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Screwed up trust structure... Need help!

Discussion in 'Property Finance' started by dickle, 17th Sep, 2016.

  1. dickle

    dickle Member

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    Hi all,

    I have been kicking myself since my last tax return when there was a miscommunication between my accountant and myself on how to structure my future investment property purchases...
    Here is my situation and I was hoping someone could either provide some guidance and possible answers or point me to the right direction where i can discuss this with a professional.

    - Accountant advised to set up a company and discretionary trust to cater for my wife if we decided to start a family. This would allow for income to be distributed to my wife while she would be on maternity leave and this structure could be used again with our future kids
    - Accountant had an understanding to only have positively geared properties bought under the trust (correct), however her take on a positively geared property is when the rental income is greater than the interest costs. On the other hand, my understanding on a positively geared property is when you take the tax return into consideration
    - Recently saw my accountant with the mindset that my properties were positively geared but was advised that they were not when a quick calculation was done - rental income vs interest paid. Have since put the tax return on this trust on hold until I can get some advice on my next steps

    Now my dilemma... As my properties are negatively geared pre-tax return, I was looking at transferring the title of the properties to my personal name to take advantage of the tax benefits.
    Here are the pros and cons of doing a transfer (2 properties under this trust):
    Pros:
    - $5-10k tax return per property
    - Ability to draw out equity and continue on buying property with the advantage of being able to claim the increased interest expenses
    - Don't have to pay land rates under a personal name as i would be under the threshold.
    - Don't have to pay yearly fees to ASIC
    - Don't have to pay a higher accountant fee for the upkeep of the company and trust, including tax return fees

    Cons:
    - Transfer of titles will consist of another stamp duty payment (approx 15k per property)
    - LMI will need to be paid again (approx 10k per property as both were borrowed at 90% LVR)

    So my questions here are:
    1. Is it worthwhile paying a total of 30k in stamp duty plus legal fees and have the LMI capitalised again to the new loan to transfer the title out from the trust into my personal name?
    2. Am i able to keep the company and discretionary trust open but kept on the side without having to pay annual fees? More than happy to close completely and lose out on the set up costs if not possible.
    3. Is there a solution where I can keep the properties under the trust and still be able to claim on negative gearing? Accountant says no, however I have read and spoken to people where they say that it is possible (not sure how though)

    FYI - just a quick background on my property situation...
    - PPOR
    - 2 IPs in personal name
    - 2 IPs in discretionary trust (above)
    - 1 IP in SMSF
    - Currently in the process of purchasing another under SMSF and personal name

    I would really love to speak to a professional in this field as I feel this is a massive set back. Looking to avoid this in future with the help of a better accountant or financial adviser.

    Appreciate any help in advance.


    Thanks
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    You didn't know this when you bought them?
     
  3. dickle

    dickle Member

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    I knew they were negatively geared pre-tax return, however I thought the discretionary trust would consider a the property as positively geared post-tax return.
    Obviously a miscommunication between the accountant and myself, plus poor due diligence on my behalf.

    Besides the judgement on my bad call, is there any help you can assist with?
    Possible solutions? What would you do in my shoes?

    Would you take the 30k or so hit upfront and be able to reap the tax benefits in the later years as I intend to hold.

    The way I see it, is that I will cough up the 30k costs and it would take roughly 3-4 years of tax returns until I see that paid off in my eyes. From there on out, it's just benefits.
    Otherwise if I keep it where it is in the trust, I am forgoing these benefits and after 3-4 years, I will continue to be at a loss.
    Sorry, just typing out my thoughts...
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    If they're negatively geared when interest rates are at 4%, how are you going to cope when they go back up to 5%+

    Once they go positive you can use the losses incurred to date. How long until they go +ve?

    Why don't you buy some other cf+ investments within the trust eg shares?
     
  5. dickle

    dickle Member

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    Hi Scott,
    No issues with serviceability and funding the loans, whether they are 4% or 5%+
    I am currently trying to aggressively purchase properties of all sorts.
    As I mentioned, they are negatively geared pre-tax return, but positive post-tax return.

    To be honest, I don't see them going positive for a very long time as again mentioned above I am aggressively investing. So am buying slightly under market price and drawing out equity at first chance. Meaning the chance of these properties going positive are slim... For the next few years anyhow.

    Sorry, I invest in shares under my personal name but in small caps. No blue chip with dividends. And would not have enough funds in shares to offset the negatives from the properties anyhow.
    Thanks for the suggestion though.
     
  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Have you considered that with capital growth and rent increases they may become positive over time and swapping and changing things in and out of trusts is a short term answer?
     
    Terry_w likes this.
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    My answers

    1. Maybe not

    2. Yes. Change the trustee and deregister the company. Lodge a nil tax return each year. The trust would have income and capital losses so seek tax advice about carrying these forward first.

    3. No. You cannot claim someone else’s expenses.


    I have some questions:

    1. Why ask an accountant for legal advice? Did you see a lawyer too?

    2. What states are the properties located in?

    3. How soon will they be positive taxable income?

    4. What happens when the properties grow and are later sold – if in a trust and if in personal names?

    5. If you want to sell have you considered waiting a bit and extracting some equity and debt recycling?

    6. Did you know borrowing further against the property will not make that property negative geared? The interest will be deductible against what the property is used for.

    7.
     
    Perthguy and Scott No Mates like this.
  8. dickle

    dickle Member

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    Hi Westminster,
    I have definitely considered that over time it will bring an increase in both growth and rent increase but I guess I'm just sussing out whether there are options out there that I may not know of.
    Also, my concerns are that leaving it as is will restrict my aggressive approach being unable to redraw equity (I can but this will increase the length in time before rent will cover interest due to higher borrowings) and that there are no tax benefits in the meantime, ie. meantime possibly meaning 5-10 years even!
    So yes, you can say I'm looking short term but this will also have a positive impact long term.
    Again, looking for professional help or advice and needing direction.
    More than happy to speak to someone over the phone or email who is qualified and who has dealt with a similar situation.
    Willing to reassess my current team as I feel a little let down... ie. accountant and financial adviser :(
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think you have a misunderstanding here.
     
  10. dickle

    dickle Member

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    Hi Terry,

    1. My accountant was the person who suggested this structure. They had dealt with many of these prior to me and sounded promising to have them sort this out while I was still in the early stages of property investing. Although, clearly things were rushed and I had a complete misunderstanding of the whole discretionary trust structure.
    Sadly, my lawyer had no part in setting the trust up. A mistake on my behalf.

    2. PPOR and 1 personal IP in NSW
    1 personal IP in QLD
    1 SMSF IP in QLD
    2 trust IPs in QLD

    3. I believe I may not have a complete understanding on this...

    4, 5 and 6. Interesting questions which I have not thought long enough about.

    Are you located in Sydney?
    Would love to set up a meeting and discuss options.
     
  11. hobo

    hobo Well-Known Member

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    But the structure was set up before the properties were purchased, right?
     
  12. dickle

    dickle Member

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    Yes, correct
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Where are the trust owned properties?
     
  14. dickle

    dickle Member

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  15. Greyghost

    Greyghost Well-Known Member

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    Well it had to be.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    At least the trust will get some land tax threshold - of $350k. Is the trust land value over that??
     
  17. dickle

    dickle Member

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    Yes. Both property land values are greater than 350k. Approximately $190k each from memory.
     
  18. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Lawrence I don't think your set up is as wrong as you think it is but it is a good idea to get it reviewed if you are concerned so those doubts can be laid to rest.
    @Paul@PFI (Paul Gerrard at Price Financial) is local to you and gives a lot of good advice to forum members
     
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  19. Cactus

    Cactus Well-Known Member

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    Sounds like you have money to spare if you would consider paying the stamps etc to love the properties and you are aggressively acquiring.

    Why don't you just loan $50-100k into the trust to buy something that yields 7% ideally fully franked. Maybe EFT or LIC. DYODD

    Then this yield can increase your income in the trust to benefit from the depreciation etc. then use the non profit cash flow from the trust to pay back your loan to the trust.

    Disclaimer. Not an accountant. Seek professional advice.
     
    pinkboy likes this.
  20. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    This is the VERY important part. If you have been revaluing your trust IPs and pulling out equity to buy your personal name IPs then that portion of the interest is deductable against your personal IP income NOT against your Trust income. This is where using splits or separate LOCs can help make it clearer.
    Therefore increasing the Trust loans doesn't always increase the loss.
    At the moment I gather there is no distributions from the Trust as after all expenses and depreciation it is making a loss. You can carry that loss forward to offset when it does start producing more.

    In terms of strategy for your purchases what made you purchase these particular IPs?