Best structure for Share/Property portfolio?

I'm a PAYG employee, high income. 28 years old, in a relationship but not married yet. I plan on being able to utilise a trust to distribute income to my partner in the coming years (she is on average income).

My current structure is:
Personal name - holds 7 IPs + PPOR
Personal name ATF ABC Trust holds 2 IPs (cf+, large depreciation) and ~$30k worth of shares. Trust has over $50k worth of paper losses

I intend on changing the trustee of ABC Trust to a corporate trustee soon. I'm figuring out implications of doing this on the properties it holds (probably full refi app). I'm not yet sure what implication changing the trustee has on the shares held in that trust? Can I change the trustee of the trust without having to sell the shares and re-buy them? I didn't think about correct structures when I bought the shares - I was just keen to learn how shares worked in the corona sell-off frenzy and figured my trust was best given I had losses in there and only planned to keep the shares for 12-24 months.

Moving forward I intend on keeping a decent share portfolio (likely predominantly VDHG) where I will drip feed cash into and set up a DRP.

I plan on discussing best setup with my accountant but keen to hear everyone's thoughts/suggestions. Keep in mind I am looking for a structure that offers asset protection, is efficient for tax purposes and flexibile enough to distribute income to beneficiaries as appropriate, but not looking for something that required a Masters degree to understand and maintain. I am trying to keep things simple and minimise my headaches not create more

Moving forward I plan to sell of a few IPs from my personal name, use the cash from that + my PAYG income to pay off PPOR debt in chunks and then debt recycle that into shares/property. On the property front, I am going to focus on properties that can be developed (now or in the future).

Questions:
1) Accountant suggested that if I plan to develop a property in the short term, I should buy in a new company (Development Company A) which is 100% owned by my trust. That way, it provides asset protection and all profits get filtered through my trust and can be washed against my losses and then distributed to beneficiaries as appropriate. Does this sound reasonable?
2) If I plan to hold a property for 5-10 years before developing, does the structure above still sound reasonable? I'm guessing I should use a different company for each property, but they are all owned by my Trust. OR would I just own it in the Trust to take advantage of tax benefits while holding the asset, and then when I go to develop it, set up a new company (Development Company B) which I contract with to do the development?
3) What entity should I hold my share portfolio in? Is the Personal Name ATF ABC Trust (to be changed to Corp Trustee ATF ABC Trust) a good choice? Or should I set up a new Trust in case someone trips over a banana peel in one of the properties held in that Trust and someone sues the Trust and tries to take all my shares?

Thanks

 

Asset protection is not merely setting up a new company but the structure of it and how it is conduct. What does your lawyer say?

2. Depends on the circumstances. Factored in land tax issues? Financing?

3. It depends again. Perhaps a company worth considering

 

do some tax modelling and forecasting and will assist

 

Shares in a trust (with a corporate trustee).
Property in another trust (with a corporate trustee)
Development in another trust, due to greater potential for legal disputes (with a corporate trustee).
I'd go with a trust over company because you may never end up developing, and you've lost your CGT discount for nothing.

Corporate beneficiary may or may not be necessary. Family trust elections in place for all trusts.
May want to hold 1 investment property in your own name depending on land tax rules for your state. May want to have 1 property per trust depending on land tax rules for your state.

Lots of considerations

 

If you were to use a trust in NSW rather than a company it could cost up to $11k per year extra in land tax.

 

the loss of the CGT discount might not be that disadvantageous. ive modelled a few scenarios where a company works better than a trust. factoring in land tax is always the biggest issue.



i posted it on Linkedin and had a partner of PWC say that the modelling in NSW generally supports a company over a trust.

 

The loss of capital gains nature may be offset by the land tax liability, as terry_w and mike_a stated.

For holding shares only, the advantages are clearer in holding in a family trust with corporate trustee, especially if the amount is significant, and you have low income beneficiaries to distribute to. Think partner not working when you have kids, kids turning 18. Also shares can have sudden increases in income for certain years, such as buybacks and takeovers where a lot of franking credits are distributed.

 

But doesn't a company lead to other issues (unless i'm wrong, not uncommon)

Lets say he has a development entity (company) racking up losses (as they do until final sale).
Then he has other properties in companies that aren't yet developing, these have taxable income (shares owned by a trust).

The issue would be that his company income can't be used to offset development losses, because even if the company pays a franked dividend to a trust and that trust distributes to a development entity, the franking credits are grossed up into tax losses.

 

The losses in the development entity would be expected to be temporary (a year, two?) Assuming its a small development and not the Docklands.

If there are low income beneficiaries available, tax impact of franked dividends distributed via the trust may be low. Depends on the situation, obviously. Or just keep the profits in the company.

 

with distributions to children over 18 the ATO is now starting to pursue Section 100A as a reimbursement arrangement. They are actually arguing things might not be in the ordinary course of family dealings.

It it is now imperative to actually use the income to pay for children's expenses (school fees, courses, etc) . I was informed by a tax barrister in QLD that ATO is arguing that if you distributed 20K to a child in the ordinary course of family dealings they would rarely give it back. But if you have paid for their expenses then the distribution covers it.

Going to be some audits in future on this very issue and getting a lot of talk in tax circles.

 

Three questions from this.
1) Can the issue be covered by keeping invoices etc where the trust or parent pays for school fees, holidays, etc?

2) If the actual payments (of uni fees, for example) are made by the parent and not the trust:
a) can the UPE still be recorded as payable to the 18 year old, or
b) does the UPE have to be recorded against the parent, or
c) the UPE actually has to be paid out in cash?

3) Is the assumption that distributions to the spouse is not being questioned in the same way, on the assumption that spousal finances are combined?

 

Makes sense. Yep I definitely need to consider land tax when it comes time to buy another property.

Re having shares in a trust with corporate trustee (separate one to the one that owns property), that makes sense. HOWEVER how do I take advantage of those losses in my current trust if I buy the shares in a diff trust? Perhaps it would be better to have a company own the shares (and Property Trust owns the company) so I can pass on profits to the Property Trust which has losses?

Company still gets CGT discount if I sell the shares eventually right?

 

• Company still gets CGT discount if I sell the shares eventually right?

Nope.

• HOWEVER how do I take advantage of those losses in my current trust if I buy the shares in a diff trust?

If both trusts have family trust elections in place, with you as the test individual, you can distribute from one trust to another to use up the losses.

 

See my tip on cgt when assets sold by a company. Cgt could still be much less than cgt or even nil.

One trust can distribute to another trust but as Mike says Part IVA needs to be considered

 

Hmm the trust seems like the go. I guess I need to set up new trust with corporate trustee for my shares

Sorry Terry, what do you mean by 'Cgt could still be much less than cgt or even nil'?

What is Part IVA? I can't see anything in Mike's comments re this.

Is Calder&Scale correct in saying I could distribute profits from share trust to property trust to use up the losses in property trust?

 

See my other tax and legal tips

 

subject to complying with Part IVA you could but if you had a trust with shares with fully franked dividends you probably wouldn't want to distribute to a development trust with losses as you might lose the franking credits.

he was referring to distributing from a passive property trust to a development trust. that requires tax modelling to determine whether it is the right option or not.

 

JM you should get some number crunching done. It might be ok to lose the franking credits to soak up the income losses even.

And the good thing about shares is that transaction costs are low so you can easily move from one structure to another

 

Thanks Mike. I would probably be distributing them to the passive property trust (which has $50k in losses currently) not the development trust.

I'm definitely liking the 'liquidity' factor of shares and the low transaction costs compared to property!

How do you move shares from one structure to the other without selling and re-buying (and paying CGT)?

 

The CGT is unavoidable, but if you dont want to sell and rebuy you can do something called an 'off market transfer' can't remember if this has any costs.