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Tax Structuring Trust & Personal Assets

Discussion in 'Accounting, Tax & Legal' started by Beng, 23rd Mar, 2018.

  1. Beng

    Beng New Member

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    Location:
    Gold Coast
    I own one property unencumbered (within a discretionary trust) and am looking to acquire a second property. I want to keep the second property as a personal asset to also go in my partner's name and structure it in a way that is most tax efficient.

    The property in the trust is not ideal for my lifestyle, but with a substantial investment, it could be. Where are I have the option to purchase a second property either ideal for my lifestyle, or purely the purpose of good investment returns (if i chose to rent it out and live in the trust property).

    I have an appointment booked with my account for specific tax advice however would be fantastic to have some insight to consider the pro's and cons on each scenario and possible other options for me to wrap my head around before I start paying $300 an hour for advice.

    The options I'm considering are;

    A) Renting out the trust property of which I will pay the highest marginal tax rate on the distributions of rent after expenses. Borrow to buy a house that suits my lifestyle.

    B) Move in to the trust property, the trust to borrow money to improve the property to suit my lifestyle. Personally rent the property back from the trust at market value and also purchase a second property with a high rental yield for investment purposes.

    I run a business from home, so I would make personal deductions against a portion of the rent paid to the trust.

    For simplicity purposes, assume that I would borrow the same amount in total for both scenarios and would keep the .

    From a simple viewpoint, It looks to me like option B is better, allowing me to make interest deductions against borrowed money. Also can deduct rates/maintenance etc against both properties V's one only.

    What am I not considering (other than GCT and capital growth)?
    Are there any major issues with personally renting from a discretionary trust when I am one of two trustees?
    If the trust pays down the loan amount from the rent it receives from me personally, and there is zero left to be distributed back to me as a beneficiary, what rate of tax does the trust pay on the principle part of the loan repayment?

    Sorry for the long-winded question.. just trying to wrap my head around the options.

    Ben
     
  2. Terryw

    Terryw Well-Known Member

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    How do you own the property if it is held in trust? Are you the trustee?

    You seem to be failing to distinguish between trust assets and personal assets.


    This is legal advice and you should speak to a lawyer who knows tax.


    If you rent from the trust and the trust borrows to improve the property it is likely to be tax positive so you will be paying tax on your main residence, potentially land tax will apply as well depending on the state, you will not have a main residence CGT exemption and you cannot leave the property via your will.


    It might be better to have the trust sell the property to you, or to buy a new property - could be done without stamp duty in some states. You can still get asset protection if structured well.
     
  3. Beng

    Beng New Member

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    I am one of two trustees and the sole beneficiary of the trust.

    If I (in the capacity of trustee) were to rent the property to myself (as either an individual, or under a business entity), for the purposes of the trust, the property would remain an investment meaning that interest on a loan to improve the property would be paid by the trust. If the trust then pays the property expenses (rates, principle and interest repayments on the loan) directly and the net distribution back to me as an individual is zero, then what tax would I be paying on that property?
    It would also mean that the next property I acquire would become a rented investment, with tax deductible expenses. It should also be noted that I would be making a deduction against my personal income for home office expenses.

    The alternative is purchasing another property to become my principle residence. The majority of this would be financed, and obviously no interest deductions being my PPR. It also means that the property owned by the trust would be rented out, distributing rent after expenses back to me which would be taxed at my marginal rate.

    I could potentially purchase the second property in a trust using a corporate trustee and then rent from the trust as an individual.

    My lawyer, who established the trust when the property was purchased and does my estate planning has been fantastic with what he's done for me so far, but does not fill me with confidence regarding his tax knowledge. So yes, I understand that I need further advice from an accountant or tax proficient lawyer, however.. I hate taking blind advice from professionals, and given that I would be engaging the services of a new lawyer to do so, I would like to better get my head around the options before engaging those services.
    The better informed I am beforehand, the better suited I'll be in assessing options put forward from those professionals.. which is why I am here. For open discussion.

    I do not wish to purchase the property from the trust for a number of reasons, but mainly that I would like it to be protected should the unfortunate instance occur where any personal guarantee I have made be called in.

    Clearly, I'm still learning the ins and outs of corporate/trust/tax structuring so please excuse my naivety, I'm just looking for any obvious road blocks in the ideas mentioned above.
     
  4. Terryw

    Terryw Well-Known Member

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    Wow, that would be extremely unusual with 2 individual trustees and one beneficiary (who was also trustee – makes it even more unusual)


    If there is no income of the trust then nothing to distribute to you, so no tax taxable for the moment.


    Trust doesn’t necessarily equal asset protection. It will depend on how the assets were funded and ongoing transactions.


    I have a client who is renting a property from a trust that he controls. There is a private ruling who confirms the interest on the loan used to acquire the trust, and the furniture, will be deductible to the trust. I advised him against holding the property in trust, but he considered my advice and decided to do it anyway.
     
  5. Beng

    Beng New Member

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    The settler of the trust was my late father, so the trust (and it's assets) were funded by him. The ongoing trust expenses are self funded by the trust using money in the trust account. Although at times, I have considered personally lending to the trust for property improvements, I decided against it given that I have in the past, and will again in the future, provide personal guarantees against other debts, I did not want the trust having a liability to me personally that could be evoked in the event that my personal guarantee is called on.

    The trust deed allows for the Trustees to add beneficiaries, which I will do in the future. Being a discretionary trust, I'm likely to add separate shell company as a second beneficiary. If Property A begins to generate income via rent, I'd distribute that income to the to the shell company rather than to me as an individual (given the company tax rate is much lower than my individual marginal rate), then the shell company can put that income towards purchasing another property in it's own name.

    I'm well aware that there is no perfect form of asset protection. I have, and continue to do many hours of research in this area. For now I'm just looking to do whatever I can to minimize risk.

    It is my understanding though, that providing the trust has no liability to me in my personal right, and no guarantee has been signed by both individual trustees (in their capacity as trustee) that assets in trust should be protected from any of my personal creditors - although they may draw from any distributions made to me as a beneficiary. Does this sound (for the most part) accurate?

    I'm not quite following here... Can you explain why you advised him against holding the property in trust?

    Maybe I'm making things more complicated than necessary. And sure, there's plenty of due diligence to be done in calculating the exact numbers of the deals to ensure that the tax benefits outweigh the costs of setting up multiple trusts and companies. But what I do know is;
    - I want the property from my Father's trust to be as secure as possible from claims by my personal creditors and/or being included in the marital pool in the event of a divorce.
    - I want maximum tax efficiency (obviously)
    - I want to minimize the amount of lending in my personal name (for reasons beyond the scope of this thread)
    - Sometimes, thinking outside of the box can open up opportunities otherwise out of reach and with substantial payoffs in the end. It's all risk V's reward I suppose.

    I should add, I'm not looking for a "one time solution", merely using my current situation as an example / discussion point to help me learn more about asset structuring to better serve my decision making throughout the course of my investing/business life.
     
  6. Terryw

    Terryw Well-Known Member

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    Sounds like this might be a testamentary trust.

    There are special additional benefits from these over and above regular inter vivos trusts.


    The trust deed may allow beneficiaries to be added, but just get legal advice on this as it could trigger both CGT and stamp duty if it causes a resettlement.


    Trusts do have very good asset protection benefits on bankruptcy of a beneficiary and have been tested by the courts many times over the years and have held up.


    You should probably seek legal advice on changing the trustee as if the other trustee dies the trust could dissolve. Similar could happen if they lose capacity.


    The reasons I advised against buying the main residence in a trust were basically

    - No CGT exemption, which there otherwise would be

    - Land tax which could have been exemptions for

    - Higher interest rates

    - Most costs in terms of loan fees

    - Accounting fees

    - No ability to debt recycle, which will effect

    o Serviceability in the future

    o Interest rate

    - No ability to leave the asset to a testamentary discretionary trust upon your death, which means

    o Less asset protection

    o Less tax savings

    o Less control

    - Etc

    -