What structure would you use?? (VIC)

Hi folks,
As some of you already know my forte is the sharemarket . I am however intending to make a pretty big move (gradually) into Melbourne property from 2007-2009 , increasing the rate of action/gearing as I perceive the market is turning.

My current structure is pretty simple. Two properties in my name (PPOR and one IP) with a DFT as a share trading vehicle + a corporate benficiary (I am sole shareholder). I am about to address a couple of issues as follows:

- move much of my trading to the company to avoid the issue of having to loan back after tax funds from the companny to the trust and to increase my ability to retain profits

- seeing as the company is becoming very large in terms of net assets I intend selling my shares to a new trust created to hold the shares. This should improve my asset protection status and make any dividends the company declares more flexible taxation wise.


Now .............assuming the above makes sense I am after people's thoughts on the best structure to purchase property in. I understand the basic ins and outs of HDTs , trusts in general etc..........so no explanations needed. Negative gearing is not an issue for me as my trust/company generate more than enough funds to meet any negative cashflow needs - hence no real need for HDTs.

The engine for all of this will be my company providing a flow of desposits to either myself or a trust setup exclusively for property. It is my intention to buy at least 10-12 properties in the next 3 years.

What I want to do is to create the most effective structure whilst considering:

- general tax effectiveness (ie preferable not sourcing deposits via dividend distribution as extra tax may be payable)

- land tax

- general simplicity/common sense.

- asset protection. My job is share trading for the trust so other than my properties I have very little litigation risk relative to most.


My thoughts/questions I'm asking myself at the moment are:

- it would be preferable for the company to loan the deposit money interest free to a newly created "property trust" (a simple DFT) and then take a property loan in the name of the trust. I assume that if an interest free loan from the company was to be used it would have to be via a trust setup as loaning to myself as an individual may be seen as avoiding extra tax on dividends??

- given the above whether the trust is justified given the land tax penalties. Flexibility in terms of CGT is obviously an issue but I have no intention of selling any property . I also need to consider the estate planning benefits of a trust , given the amount of property.


Any ideas/suggestions welcome. Given the millions of dollars in property we're talking I am ofcourse going to consult my own accountant. I just like to have as many ideas on board as I can before these appointments as I often find that the best ideas come from myself and talking to others (including this board) beforehand.

Cheers (and thanks)

Ed

 

Hi Ed,

We've just used a HDT for a property purchase as this was the best in terms of discretionary allocation of capital growth and being able to negatively gear (otherwise the losses wouls have trapped in the trust if it was a straight DT).

Previously (before knowing about HDTs) we bopught a property in a DT and can't claim the costs beyond just balancing the income - when it starts making positive cash flow (one day soon) we'll probably have enough unclaimed depreciation that the income will be tax free for years! We would prefer the negative gearing claims up front to help cashflow.

It's not just a case of covering the negative gearing costs, but being able to claim them.

If you can buy positive cashflow properties up front then it's not such a big deal and a DT would probably be fine.

Just thoughts. Dave

 

Gday Dave,
Not sure I understand how you're applying the benefits of a HDT to my situation. I may be wrong (pretty sure I'm not) but the way I see it is that the DFT I have holding the property can claim depreciation and any other costs associated witht the property and can take advantage of those losses in the current tax year as long as it has enough income/cashflow to use up those deductions. In my case I will be distributing enough cash from my share trading trust to the property trust to use up all those deductions.

Do you see a problem there??

I possibly wasn't clear enough first up. When I said I didn't need a HDT as my "trust" will be creating enough cash I meant the share trading trust will be distributing funds to the property trust to use up those deductions. Sorry if I confused things

Cheers,

Ed

 

Hi Ed,
Yep, I probably missed your point there. We have structured differently so that the HDT for the property is separate from the share trading / managed funds in a DT - the separation of trusts is sort of an asset protection thing, also a historical creation and maybe not essential.

Anyway, as a result our HDT will only have property in it. Had it been a normal DT it would have had losses without enough income to fully claim against, ie losses locked in the trust. The HDT gets around this as the loan is outside the trust.

Also, as the higher income (read tax bracket) earner I salary sacrifice for the loan interest (IO). The normal DT pays my beautiful (yes she's reading this ) and lower income earning wife as the beneficiary from MF activity. Salary sacrifice maybe something you want to consider - depending on if you have set yourself up as a share trading business.

Cheers, Dave