Join Australia's most dynamic and respected property investment community

My Trust...Problem

Discussion in 'Accounting & Tax' started by Hedgy, 6th May, 2016.

Tags:
  1. Hedgy

    Hedgy Well-Known Member

    Joined:
    6th May, 2016
    Posts:
    61
    Location:
    Sydney
    Hi All,

    I'm new to this forum and let me say that this is an amazing resource. I wish I had found it a lot earlier. Oh well, I'm here now so all good.

    I keen to hear anyone's thoughts on a problem I have. I currently have an IP that is held in my family (discretionary) trust. This was a good arrangement when I had money flowing through the trust, but my employment circumstances have now change and as such I don't have any money flowing through the trust other than the rental income. The IP is negatively geared so I am making up the short fall out of my own pocket and the income losses remain locked in the trust.

    I would really like to gain access to the income loss so I can reduce my taxable income (standard negative gearing). I've had some discussion about possible options with my accountant, but I'm not sure my account is really thinking too hard about this. So I am very keen to hear whether anyone might have suggestions how I can access the income losses currently locked up in my trust.

    I live in NSW and normally the transfer of a property held in trust to a beneficiary is only subject to a $50 transfer fee and not traditional stamp duty. But for various reasons (for which I won't go into here) this is not an option and the NSW Office of State Revenue has confirmed that if the property is transferred to me (as a beneficiary) then regular stamp duty will be applicable. This will probably also trigger CGT, but as I've only owned the property for a short period of time the CGT should be too harsh.

    I'm happy to transfer to IP to me personally so I can access the income loss, but I don't have enough cash on hand to pay for the stamp duty. I was thinking that if I establish a LOC I would pay the stamp duty with that and claim a deduction on the LOC interest payments. Is this possible?

    I do like the idea that any CGT incurred by the trust can be distributed to beneficiaries so I was wonder whether there are any tricks in which the IP remains in the trust but somehow I can access the loss. Any thoughts.

    I have been advised that if I convert the trust to a hybrid trust then I could take a loan to purchase units and that interest would be deductible. I'm not comfortable with converting my trust to a hybrid so that is out.

    Sorry for the long rambling post, but hopefully it will explain my predicament.

    Look forward to reading any suggestions.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,942
    Location:
    Sydney
    Transfer from a trustee to a beneficiary usually involves stamp duty in NSW, unless a bare trust.

    Changing ownership will mean new loans are needed. Do you have another property with which the LOC can be secured against?

    Converting to a hybrid could be a resettlement which would mean CGT and duty anyway and you only claim interest on the loan buy the units. This would be difficult.

    Hope you have set up a loan agreement in writing to cover the money you are lending the trust.

    How long would it be showing a loss?

    Considered land tax side too?
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    Terry_w likes this.
  4. Hedgy

    Hedgy Well-Known Member

    Joined:
    6th May, 2016
    Posts:
    61
    Location:
    Sydney
    Thanks for the response Terry.

    Yes, I have a second IP outside of the trust that is in my name directly. Are you suggesting that if I go down the path of an IP I establish it based on my second IP?

    No I don't have a written loan agreement in place with the trustee. My employment circumstances only recently changed. I know it is a stupid question, but why the need for a loan agreement? Is it so that when the trust IP property is sold my loan would be repaid thus reducing the capital gain and therefore the CGT liability. Your question is why I'm not happy with my current accountant as he has not raised this with me despite being across this...grrrrr.

    As for how long the trust IP will be running at a loss, it's an interest only loan and I doubt rents will increases significantly over the next few years so at the very best I suspect it will be running at a loss for next 3 to 5 years depending on which way interest rates go.

    As for land tax, that's a problem in the current trust structure that's for sure. I'm foolishly paying it out of my own cash and looking into the option of perhaps using the LOC to increase my deductible debt instead of using my own cash and increasing my un-deductible debt.
     
    Last edited: 6th May, 2016
  5. Hedgy

    Hedgy Well-Known Member

    Joined:
    6th May, 2016
    Posts:
    61
    Location:
    Sydney
    Thanks for the tip Paul@PFI
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,942
    Location:
    Sydney
    There are a couple of issues with not having a written loan agreement with the trustee.

    1. Deductibility of interest. You are incurring interest which isn't deductible if you are borrowing money. If you are using cash to fund the trust's shortfall this may not be an issue but you are diverting money from yourself to the trust.

    2. Is it a loan or a gift? Without any record no one will know. What if you die, go bankrupt, insane, or lose control of the trust - there will be disputes between different parties over what the movement of money was and the wrong people may benefit from it. Don't forget it is not 'your' trust. You may control it, but this control is only temporary.
     
  7. Greyghost

    Greyghost Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,259
    Location:
    Melbourne
    3-5 years...
    Short term problem.
    You will obtain the benefit of the quarantined losses in the trust at some point.

    When it does become positively geared you will then loose the flexibility of discretionary distributions. Plus if you transfer it out (subject to stamp duty) you will loose the balance of carried forward tax losses in the trust.

    I think you just need to be patient with it..

    On a second note, maybe time for s new accountant if he did not explain to you the ramifications of having s geared property in a trust, timing etc..
     
    Lenny, wylie, hobo and 2 others like this.
  8. Hedgy

    Hedgy Well-Known Member

    Joined:
    6th May, 2016
    Posts:
    61
    Location:
    Sydney
    Thanks Greyghost. Must admit I'm reluctant to shift the property out of the trust for the reasons you mention. You're indeed correct about new accountant, which is why I called a few new accountants yesterday. Thanks for your thoughts.