Establishment fees for trust used for caveat on IP titles etc

Discussion in 'Accounting & Tax' started by WallyB66, 3rd Feb, 2018.

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  1. WallyB66

    WallyB66 Well-Known Member

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    Hi

    I had an arm wrestle with my accountant last year over whether costs for establishing trusts for (in part) placing a caveat on titles of my (personally owned) IP's for asset protection purposes was tax deductible.

    I argued that they would be- similar to an insurance policy which protects your asset in case of fire etc this protects against litigation etc.
    His position is that there is no nexus established between the costs of establishment and my income

    Any thoughts are appreciated
     
  2. Ross Forrester

    Ross Forrester Perth business advisor and founder Business Member

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    I think your accountant is correct.
     
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  3. Mike A

    Mike A Accountant Business Member

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    Section 40-880, as currently drafted, applies to ‘business related costs’ that fall within the specific categories included in subsection 40-880(1). These categories are reproduced below:

    40-880(1) You can deduct amounts for capital expenditure you incur that is one of these:

    (a) expenditure to establish your business structure;

    (b) expenditure to convert your business structure to a different structure;

    (c) expenditure to raise equity for your business;

    (d) expenditure to defend your business against a takeover;

    (e) costs to your business of unsuccessfully attempting a takeover;

    (f) costs of liquidating a company that carried on a business and of which you are a shareholder;

    (g) costs to stop carrying on your business;

    to the extent that the business is, was or will be carried on for a taxable purpose


    Note – examples have been excluded

    The trust has incurred a capital cost.

    It doesnt relate to a business being carried on

    It doesnt have a taxable purpose.

    Non deductible.

    Make your arms bigger :p
     
    Last edited: 3rd Feb, 2018
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    How could this be deductible? It has nothing to do with the production of income - for either yourself or the trust.

    Does the trust charge you interest?

    How could it provide asset protection too?
    I have reviewed a few of these set ups for people and they had virtually no asset protection as a result of the way they were set up.
     
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  5. thatbum

    thatbum Well-Known Member

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    That was my first reaction too - how exactly would a caveat on your own properties from your trust help with anything???
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There is an erroneous belief that it can secured an equitable mortgage over you how with the mortgage securing a non existent debt to the trust.
     
  7. RPI

    RPI SDA Provider, Town Planner, Former Property Lawyer Business Member

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    Whereas if you setup a trust that actually lent money to other entities (eg other trusts that bought properties) and the other entities paid interest at commercial rates for the second mortgage, then the asset protection works.
     
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  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Two issues

    1. Tax. I agree. No deduction. Also not a third element CGT cost.
    2. Legal. Strange structure.
     
  9. sanj

    sanj Well-Known Member

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    The specific question has been addressed so my main thought is that instead of focusing on deductibility of your asset protection focused strategy you should get a lawyer to ensure it actually works, otherwise it's all pointless
     
  10. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Thats normally step 1. Thats why its a post we dont normally read
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There would have been a way to make it deductible too possibly.
     
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  12. WallyB66

    WallyB66 Well-Known Member

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    Tks for response- this was set up by a lawyer w/ asset protection expertise- theory as follows:
    • trust established w/ separate trustee (not myself obviously)
    • mortgage IP's to this trust through equitable mortgage supportedby promissory note and deed of gift
    • caveat registered on title to IPs with trust appearing after bank as interested party etc
    Thanks for feedback Sanj
     
  13. WallyB66

    WallyB66 Well-Known Member

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    Thanks guys- appreciate your thoughtful commentary as always. Will let some moths out of the wallet and chase some independent thoughts/ possible alternative game plan on this set-up
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A gift is not perfected if not given. You have wasted your money.
     
  15. WallyB66

    WallyB66 Well-Known Member

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    Spent most of arvo in a rabbit hole on this issue- partly involving fat lord vestey and paul kelly lyrics .....;):)
    Appreciate the comments gents - will resolve from my end and post outcome if of any interest - thanks again
     
  16. RPI

    RPI SDA Provider, Town Planner, Former Property Lawyer Business Member

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    Be careful of a certain vestey structure, overly expensive with dubious legal basis
     
  17. frecak

    frecak Active Member

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    Anyone got experience on this asset protection structure?
    I understand WallyB66 is referring to a 'vestey trust', better referred to as a 'loan n' gift'. That is;

    • I have 100k to my name.
    • I create a trust (remember a trust is its own legal entity).
    • I ‘gift' 100k to the trust and witness it by a deed of gift. I am now flat broke. There is no ‘gift tax’.
    • I then ask the trust for a loan of 100k to buy property. I am now in debt to the trust, to the tune of 100k.
    • The trust registers a mortgage or caveat over the property for its own protection. Alternatively, I could also produce a promissory note (I promise to pay...)
    • I own nothing (except debt). The property is not mine. I have no control over the trust (as long as I am not the trustee).
    • So any creditors take second place in the queue (or third if I took a bank mortgage - eg; the house value was 200k )
    • Even the family court can’t do much… unless they want to dismantle the concept of private/legal ownership.

    Or I could just get my mum to buy it. Same result.
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends really. The strength of the docs, how you transact and when and what protecting against
     
  19. frecak

    frecak Active Member

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    Let's say a hostile spouse. Who would have the skill to put together a structure for me?
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Depends on how it is set up. If you control the trust and or have funded it or received a distribution from it the strength is like a wet paper bag.