent opportunity to show people there are other ways. It is a shame your employer probably won't let you salary sacrifice because the benefits are much better than a HDT. Don't give up that easy, go to the union. If you get through there will be a lot of people you work with that will benefit too.

I am not going to tell you whether your HDT will pass or not. From what you have said it sounds like the least offensive but you would have to read the deed to be sure. My stand on this issue is apply for an ATO ruing on your particular deed asap. The longer you wait the higher the cost if you are caught, besides you will sleep better. If you have a HDT then you have a longer term plan. You are not going to be able to avoid the ATO for all that time, so get it over with and do it now.

 

Salsa,

Just thinking about the numbers here. I think we have got down to the stage where you can justify a HDT cost wise because it will save you stamp duty and land tax. I'm not too sure that adds up when you consider the huge tax savings of negative gearing. Say the property earns $30,000 in rent has $5,000 in depreciation and $40,000 in other expenses that you can salary sacrifice. Not these figures are very conservative. The larger the negatvie gear the beter the benefit of Salary Sacrifice over HDT. For example you and your spouse's tax returns would be

Rent income $300
Depreciation (50)
Wages 80,000
---------
Taxable income $80,250

The HDT would mean you and your spouse would get half of all the property items ie

Rent Income $15,000
Deprn (2,500)
Other expenses (20,000)
Wages $100,000
-----------
Taxable income 92,500

That is an extra taxable income of $12,250 each per year Total of $24,500 tax on which will be at 41.5%, if you have someone else you can distribute this to and they are in the 31.5% bracket you will save $2,450 per year in tax. For that matter a bucket company would achieve better than that. But if you can find someone to distribution the income to that has no other income (very relevant for people with a non working spouse) they may pay as little as $18,525 in tax on it when you would have paid $10,167.50, that is each year!
Is this worth the land tax and stamp duty saving? Don't forget the GST Saving too.