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What Entity To Buy This In?

Discussion in 'Accounting & Tax' started by kierank, 25th Jan, 2016.

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  1. kierank

    kierank Well-Known Member

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    My wife and I are contemplating buying a unit/apartment. Initially, it will be an investment property (with a loan, etc) but, at some undetermined time in the future (could be 5, 10, 15... years), when we want to downsize, we would sell our current PPOR (on acreage so not ideal for an IP) and make this apartment our home. At this time, hopefully, the apartment would become debt free.

    For this thread, let’s say the apartment is an IP for 5 years and then we make it our PPOR. As a buying entity, I see that we have two options:

    1. Buy In Our Own Names
    a. Advantages
    i. We get all the tax deductions for owning an IP for 5 years and then all the advantages of owning a debt free PPOR.
    ii. On our death, if our beneficiaries want to sell the apartment, our estate would liable for CGT on the first 5 years but not after that as long as the property was sold within 2 years of our death.
    iii. On our death, if our beneficiaries wanted to keep the apartment (our wish), our estate would liable for CGT on the first 5 years and our beneficiaries would have deemed to have acquired the apartment on the date our death.
    b. Disadvantages
    i. Our death would trigger the payment of CGT for the first 5 years.
    ii. Our beneficiaries would be up for the costs of enacting our wish of keeping the apartment. Such costs would be stamp duty, legal fees for the transfer, etc.

    2. Buy In An Existing, ‘Idle’ Trust With Corporate Trustee
    a. Advantages
    i. We get all the tax deductions for owning an IP until our death via our Trust and then the tax deductions would transfer to our beneficences via the same Trust until they sell or the Trust expires (July 2086).
    ii. Our death does NOT trigger a CGT event. CGT is only payable when the beneficences sell or the Trust expires.
    iii. Our beneficiaries are NOT up for the costs of enacting our wish of keeping the apartment.
    b. Disadvantages
    i. Us/our beneficiaries miss out on the CGT exemption for the period that we live in the apartment.

    I am mainly concerned about do I have the right understanding of both options. I am neither an accountant nor a lawyer. We will be seeing these in due course; I want to ensure I have the right understanding before I do.

    Once I have the right understanding, then I intend to undertake some scenario planning based on different numbers for IP years, different number for CG, different numbers for how long we live, etc to see how each option plays out.

    Any feedback on this would be appreciated.
     
  2. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    "We get all the tax deductions for owning an IP until our death via our Trust and then the tax deductions would transfer to our beneficences via the same Trust until they sell or the Trust expires (July 2086)."

    is it a unit trust ? and why would the tax deductions transfer to the beneficiaries when you die ?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I have written many tips on this in both the tax sections and the legal sections (it is a legal question with tax implications).

    your understanding of taxes on death is largely incorrect.

    Firstly death doesn't trigger CGT. If you die the property will pass to the beneficiaries stamp duty free and there will be no CGT triggered. The beneficiary will probably inherit your cost base (depending where you die). So owning in your own name won't be different than owning in a trust in this regard. Owning in your own name would mean you could leave it to a trustee of a testamentary trust in your will and this trust could be controlled by your children or non children beneficiaries. There are more tax advantages in a discretionary testamentary trust compared to one set up during your lifetime and the trust will last longer - generally 80 years from your death.

    If the property is held in trust there will be no tax deductions for yourselves. The trust will claim any deductions.

    You don't mention land tax. Depending where the property is located the trust may have to pay land tax even if you are living in it.

    Owning in your own names may work out better for you - both or one of your names. You need to think carefully about this too.
     
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  4. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    agreed terry. also need to consider whether you want to transfer the property to an SMSF at a later stage as funds have accumulated there. that can also determine the type of entity to acquire the asset.
     
  5. D.T.

    D.T. Adelaide Property Manager Business Member

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    He did say he was planning to live in the property
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Worth considering the super option as circumstances change.
     
  7. Ian Macleod

    Ian Macleod Active Member Premium Member

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    If the Investment property is owned in the names of the individual/s does transferring to a SMSF not trigger CGT and stampduty? or are their ways to side step these costs?
     
  8. D.T.

    D.T. Adelaide Property Manager Business Member

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    Transfer only from unit trust I thought?
    Accountant gurus?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would be a CGT event, but a SMSF is prohibited from buying a residential property from a member (unless business real property). Stamp duty could be exempt though depending on the structure of the ownership and the SMSF (assuming business real property is transferred).

    A SMSF could acquire units from a related unit trust under certain strict conditions.
     
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  10. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    stamp duty on the transfer of units will depend on the state. But you may not want to transfer the units. you may want to redeem and issue units. a different situation.

    re CGT some tax planning can be done. Let's say Beryl and Seymour (just had the joy of completing and passing an SMSF Advice course) have a unit trust with units held 50/50. They want to transfer the property to an SMSF. Beryl is 58 and Seymour is 60.

    You would want to be looking at whether it worth transferring all the units into the SMSF. Or if you redeem then same CGT issues to deal with.

    depending on the other income of Beryl and Seymour you may be able to move the asset across over a number of years. The CGT may well be nil if the taxable income of Beryl and Seymour is less than $20k each including the GST.

    Could look at super contribution strategies and claiming a tax deduction to minimize or reduce the CGT to nil. However need to look at the converse side which is 15% tax on concessional contributions to the fund.

    A tax analysis then needs to be done on long term tax benefits of having the income stream in super (any CGT liability in Beryl and Seymour's name) and having the income stream in their name.

    It may or may not be worth moving across and every case is different. But at least in a unit trust it does provide some flexibility but it's not the right structure for everyone.
     
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  11. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    and not just any unit trust must be a fixed unit trust.

    and if the property has been transferred from individual names to a fixed unit trust would need to wait 3 years
     
  12. kierank

    kierank Well-Known Member

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    It is my understanding that the trust is a Hybrid Trust and the appointment of income from the units bought in the trust and interest paid on the loan to buy those units are the same (50% to me and 50% to the wife). So, all the property income and expenses are incurred in the trust and the net income to paid to us 50:50. We each offset this net income against the interest we each paid on the loan.

    On our death, our Will beneficiaries (our two children) become directors of the corporate trustee of our Hybrid Trust, the property income and expenses continue to be incurred in the Hybrid Trust and the net income is paid to this trust beneficiaries (our two children).

    So, we (or our children, on our death) get all the tax deductions for the property albeit through our Hybrid Trust.

    I hope I got that right?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You are conflating directiorship with unit holders. If the units are owned by yourself you can will these when you die. You cannot will the directorships as directors are appointed by the shareholders of the company. So you will have to will your shares in the trustee company too.

    If you have borrowed to buy the units this debt needs to be considered in the will as well. If the will is framed right the children may be able to borrow to pay out your loan and this interest may be deductible. If you don't account for this in the will the estate will pay out the debts.
     
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  14. kierank

    kierank Well-Known Member

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    Being a newbie, I haven't had time to read all the threads on PC. Thanks for the heads-up on your Tips. I have already started searching for these and reading them.

    When I was doing my research on the ATO website, I completely missed the following paragraph:
    "There is a special rule that allows any capital gain or capital loss made on an asset acquired on or after that date (a post-CGT asset) to be disregarded if, when a person dies, an asset they owned passes either:
    • to their legal personal representative or to a beneficiary, or
    • from their legal personal representative to a beneficiary."
    Oops. Thanks for pointing that out. To make sure I got this right, it does not matter whether we buy the apartment in our own names or our trust as no CGT nor S/D is paid with either option on our death. Buying in our own names offers a time advantage as the apartment could be transferred to a testamentary trust (which our Will allows for) which would expire 80 years after our death whereas our existing trust expires in 70 years from now.

    True. I could have worded this better. Property income and expenses will be incurred in the trust and the net income will come to us. So we do get the benefit of the expenses/tax deductions albeit via the trust.

    Good point. The apartment will most likely be in Qld. I know trusts have a land valuation threshold of $350,000 so we have to be mindful of this. I thought one could claim a home exemption for Land Tax in Qld, whether it was in our own name or in a trust.

    LTA041.1.2—Land tax home exemption—trustees (Queensland Treasury)

    Am I wrong here?

    Starting to agree with you here. Obviously, I need to continue my research and improve my understanding before seeing my advisers so that my head is half on the same platform as theirs.

    I know I have to start with the end in mind. Why is this stuff so complicated?

    Thanks for all your input.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, your death won't trigger CGT or stamp duty (perhaps just nominal) whether the property is in your personal name or the trust of a trustee.

    Yes, in QLD a beneficiary residing in a trust property could mean the property is exempt from land tax, But only if all the beneficiaries are residing in the property.. s 41 LTA QLD LAND TAX ACT 2010 - SECT 41 41 Exemption for land used as home
    Unlikely if the trust is a discretionary trust.

    If the property was in NSW though unless it was a testamentary trust with a right to occupy there would be no exemption.

    I think ViC is more lenient..
     
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  16. kierank

    kierank Well-Known Member

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    I knew our smsf couldn't buy residential property from us or our trust and I knew we couldn't live in a residential property owned by our smsf.

    Also, our smsf is in pension phase. I suppose we could stop our pension, revert to accumulation phase, buy some business real property and then re-commence our pension.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thats a question for a financial planner or a tax agent licenced to give financial advice. There are many issues to consider.
     
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  18. kierank

    kierank Well-Known Member

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    Me being lazy again (I know this can be dangerous when talking about legal and tax issues). Yep, we will our shares in our trustee companies to our kids and as shareholders they would appoint themselves as directors of the trustee companies.

    In our Wills, we allow our children to borrow against the assets of the testamentary trusts but we limit them to 60% of their market value. We did not want them borrowing 100%, then things go pear-shape and they lose everything (after our lifetime of work!!!). Probably could have made it 80% but we wanted to be conservative.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is interesting, i haven't had anyone limit borrowings like this before.
     
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  20. kierank

    kierank Well-Known Member

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    ... and not something that we are considering doing. Way back, our strategy was to buy shares in our smsf, and buy properties in trusts. Not going to change now.