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Positive Gearing in a HDT

Discussion in 'Accounting, Tax & Legal' started by DaveA, 25th Feb, 2007.

  1. DaveA

    DaveA Well-Known Member

    19th Feb, 2007
    Sydney, NSW
    i was having a think about this today and i just wanted to see if what i think is actually the correct answer.

    If i buy 500k of negative geared property in a HDT which then over time (as rents increase) becomes a property that makes money before tax (so you are actually paying tax on the rent you recieve), is it then the best idea to purchase the units back (wiether this is at market value/cost or however, not really important here, so ignore CGT issues) and turn it into a DT and distrobute the profits to lower income earners?

    This way you would have the benefits of the negative gearing on a high salary at the begining and then profit being earned being tax less (either company or lower tax rates).

    When the units are redeemed, does the trustee borrow money inside the trust and then pay for the units, in this case, how would the trustee use the equity inside the trust, would he refinance the loan and distribute the funds to a beneficary (taxable?) or maybe make a loan (at a realistic interest rate) to a company/another trust/individual (how would this satisfy the test of making interest payments on the re financed part tax deductable)

    thanks for any direction guys
  2. D&K

    D&K Well-Known Member

    14th Nov, 2005
    Hi Dave,

    At the risk of confusing myself, I may be able to help with your first question, as it sounds familiar.

    Initially the high income earner buys the units, funded by a loan, and gets -ve gearing tax relief. As the IP grows in value, income attributable to the unit value is paid to the unit holder; however, income attributable to the portion of capital growth becomes discretionary. (this is a long term thing)

    So if you bought at $200k and the IP is now worth $300k, then 2/3rds of the income is attributable to the initial unit holder and 1/3rd is discretionary (which you could distribute to a low-income earner).

    As far as I know, there's no need to sell units at this point. Perhaps the trust could borrow against the gain and pay back the high-income unit holder. This would increase the discretionary portion but reduce the discretionary income because of the new loan ... which sort of defeats the purpose.

    So if the trust loaned for and payed back $50k, the discretionary portion gets 1/2 the attributable income (up from 1/3rd) but now has a $50k loan to service before distributing income (and any losses would be locked in the trust).

    I'm not sure why you'd want the HDT to buy units back, maybe I need to look even longer term? :confused:

    This is really a NickM question (and probably also to correct where I may have lost myself above). Hopefully I've helped clarify at least the first part.

    cheers, Dave