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Understanding trusts

Discussion in 'Accounting & Tax' started by Mintle, 8th Sep, 2015.

  1. Mintle

    Mintle Member

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    Hi all,

    I'm just getting started in the world of property investing and I am putting a bit of effort into trying to get the foundations right (finances, strategies etc) before I get too far into it. One thing I've been reading quite a bit about is discretionary trusts.

    I recently had a meeting with my accountant to discuss if a trust is suitable for me, and after having time to digest the information they gave me it has only raised more questions. I was hoping someone more experienced on here might be able to save me another trip to the accountant.

    My situation:
    -Married, combined income ~$150k. The difference between the wife's income and mine is about $15-20k, can vary from year to year.
    -PPOR is in joint names
    -looking to buy 2 IP's in the next 12-18 months. Prefer to renovate and hold, so only looking at properties that have potential to manufacture equity. Willing to consider renovate and flip under the right conditions.
    -Properties we are looking at are JUST cashflow positive, but any moderate changes to expenses could push them into neutral/negative territory.
    -I'm considering a trust as it is possible either the wife or I will temporarily stop work or go to reduced hours in the next 3-5 years due to childcare commitments, and it seems like it would be a tax effective structure.
    -I've no real need for asset protection at the time being, but if I ever dip my toe into property development (possible, but unlikely) it would certainly be beneficial

    My accountant has told me its borderline - it's possible I would see some benefit from it in terms of income distribution in years to come, but they didn't seem too enthused about the idea as any losses on the property would get tied up in the trust and any potential benefit will be gone. This is where I'm getting confused.

    I'm curious as to how these losses would be recorded for tax purposes. I'm assuming that all expenses relating to the property (interest, maintenance, the lot) will be applied through the trusts tax return, not the trustee's. And if a property within the trust records a loss then that loss is contained within the trust and can't be offset against the trustee's income. The trust also does not have to pay tax if all income is distributed to beneficiaries within an income year. So can this loss ever be used to offset an income/profit, if the trust always distributes income within the year? The only way I can see would be if the trust retained the earnings rather then distributing profit and paid tax in a particular year.

    Thoughts on the above? I've also been told by a broker that gaining finance for a trust can make things a little harder, and I'm starting to wonder if it's worth the bother.

    To trust or not to trust? That is the very confusing question. I think another trip to the accountant may be in order.
     
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  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    The circumstances/reasons you've given are neither here nor there. I'm sure some lawyers will be along soon to scaremonger :)

    Losses get stuck in the trust, they can't be disbursed. Here's how I think that works: Trust does a tax return and say its negative $5k for the year (after rental income, relevant related exenses etc). That negative $5k is carried forward to the next year. So next year you have less issues and it's more profitable at +$5k, that means the trust's back at $0 and has nothing to distribute out to beneficiaries.

    Finance for a discretionary trust is not really any harder than for a person. One of mine is a unit trust and that meant less lenders would look at it but still got the deal done through a good broker. I'm sure some brokers will be along soon to comment.

    Which state(s) are you planning to invest in? State based land tax is a legitimate consideration when it comes to trusts, imho. This is the only part you haven't touched on. Personally what I'm doing is, fill up on land tax threshold in one partner's name, then the other's, then a trust til full and repeat with further trusts as necessary. Different states have different rules on this (Especially NSW!) so check look that up first.
     
  3. sanj

    sanj Well-Known Member

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    Losses dont have to be stuck in a trust. If youre set up right and have an imcome producing business you cab stream income /profits to the trust in question and soak up the losses
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If your only concern is tax then you may want to look at other strategies such as spousal loans, spousal sale, etc.

    No mention of land tax in your analysis, or many of the other issues either.

    I have written a post for my legal tips on 'should I use a trust' which I will post in a few weeks.

    And remember a trust is not a structure but a legal relationship between 2 or more people.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Many people think that a trust is some magic solution. Reality is that a trust will complicate loan issues and then land tax, loss issues and a myriad of other issue make it a costly and unwise choice. One area where a trust can be a terrific structure is wealthy families especially where wealth is not built on borrowed money. Some Trusts can even be combined with super for some exciting opportunities. But most people on PC follow a borrowing strategy and their circumstances wont suit.

    Trusts can also be used by spruikers to give some air of sophistication so that the true investment seems better. Its the modern flim-flam man potion. A polished turd. They can make a bit of extra coin from complex accounting and tax matters. Make themselves an income stream from the property and the tax work. And its so complex so of course they have clients who then wont wander too far. Of course they tell you all the wealthiest and most successful investors use them...(Just not ones who borrow).

    Years later even if the trust assets have risen in value borrowing to access equity will only benefit the trust and trust value doesn't add to personal wealth. In most mum and dad situations there can be limited beneficiaries to distribute to and little or no marginal tax rate issue between the spouses.

    Example abound of tax issues with misuse of trusts too. Non-fixed trusts, family trust elections, land tax issues, estate planning problems, incorrect loan arrangements, streaming income that violates Part IVA (Sanj's example above ?) and basic defective trust operation are all issues that regularly appear with trusts. I wish I had a dollar for every trust I have seen where the deed has been lost, not stamped or was never executed etc.
     
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  6. Mintle

    Mintle Member

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    Thanks all. I'll be investing in Qld and land tax is not an immediate concern of mine, my main interest in the trust stemmed from the ability to be able to distribute income. I don't have an in depth knowledge of trusts and how they operate, hence why I've sought advice, but on the surface they seem to be an effective tool to help achieve certain goals.

    After doing some more research and taking the above comments into consideration I'm forming the opinion that a trust may not be as beneficial in my circumstances as I thought, and I'm starting to understand why my accountant wasn't too taken with the idea.
     
  7. joel

    joel Well-Known Member

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    I sure would benefit from a "trusts for dummies" post! I have no idea when or how to use a trust.
     
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  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my legal tips - many on trusts
     
  9. Matty77

    Matty77 Active Member

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    The main reason to go for a trust it to protect your assets so other people cant get them. I know you say your are low risk but there are many examples of people that have lost everything thinking they are low risk and something happens. For example - burgular break into IP and gets attacked by tentants dog, dog wounds intruder and ends up in hospital.

    6 months later you are being sued for the IP home and everything else you have as burgular is now unable to work due to what happened. Did you have the correct insurance? I doubt it.. woops Im low risk remember???

    he will win in court, if not it will cost you THOUSANDS to defend yourself, either way its going to cost you a lot of money. Maybe your smart and settle out of court...

    Worst case you are silly enough to have all your 2 IP and your PPOR with the same bank, and burgular wins his case.

    Bank takes what they want first from 2 x IP and PPOR

    Burgular then takes whats left of 2 x IP and PPOR

    you are left with nothing.

    Don't worry about tax issues, think about your risk, your going to invest hundreds of thousands of $ in something take the time to spend a little more $ and get the trust set up properly so to reduce your risk.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Good golly!
     
  11. NewInvstar

    NewInvstar Member

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    Hi Terry,

    Im new and still trying to learn how to navigate around. could you please direct me to your legal tips re trusts?

    cheers :)
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Here is a bit of a list. Some cover trusts more in-depth than others:

    Legal Tip 2: Asset Protection and clawback provisions https://propertychat.com.au/community/threads/legal-tip-2-asset-protection.224/

    Legal Tip 6 Bankruptcy and Terms in Trust deeds https://propertychat.com.au/community/threads/legal-tip-6-bankruptcy-and-terms-in-trust-deeds.440/

    Legal Tip 9: What is a Testamentary Discretionary Trust? https://propertychat.com.au/community/threads/legal-tip-9-what-is-a-testamentary-discretionary-trust.612/


    Legal Tip 11 Other legal ownership structures (non individuals) https://propertychat.com.au/community/threads/legal-tip-11-other-legal-ownership-structures.680/

    Legal Tip 13 Do your trust resolutions before 1 July https://propertychat.com.au/community/threads/legal-tip-13-do-your-trust-resolutions-before-1-july.772/

    Legal Tip 16 Asset Protection: General Issues https://propertychat.com.au/community/threads/legal-tip-16-asset-protection-general-issues.945/

    Legal Tip 17 The 18+ Advantages of using a UT v Personal Name https://propertychat.com.au/community/threads/legal-tip-17-the-18-advantages-of-using-a-ut-v-personal-name.969/


    Legal Tip 20: Estate assets v Non Estate assets https://propertychat.com.au/community/threads/legal-tip-20-estate-assets-v-non-estate-assets.1128/

    Legal Tip 23 Why Set up a testamentary trust https://propertychat.com.au/community/threads/legal-tip-23-why-set-up-a-testamentary-trust.1262/

    Legal Tip 27 Naming Trusts and Companies https://propertychat.com.au/community/threads/legal-tip-27-naming-trusts-and-companies.1404/

    Legal Tip 29. Combining ownership Structures https://propertychat.com.au/community/threads/legal-tip-29-combining-ownership-structures.1510/

    Legal Tip 31 Trust Resettlements https://propertychat.com.au/community/threads/legal-tip-31-trust-resettlements.1580/

    Legal Tip 32 What happens to trust property if the trustee is deregistered? https://propertychat.com.au/community/threads/legal-tip-32-what-happens-to-trust-property-if-the-trustee-is-deregistered.1619/

    Legal Tip 36 Clauses in Trust deeds removing Appointors upon Bankruptcy https://propertychat.com.au/community/threads/legal-tip-36-clauses-in-trust-deeds-removing-appointors-upon-bankruptcy.1802/

    Legal Tip 38 Spousal and Related Party Loans https://propertychat.com.au/community/threads/legal-tip-38-spousal-and-related-party-loans.1872/

    Legal Tip 39: And/or Nominee contracts and Asset protection https://propertychat.com.au/community/threads/legal-tip-39-and-or-nominee-contracts-and-asset-protection.2032/

    Legal Tip 41: What is a Trust? https://propertychat.com.au/community/threads/legal-tip-41-what-is-a-trust.2181/

    Legal Tip 42: Suing a Trust https://propertychat.com.au/community/threads/legal-tip-42-suing-a-trust.2200/

    Legal Tip 43: Suing a Corporate Trustee https://propertychat.com.au/community/threads/legal-tip-43-suing-a-corporate-trustee.2249/

    Legal Tip 44: Director Liability with Trustee Companies https://propertychat.com.au/communi...rector-liability-with-trustee-companies.2294/

    Legal Tip 46: Is property held by a trustee safe if trustee becomes bankrupt? https://propertychat.com.au/community/threads/legal-tip-46-is-property-held-by-a-trustee-safe-if-trustee-becomes-bankrupt.2360/

    Legal Tip 48 Don’t Treat Trust Assets as if they are your own assets https://propertychat.com.au/communi...t-assets-as-if-they-are-your-own-assets.2415/

    Legal Tip 51: Divorces/Separations and Beneficiaries of Discretionary Trusts https://propertychat.com.au/community/threads/legal-tip-51-divorces-separations-and-beneficiaries-of-discretionary-trusts.2562/

    Legal Tip 52 Who should be the shareholders of a trustee company? https://propertychat.com.au/community/threads/legal-tip-52-who-should-be-the-shareholders-of-a-trustee-company.2600/

    Legal Tip 54: Stamp Duty Transferring a property from a trustee to a Beneficiary in WA https://propertychat.com.au/communi...y-from-a-trustee-to-a-beneficiary-in-wa.2684/

    Legal Tip 55: A Company Owning Property https://propertychat.com.au/community/threads/legal-tip-55-a-company-owning-property.2717/

    Legal Tip 58: Death of a trustee https://propertychat.com.au/community/threads/legal-tip-58-death-of-a-trustee.2872/

    Legal Tip 59: Excluding Beneficiaries from Trusts https://propertychat.com.au/community/threads/legal-tip-59-excluding-beneficiaries-from-trusts.2897/

    Legal Tip 60: Appointor Roles in Trusts https://propertychat.com.au/community/threads/legal-tip-60-appointor-roles-in-trusts.2926/

    Legal Tip 61: Multiple Trusts as an Asset Protection Strategy? https://propertychat.com.au/communi...-trusts-as-an-asset-protection-strategy.2966/

    Legal Tip 64: Differences between a unit trust and a company https://propertychat.com.au/communi...nces-between-a-unit-trust-and-a-company.3098/

    Legal Tip 72: Trust Splitting https://propertychat.com.au/community/threads/legal-tip-72-trust-splitting.3399/

    Legal Tip 80: Plan Structures Early https://propertychat.com.au/community/threads/legal-tip-80-plan-structures-early.4372/
     
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