How would you set up my structure?

Hi all,

I'd like to pose a question regarding how you'd set up your structure if you were me. I'm seeing my Accountant this week but wanted to get some ideas from PChat.

Current scenario:
- 27 years old
- Own 9 properties - 7 in personal name, 2 in a trust (individual trustee - yeah I know, bad move)
- High income, majority of which is commission
- My employer is happy to pay my commission into a different account, so I can divert this to a trust if I want.

My investment goals are to have 2 separate 'funds' - one for long term hold properties, and one for development properties (quick reno + flip, subdivisions etc). I'll keep the other 7 properties in my personal name as it's not worth paying Stamp Duty to transfer them into a Trust.

My questions:
1) It seems that having a Disc trust w/ corporate trustee is best for my development properties, as I can't claim CGT discount anyway and don't want to hold them for extended periods. Also asset protection in case I ever got sued or anything went wrong with a development - does this make sense?
2) My current trust (individual trustee) has 2 long term hold properties in it. The trust has ~$35k in losses in it, and the properties I'm keeping have huge depreciation so it will take a long time before the trust makes a profit (unless I have my comms paid into this trust). Is there any benefit of me changing this to a corporate trustee until it's ready to turn a profit?
3) Which trust should I have my commission paid into? Strong preference would be to have an offset account against loans. I'm thinking the Long Term Hold Trust makes more sense (less chance of being sued than Development Trust so better asset protection, will always have loans to offset against). The other option would be to set up a 3rd Trust but I'm thinking this would be a little too complicated... Help!!
4) If I end up having 2 Disc trusts with corporate trustees, will it be hard to transfer funds between the trusts? For eg if I have $200k in the 'long term hold fund' Trust but I find a nice development opportunity and want to use this money, is it easy for me to transfer this money into the 'Development fund' Trust for the purchase?

Any help would be greatly appreciated. If anyone here has 2 separate Trusts set up for different purposes, would love to hear how they work for you.

Thanks!

 

You realise this doesnt change the tax situation. You still pay tax on commissions personally no matter what accout they go into? And its a nightmare to do this directly unless you document it. Loan? Gift? Youd have to document every payday.

Even if your commission cash goes into a trust bank account it doesnt become trust income. Otherwise anyone could just put their salary into a joint account and split the income with a partner.

 

In general, transferring cash between bank accounts is easy. Getting it documented correctly and following the rules so that you dont create a tax nightmare is harder.

 

The PSI rules are different for comission agents

Commission agents

 

Best to see a lawyer for the law aspects. You are mainly referring to legal issues. I would be interested why you think an accountant is the one to advise on these?


1. Changing trustee doesn’t have any effect on the CGT outcomes.

Assets held as trustee are not assets that cannot be taken by a trustee in bankruptcy if the trustee were to end up bankrupt. However if the trustee is sued in relation to the trust its personal assets can be at risk in these situations.

So if you go bankrupt due to defamation for example, assets you hold as trustee would be generally safe.

But if a tenant of the property breaks their back falling over the trust assets and your personal assets could be at risk.


2. Changing trustee doesn’t change tax outcomes.

3. Why do you want your employer to pay commissions into the trust? No change in tax outcome but various legal issues.

4. A trustee can’t just transfer money around to others. It would need to be either a distribution of income or distribution of corpus/capital of the trust. In either case the recipient must be a beneficiary of the trust and there are potential issues with the ‘laws against perpetuities’.

However, a trustee can lend another trustee (if deed allows it). So if Trust A holds cash and Trust B will hold the property A could lend to B (and even take a mortgage, a good asset protection strategy often used by my clients.

 

Any benefit of a disc trust as opposed to starting a company to develop?

 

Thanks for your response Terry - my responses in blue below.

 

Good question. Would be keen to hear people's thoughts on this...

I'm on the highest tax rate and don't have anyone low income to distribute to, so is there any benefit of having a disc trust? Or would a simple company be a valid solution?

 

How do the PSI rules impact you ? Thats the first question for your accountant

 

Interesting. I'm still trying to get my head around Trusts properly. Can I set up a bucket company to use as a beneficiary of my Disc Trust w/ individual trustee?

And are there any other reasons to change from individual trustee to corporate trustee? I'm guessing just asset protection?


Who the trustee is doesn’t change things really. It doesn’t change who the beneficiaries are or the tax outcome. Another company could be beneficiary if the deed allows it.


There are many advantages of having a company as trustee, some other ones include

a) Passing control easy without changing title

b) Borrow capacity effects

c) Incapacity control passing

d) Control on death passing

e) Bankrupty – clear distinction between trust and non-trust assets

f) Etc

Legal Tip 138: Advantages of a Corporate Trustee over an Individual Trustee

https://propertychat.com.au/community/threads/legal-tip-138-advantages-of-a-corporate-trustee-over-an-individual-trustee.11569/


Trust Strategies to Increase Borrowing Capacity

Trust Strategies to Increase Borrowing Capacity



I thought having it paid into the Trust would mean I could distribute the income to a bucket company and save tax. Is this not correct?

Not correct. You earn the money so you are taxed on it even if you direct the employer to pay the trustee.

You should see if you could restructure things so that you are not an employee but a contracting entity conducting a business.

 

There are different consequences, but the tax outcome could end up being pretty similar.

 

Thanks Terry. I can't do this unfortunately - I'm pretty sure I need to be paid as an employee, I can't contract to them. I've asked this before.

Also, this would affect my borrowing capacity from what I understand...

 

What do you mean by 'different consequences' Terry?

PS: I'm going to read through your relevant tax tips tonight... Might give me some better understanding before I meet my accountant this week.

 

You should read my legal tips

There are lots of different consequences for a company acting in its own right or as trustee.
One example is stamp duty on the transfer of shares and passing control. Others are
land tax, depending on the state,
control on death or incapacity,
trust law applies to companies acting as trustee,
introducing others in the development
etc

 

One benefit of a company would be to retain all profits and only pay 30%ish tax on it, as opposed to a disc trust, as I've heard most trusts need to distribute all profits, I'm no expert though, and @Terry_w would be considered an expert in this regard I imagine.

 

There is a risk to retaining profits in a trading company though.
The way around that is to get the profits out into another company. This could be done if the shares of the development company are owned by another company OR is the development trust distributes the profits to a bucket company.

In either case the structure of the 2nd company needs to be carefully considered.

 

So have an employee/employer relationship. Talk of putting your commissions into a trust is a moot point. Tax wise anyway on the tax treatment of the commission.