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Unit Trusts, SMSFs and Depreciation.

Discussion in 'Accounting, Tax & Legal' started by kanebullen, 20th Jul, 2009.

  1. kanebullen

    kanebullen New Member

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    Hi All

    Just hoping I might be able to get some advice from you Gurus on Unit Trusts. I have read through some similar threads, but couldn't see anything 100% relevant to our situation, which is as follows:

    • We have 3 people that are looking to buy caravans that will be leased to a hire company on an adhoc basis. (they will then lease out to their clients)
    • Two people want to invest through their SMSFs, but I will be investing through a Discretionary Family Trust
    • The two SMSF's will invest with funds available, while I will be taking out an investment loan in the name of the DFT (using equity elsewhere, not against the van). I'll then be claiming interest against the rental income, as well as depreciation.
    • Given the uncertainty as to length of rental contracts etc (could be 1 month, could be 1 year), we are keen to share the risk, so that we split all income from the 3 vans.
    • We may increase the number of vans over time (depending on demand!)
    • Although not guaranteed, we expect the investment to yield quite well, so it won't be expected to be negative geared.
    My thoughts are that the best way to do this would be to setup a Unit Trust, with 3 unitholders of equal value - my DFT and the two SMSFs. The Unit Trust will purchase the three vans and pay all costs, and all rental agreements will be between the Unit Trust and the client. Income will be split between the three unit holders appropriately.

    The questions I have on this are as follows:

    1. Does this sound like the best sort of structure for this situation?
    2. Could this cause any issues with SMSFs considered to be "carrying on a business"?
    3. Given the SMSFs will not be borrowing (or paying tax), I believe they don't need to think about depreciation. But I would obviously like to claim what I am entitled to. I seem to think that the Unit Trust could pay "tax deferred income", but does this cause issues because only one of the three unitholders needs this?
    4. Are there any other potential issues we should be aware of?
    I'm sure there's some things I haven't made clear, so am happy to expand on anything.

    Thanks heaps,

    Kane
     
  2. Superman

    Superman Well-Known Member

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    Let me answer your questions:

    1. Does this sound like the best sort of structure for this situation?
    In terms of spreading the risk and potential profits it is fine. I would suggest a corporate trustee and also a unit holders agreement that details how each investor would get out of the investment if they wanted too etc

    2. Could this cause any issues with SMSFs considered to be "carrying on a business"?
    Yes. You know an SMSF can't carry on a business, and I would say that the purchasing and leasing of caravans would amount to a business. Even before hitting that issue, the investment by the SMSFs in a related party unit trust would be considered an in-house asset, and if more than 5% the assets of the SMSFs then they can't do it.

    3. Given the SMSFs will not be borrowing (or paying tax), I believe they don't need to think about depreciation. But I would obviously like to claim what I am entitled to. I seem to think that the Unit Trust could pay "tax deferred income", but does this cause issues because only one of the three unitholders needs this?
    Ignoring my answer to your second question which effectively puts the kibosh on the whole idea, if the UT claims depreciation then it can distributed as a tax deferred distribution to the unit holders. Hhhmmmm - actually the 'business taxable income' of the unit trust would be reduced, meaning any additional cash paid over and above the taxable distribution would be considered a return of capital on the original unit investment.

    4. Are there any other potential issues we should be aware of?
    Yes. Lots. Don't do it. Two main reasons.

    Reason 1 - the SMSFs can't enter this structure without breaching in-house assets via the investment in a related unit trust doesn't come under the exemption in Reg 13.22c of the SIS Act.

    Reason 2 - why would a company in the business of hiring out caravans etc both sourcing the vans through another party when they should be able to finance it themselves through either commercial hire purchases or operating leases? I am aware some lenders have recently pulled out of the vehicle finance market, but it seems that the business actually doing the hiring would be paying you guys less than a finance company - otherwise it it not in their interests to do it. This means lower returns for you - and considering you would be borrowing to fund it, you could quickly be in the pooh! I would also ask that is the company running the hiring business cannot organise their own finance for the purchase of the vans, are they a strong enough business to provide the expected yields you are chasing?


    I apologise for coming across as so negative in my reply but the information put forward simply doesn't pass the 'smell test'. I the information I have given here is exactly the same as I would give a client if they sent me this in an email.

    If however the company actually doing the hiring actually has a fantastic track record and can give some guarantees in regards to the return to the people it hires the caravans from, they investigate it further, do your due diligence - but just don't use the structure you suggested.

    Good luck :)
     
  3. kanebullen

    kanebullen New Member

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    Thanks

    Thank you - I really appreciate your time answering my queries. Your responses make a lot of sense and I understand exactly what you're saying.
     
  4. kanebullen

    kanebullen New Member

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    As a further query on the above, if buying only 1 or 2 caravans and renting them out, would you consider this to be carrying on a business? If so, would that "business" then be able to access the 50% bonus tax deductions?

    The reason I ask, is my accountant (who is not across unit trusts, hence why I posted here), suggested that he wouldn't consider this "carrying on a business" until it started to be a "substantial" number of caravans. He then said that would mean I wouldn't be able to access these concessions?

    Cheers,

    Kane
     
  5. Superman

    Superman Well-Known Member

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    However you determine it is irrelevant - the key thing here is the investment in the unit trust (which the ATO is currently looking at in SMSFs). From the SMSFs perspective (I know you are not investing via an SMSF - but the other two are) they are simply passive investors in the unit trust.

    In general, it is not just size which is looked at when figuring if you are carrying on a business. They also look at effort, business records and profitability. So, if it is run like a business, looks like a business and smells like a business - then it is a business!

    I have attached some light reading from CCH which explains it a lot better than what I can.

    I my opinion the depreciation on even one caravan if it is used to produce assessable income is necessarily incurred in carrying on that business - and hence deductible. Same goes for the 50% tax break up to 31 December.
     

    Attached Files:

  6. kanebullen

    kanebullen New Member

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    Thanks again for your reply.

    Given the issues with SMSFs and Unit Trusts, I've discounted that idea completely, so I was just thinking about the options available if I simply go it alone with a single caravan.

    Having a look through your attachment, I suppose that if I wanted to be considered to be carrying on a business, then I should be looking at it to make a profit (rather than merely realising a capital gain), doing it for the long term, keeping good business records, and perhaps setting up an appropriate business name etc.

    What structure would you recommend for this - could this be contained within a DFT, or do I need to go further?

    Thanks heaps

    Kane
     
  7. Superman

    Superman Well-Known Member

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    DFT - yes.

    Corporate trustee always good.

    Just ensure you are going to make some money over and above the loan repayments if you are borrowing to fund the purchase.

    Do some serious due diligence and put the questions (i.e. uninformed speculation) to the business who will be hiring the things from you. At the end of the day they have their own best interests at heart - not yours!