Purchasing Investment Properties via a Discretionary Trust

Hi Everyone,

This is my first post so please forgive me if a thread of a similar topic has previously been posted.

I'm in my early twenties (currently working in the accounting industry in Sydney) and looking to purchase my first investment property after my mid-year review (I have a decent size deposit and am expecting a payrise that should assist with my borrowing capacity before I go for conditional approval in July/August 2020). In the meantime, I've been putting some thought into how I should structure my portfolio on a long-term basis in terms of the entity through which the property should be purchased. I have never previously owned real property.

The notion of establishing a discretionary trust with a corporate trustee seems attractive given the level of asset protection and other benefits it offers (e.g. distributing funds to lower income-earners in the family to reduce taxation). It wouldn't be ideal purchasing the property in my personal name and then incurring CGT and stamp/transfer duty fees when transferring the property into a trust at a later date.

I was hoping to hear your thoughts on my current situation and how I should approach it, including any further aspects to be considered when purchasing an investment property via a trust. Feel free to ask some questions on my other circumstances if it will help with your response. Thanks in advance

 

Why do you need asset protection? What if the ip is in a tax loss position (likely) and you want to refinance later on?

 

If the land content was $500,000 and the property was in NSW would the land tax of $8,100 per year put you off considering there would be none if purchased in your own name or in a company?

 

I have recently discussed the differences between a trust and a company for holding an investment asset. Had some good feedback

Michael A. posted on LinkedIn

AND

Michael A. posted on LinkedIn

 

In NSW my conclusion when looking into this for my circumstances I was that better off buying in personal names until reaching close to the land tax free threshold, and then purchasing in discretionary trusts. However at this point it might be better to diversity into other states (if persisting with residential investment property) or into shares/commercial property.

Regards,

Jason

 

Agree you need to model it out over a 5 to 10 year period based on the individual circumstances

 

Thanks for your response.

If I stick around in my industry and eventually hit Partner (say in the next 10 to 20 years) there will be a lot of personal exposure and potential personal liability if mistakes are made (in my industry, there are a fair few instances where PI insurance won't protect you - a lot of staff at or above the Director level tend to structure their investments through a trust). Also, I've had a fair few friends and family go through some really unlucky situations where they've had to sell off personal assets for unexpected events - these are unlikely to happen to ordinary people when you look at the statistics but it can happen to anyone at the end of the day.

When you refer to the IP being in a tax loss position are you talking about the IP being negatively geared and the losses being quarantined in the trust? If so, one of my managers has 10s of thousands in losses quarantined in his trust and it didn't seem to affect him when refinancing recently.

 

More a question of your cashflow. Losses quarantined in the trust cannot be deducted against your personal income. This is a hit to your cashflow. Perfectly fine as long as youve taken that into account.

 

Thanks for your response.

The land tax would definitely putt me off - I understand that discretionary trusts are not entitled to a land tax free threshold. At this stage, I'm intending on investing in 2 bedroom apartments (and standalone houses further down the track) which should have a relatively low land content which should reduce any land tax liability considerably. Also, from what I understand Revenue NSW are fairly easy going when it comes to establishing payment arrangements for land tax to spread the liability throughout the year as opposed to paying it off in a lump sum.

I'm not currently interested in purchasing the property as owner investor - my current lifestyle wouldn't allow me to go live in the property for at least 6 months before renting it out to claim the MRE. I am open to considering a company structure though.

 

You shouldn't assume 'discretionary trust' = asset protection. I have seen some terrible setups that would not be very effective if attacked. You should also consider asset protection at death - which is rarely considered. Trust assets cannot pass on your death

 

Only you can answer this but are you really going to stay in a firm to make partner? Most accountants leave practice. In corporate, personal liability is less likely.

 

It's still early days but that's the long-term plan. If I'm able to build up a decent ledger of referral sources I would also consider starting my own practice - a trust would seem more appropriate under these circumstances.

However, based on the responses to this thread, I should put more consideration towards owning property under my personal name or a company and consider a trust structure later on.

 

If purchasing under a company:

* As the sole shareholder, could I loan the deposit to the company to purchase the investment property? If so, could I treat transfers from the company to myself as non-assessable income to the extent that it relates to loan repayments on the principal balance?

* If I enter into a loan that allows you to draw on the equity at a later date, would I be able to access that equity to purchase an investment property under a separate structure (i.e. under personal name, another company or trust)?

 

a sole shareholder could lend the deposit and this could be paid back in the future without tax. But you probably wouldn't want to be the sole shareholder.

 

could also subscribe for shares in the company. Give a higher cost base. if a DT owned the shares could consider gifting to a discretionary trust and the DT subscribing for shares in New Co

 

most accountants leave practice ? i know plenty who haven't. with average partner salaries of between $400k to $600k it's not a bad return on investment.

 

Is there any particular reason(s) as to why I shouldn't be the sole shareholder? Is this in relation to shareholder distributions or some other consideration(s)?

 

Inflexible - think of when there are profits. You also seem to be worried about asset protection

 

I dont know you however I cant imagine a benefit of acquisiring using a disc trust. There could be merits but more likley not. IO could likley consider a long list of isssues and it would be wise you understand the pro's and con's to the decision. It may assist to engage with a personal tax adviser. I often speak to people who misunderstand asset protection. Some limits to a DT include : No negative gearing, land tax, quarantined losses, limited beneficicaries if you are single, cost and potential limitations for borrowing especially as a first time buyer