Transcript Martin Ryland - Ryland Taxation Services

Martin Ryland
Investing with Structures - The Basics
©
Ryland Taxation Services
Basic ground rules
 If you have a question, try to wait
until the end.
 I will not be offering personal advice
tailored to your situation during the
seminar.
 This advice is very general in nature
and does not cover all aspects of
structuring. It is relevant as of 27-22007.
The Problem
Being sued - assets at risk
Too much tax
 Restrictive Structures
Example
 John owns 10 rental properties in his
name.
 Non working spouse, 3 children.
Each property returns $15,000 a year in
income after expenses.
 Tax Bill for John $50,100
 Land Tax Bill $13,250 assuming
unimproved land value of 150k each.
Example – with trusts
 John has 10 properties, each in its
own trust.
 John distributes $1,335 to each child
tax free and splits the remaining
income with his spouse
 Tax bill $36,688
 No Land Tax.
 Total Saving - $26,662.
Rules of structuring
 Buy in the right entity from the beginning.
 Asset protection is about doing stuff before
you get sued.
 Trusts are your friend.
Individual
Pros
 Borrowing is easier
 Negative Gearing
 Lower accounting fees
Individual
Cons
 No asset protection
 No income distribution
 High income tax rates for individuals
compared with other structures
 Land tax problems
Example
 Mark owns a rental property
 $10,000 taxable loss, extra $3,150
refund
 Easy to refinance
 Potential future problems
Why use Individual?
 You plan on living in your property.
 First Home Owners Grant
 No relatives
 You won’t earn a lot
Don’t or can’t pay additional
accounting fees.
You aren’t concerned with Asset
Protection.
What is a Company?
Oof
Urk
The Meat
Mammoth Meat Pty Ltd
Shareholder 1 - Oof
Director
Shareholder 2 - Urk
Profits
Corporate Takeover
Companies
 Legal entities – can operate on their own
 Governed by ASIC - must pay $212 a
year.
 They pay a flat 30% tax rate from the first
$1.
Example
 Jane has $60,000 to buy property in.
 It will be negatively geared.
 Obtains a company and finances a loan
through the bank.
 What happens
Companies
Pros
 Asset Protection - to some degree.
 30% flat tax rate.
Companies
Cons
No negative gearing!
Higher accounting fees.
Profits trapped.
Complexity
Final advice for
companies
 Buy shares in a discretionary trust
Trusts
 Trustee – you look after the boat, it
is in your legal name, but you do not
‘own’ it.
 Settlor – The person giving you the
boat. Will not benefit from the trust.
 Beneficiaries – your children
Discretionary Trusts
 Also known as Family Trusts
 Trustee has the discretion to
distribute profit to anyone authorised
by the deed to distribute to.
Like a bucket??
Rental income, shares, interest, trust distributions, etc after
expenses
Spouse
You
Kids
Relatives
Example
 Rental property – generates $15,000 a
year.
 You have a non working spouse and 4
children.
 If you use a DT, $1,335 to each child,
rest to spouse. Tax Bill $549.
 If in own name, tax bill $4,725
(31.5%). At highest rate of personal
tax, $6,975.
Discretionary Trust
Pros
 Asset protection – no one owns the
assets.
 Income splitting – remember the
bucket.
Discretionary Trusts
Cons
 No negative gearing
 Losses are typically lost unless you make a
FTE limiting beneficiaries.
 Individual trustees can lose personal assets
if trusts are not able to pay creditors
 Lasts for 80 years.
 Higher accounting fees
Who can receive a trust
distribution?
Answer – Read the deed.
Note
 If the trust runs a business, personal
services income rules may limit
discretionary powers.
 Trustee can be a company to provide
protection to your personal assets.
Unit trusts
Issues units like companies issue
shares.
 Income cannot be distributed as you
wish – they must go to the unit
holders.
Unit trusts
Pros
Negative gearing (for unit holder)
Allows contributions to super later
(with restrictions)
Cons
If unit holder goes bankrupt, creditors
control unit trust.
Can’t distribute losses.
Example
 Mary has $60,000 and wants to invest in a
negatively geared property worth $300,000.
 She borrows $240,000 and with the other
$60,000 buys units in a unit trust.
 The trust buys the property. The income
earned by the trust goes to Mary.
 Mary declares the income in her own name,
and writes the interest incurred against the
income from the trust.
Hybrid Discretionary Trusts
The problem
Discretionary Trusts don’t allow
negative gearing.
Unit Trusts have no asset protection.
A solution?
HDTs can issue special income units
that you can borrow against .
Example
 John wants to buy a $400,000 house
 Buys in name of the Hybrid Discretionary
Trust and borrows $400,000 from the bank
in his own name
 John receives 400,000 special income units
 Trust runs property and must give John
100% of income
 John claims the interest in his own name,
and claims overall tax loss if the interest
exceeds the income.
 SIUs can be redeemed, and it has been said
that they
Hybrid Discretionary Trusts
Pros
 Negative gearing
 Asset protection
 Once positively geared, redeem units and
distribute at your leisure!
Cons
 Negative gearing aspect in a cloud
 Unit Redemption in a cloud
 Value of SIUs for bankruptcy proceedings
 High Accounting fees.
Other trust advice
Three types of trusts can transfer
income to children at adult rates
1. Child maintenance trusts
2. Estate proceeds trusts
3. Testamentary trusts
 Need to sign now and want a trust to
own the property? Add ‘ATF’ after
the name of the potential trustee.
Super Funds
Imagine a way of investing in property
that was completely tax free
You can arrange for contributions to
them to be tax deductible
 $50,000 for the next financial year all
ages, $100,000 if you are 50 and over
after the 1st of July 2007 up to 30th
June 2012.
Super Funds
Pros
 15% tax on profits and contributions
 No tax on super pensions or payouts after 1
July 2007 if you meet the criteria
Cons
 Can’t borrow. No borrowing at all
 Can’t live in
 Can’t use as security
 Assets locked away until retirement.
 Can’t personally benefit from assets.
 Accounting fees.
Joint ventures
 Joint ventures are not a structure
 “highly defined partnerships that
don’t lodge tax returns “
 Long contractual agreements
Joint Ventures
Pros
 Allows super funds to get involved in
projects requiring borrowed funds
 Stamp duty savings
 Redistributing profits among entities
Cons
 High fees for contracts and accounting
 Disagreements are rarely prepared for
 Must be very careful on the paperwork, eg
insurance
Advice for JVs
 Great for when you don’t have the funds to
go ahead with a project
 For short quick stuff, like a development
 But the final word on JV is ensure a lot of
preparation and time is spent making sure
everyone understands their responsibilities
and risks and makes firm commitments to
the project. Many people have been burned
on JVs due to a breakdown between the
parties involved.
Discretionary trust and
companies
Trustee - Company
Creditors
Trust
$
‘Bucket’ Company
Unit trust and hybrid
discretionary trusts
Unit Trust
(owns the property)
Units
owned by
Hybrid Discretionary Trust /
Discretionary Trust
(owns the units)
Income
Unit trust and hybrid
discretionary trusts
Pros
 Negative gearing (with HDT, not with DT)
 Asset Protection
 Distributing Income
 Contribute property to super later
Cons
 Higher accounting fees
Unit trust and hybrid
discretionary trusts
Note
Each trust must have different
trustees, or they are treated as one
trust.
If you feel uncomfortable with HDTs,
use a DT instead, but you will lose the
ability to negatively gear the asset.
Transferring assets around
 2 costs to consider
Capital Gains and Stamp Duty
Capital gains – When you transfer
properties, the Market Substitution
Rule applies. (If discount available,
worst case scenario 23.25% of gain)
Stamp duty – Property is transferred
for Market value.
Stamp duty - Queensland
Value of property
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Stamp duty payable
$5,600
$8,975
$12,475
$15,975
$19,975
$23,975
Example
 Jane started as a doctor and is
worried about getting sued. She is
moving to another city to earn more
income and wants to rent out her
home. It is worth $500,000 and she
paid $300,00 for it. There is no debt
on the property.
 Solution – Transfer to a Discretionary
Trust.
 Costs? No CGT as it is her home on
transfer, $15,975 in Stamp Duty.
Bankruptcy Clawback rules.
 Any asset transfer made after the
date of bankruptcy can be voided by
the trustee in bankruptcy.
 Any asset transfer for less than
market transfer can be ‘clawed back’ if
made in the last four years (five if you
can prove you were ‘solvent’ at the
time of the transfer)
Land tax - Queensland
Individuals
300,000
500,000
750,000
1,250,000
2,000,000
$0
$500
$2,250
$9,500
$20,750
Trusts, Companies, etc
$1,500
$2,250
$9,500
$16,500
$30,000
Too much land tax? – Consider trust cloning
How do you get
structures?
Accountant
 Lawyer
 Online
 Ask a Friend

That problem I had?
 Step 1 – Transfer my home into my
spouse’s name – Stamp duty free if
done for ‘love and affection’.
 Step 2 – Transfer business from
Corporate Entity to Discretionary
Trust.
 Step 3
Me
Discretionary Trust
Property purchased – 100% Geared
with fully tax deductible debt.
Must pay $7,225 in stamp duty.
Property sold – Capital Gains
after discount and active
asset reduction (Average
10% tax on gain)
Office
Use loan proceeds to pay out
debt on home (non-deductible)
and previous debt for office
(deductible).
Property negative geared?
Problem – Discretionary Investment
Trust is negatively geared. Losses
lost?
Answer Investment Trust
Business Trust
Others
Losses offset by
Trust income
Me
Result?
Only asset is shares in a $2 company.
All debt fully deductible.
My tax return only shows trust income.
Note – Part 4A (the anti avoidance
provision) applies to any transaction,
so speak to your accountant first.
In closing
 1. Always buy your investments in
the right entity from the start.
 2. Asset protection is about doing
stuff before you get sued.
 3. Trusts are your friend.