# Investing through a family trust



## Fab (16 May 2007)

Hi,

I understand that investing in shares through a Family trust gives more flexibility at least this is what I was told by my accountant. I did not have the opportunity to discuss that further with him which why I am posting my questions here.
I understand that one of the benefit of investing through a Family trust is that the Capital gain can then be shared amongst the trustees nevertheless I am not sure that within a Family trust I would be able to benefit of the 50% CGT discount if shares invested for more than 1 year and could I get tax deduction under my personal name for investment in shares made through the family trust (Currently I can claim at the end of the year all shares investment related interest as I am using a Line of credit in my name in order to do that ).
Thanks for your feedback.

Cheers


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## GreatPig (16 May 2007)

This is a complicated topic. There's no problem (that I'm aware of) in relation to the 50% CGT discount being passed through a trust (although it's shared by the beneficiaries, not the trustees), but the issue of loan interest deductibility is currently very thorny, especially where it leads to negative gearing.

You can only claim an interest deduction if you have a fixed right to the income generated by the loan funds. This isn't the case with a normal discretionary trust (unless you on-lend the funds to the trust, but it would need to be at the same interest rate for various reasons which would provide no benefit to you), but could be the case with a unit trust. The more recent hybrid discretionary trust (a combination of a unit and discretionary trust) has been touted as an entity that can allow negative gearing by an individual, but this has recently been getting a lot of negative responses from the ATO when people have applied for PBRs (private binding rulings).

This has had a lot of discussion recently on the Somersoft property forums, and quite a few people (me included) are keenly awaiting news of something more definite. Apparently Chris Batten is doing a lot of work on this with the ATO at the moment, trying to nail the issue down.

Cheers,
GP


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## MBI (29 May 2007)

Thanks Great Pig and you seem to be knowledgeable about the setting up a trust.  At the behest of a friend, I am also starting to look at transfering my shareholdings to a family trust.  Is there any resources in the web that will give a good intro on Australian discretionary and unit trust, tax implications, trust termination and surviving clauses etc?.

Cheers ...


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## GreatPig (30 May 2007)

I don't know that there's much free info on the Web. Some accountants have a bit of basic information, Kevin Munro's site has some good info, but I notice it's currently under reconstruction, and Chris Batten's site has some although you need to subscribe to get very much.

Dale Gatherum-Goss has a good book called Trust Magic, but you have to buy it. And then there's the Family Trusts book by Nick Renton: very dry on the palate but quite comprehensive (although nothing about hybrid trusts last time I read one).

GP


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## Baka_Gaijin (1 June 2007)

The ATO website will answer most questions, but you need to know how to find what you are looking for.

There are limited circumstances where the following is not the case but basically, a family trust will allow you flexibility in one repect the trustee can decide which beneficiaries receives receives distributions from the previous year's profits. They are slilghtly inflexible in that you MUST distribute all of that year's profit. The 50% CGT exemption you are referring to is for individuals and as the trust is an "flow through" entity, beneficiaries can receive the same tax treatment as if they received the income directly. Negative gearing is not really an issue, mainly because it is quite rare to actually do achieve with shares. If you are borrowing funds to invest, you are pretty much going to get a deduction for the interest. Just be sure not to ammalgamate investment borrowings with personal or else you get yourself into a complicated mess.


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## GreatPig (1 June 2007)

Baka_Gaijin said:
			
		

> Negative gearing is not really an issue, mainly because it is quite rare to actually do achieve with shares.



That depends on how you do the gearing. Not sure with margin lending, but if you set up a LOC secured by real estate, you can 100% gear into shares and be quite heavily negatively geared (a work colleague does this, and I have a variation on the theme myself).



> If you are borrowing funds to invest, you are pretty much going to get a deduction for the interest.



Not necessarily, where borrowing in your own name to buy shares in a trust. You need some form of unit trust for that, and a number of factors are taken into consideration to determine whether all, some, or none of the interest can be claimed.

GP


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## reece55 (1 June 2007)

Guys
In the event that you are negatively gearing, a trust is not the place to do it - you cannot distribute losses from a trust, they are retained and offset against future profits subject to the non-commercial loss provisions...... If you want to have the benefit of passing through losses, try this in a partnership structure....

If anyone seriously wants some reasonably charged advice and you happen to be in Adelaide, give me a PM and I can arrange an interview for you at my firm (shameless plug I know). Trusts will costs you about a couple of hundred to incorporate and, depending on the volume of transactions, 300 - 1K in accounting fees per year. Would love to be able to help any ASF members out, but legally off this forum!

Cheers


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## Baka_Gaijin (1 June 2007)

Greatpig

The words "rarely" was intentionally included because most people gear share investments against the actual shares themselves to give them a larger portfolio. Banks typically go to about 70% on shares. If you know someone that is an except, good on them.

Likewise for the second post, "pretty much" would include the situation where you screw up the structuring and disqualify yourself from deductability.

If you want to be anal about it we can list the infinite "what if" scenarios that could be exceptions, hopefully we will be finished before Christmas.


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## MBI (1 June 2007)

reece55 said:


> Guys
> In the event that you are negatively gearing, a trust is not the place to do it - you cannot distribute losses from a trust, they are retained and offset against future profits subject to the non-commercial loss provisions......
> Cheers




Reece -  pls help by elaborating on what this 'non-commercial loss' is about.  Unfortunately I am in Brs and not Ade, but will keep yours in mind in the event a friend there needs an accountant.

Folks, it's really good to get all these helpful contributions from you people.  Like to have some grounding on understanding trusts before seeing an accountant or lawyer about. Managed to grab a book recommended by greatpig....

Cheers and have a relaxing weekend ,,,


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## reece55 (1 June 2007)

Hi MBI
Sorry, don't worry about the non commercial loss rules - I forgot as you are not distributing the loss in the case of a trust, they don't apply.....

But for a partnership or on your own, you need to ensure that if you are making losses, to use them against your income they qualify in accordance with the rules. The fact sheet is here: http://www.ato.gov.au/businesses/content.asp?doc=/content/13280.htm

The other thing to bare in mind with trusts is the family trust election requirements and understanding that by making this election, eventually the trust must be dissolved as you will run out of family members to distribute to and who the specified individual needs to be..... But once again, these are complex matters left best to a good chat with your accountant.

The biggest benefits I see with a trust are:
* Ability to value shift income legally!
* Ability to distribute to your kids, therefore getting rid of about $700 of income per kid (finally, one instance where a child decreases your cash outflow"
* Increasing your $5,000 franking credit limit to a lot of people...... especially good for those dividend extraction strategies.....
* Overall, super flexibility.

Cheers


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## AnalysisParalysis (1 June 2007)

Pm me if you seriously want to set up a trust. I can steer you in the direction of an accountant that is wealthy himself and specializes in setting up bulletproof trusts. You need to be getting an income of more than 60-70k for it to be worthwhile from what I'm told, depending on the reason for setting it up. Costs a couple of grand, but it's the "bees knees".


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## Mousie (1 June 2007)

reece55 said:


> * Increasing your $5,000 franking credit limit to a lot of people...... especially good for those dividend extraction strategies.....
> 
> 
> Cheers




Hey reece55,

Could you elaborate on what this means? Have never heard this point in relation to trusts before; just finding out more before deciding whether to set one up at this juncture. Thanks


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## GreatPig (1 June 2007)

Baka_Gaijin said:
			
		

> If you want to be anal about it we can list the infinite "what if" scenarios that could be exceptions



Gearing in the manner I mentioned is by no means "rare". It may not be the majority of situations, but that doesn't make it rare.

And "pretty much" regarding interest deductibility with trusts is incorrect (assuming we're talking negative gearing against other personal income). You can't negatively gear at all against personal income with a standard discretionary trust, and with unit or hybrid trusts it depends considerably on the wording of the trust deed and the (perceived) motive for negative gearing that way. From what I've seen recently, I'd guess there are quite possibly more cases of full interest deductibility being disallowed rather than allowed - at least with hybrid trusts that allow for discretionary capital gains distributions while units are on issue.

GP


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## reece55 (1 June 2007)

AnalysisParalysis said:


> Pm me if you seriously want to set up a trust. I can steer you in the direction of an accountant that is wealthy himself and specializes in setting up bulletproof trusts. You need to be getting an income of more than 60-70k for it to be worthwhile from what I'm told, depending on the reason for setting it up. Costs a couple of grand, but it's the "bees knees".




Analysis
Sounds like a con to me - a trust is a trust mate, and if you are paying a couple of grand to get it established, then you are getting ripped off......

The formation of the trust and it's deeds are available to anyone. I mean, you could just copy and paste the text from the clear docs web site, go down to your state revenue office, get it stamped and away you go. There are many strategies for tax purposes, but these are well known and most firms should be able to give you the same service..... I challenge you to illustrate why you would pay someone a couple of grand to get $500 worth of service......

Cheers


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## reece55 (1 June 2007)

Mousie said:


> Hey reece55,
> 
> Could you elaborate on what this means? Have never heard this point in relation to trusts before; just finding out more before deciding whether to set one up at this juncture. Thanks




Say you are using a dividend extraction strategy whereby you invest in highly geared warrants to extract franking credits. Technically, if you had yourself, your spouse and say your mum/dad, you could extract 15K (5K * 3) worth of franking credits in the trust legally without having to satisfy the 45 day holding period........ It's 15K cash in your hand and provided you had other capital gains, you wouldn't have to outlay a cent via the T+3 settlement rules by buying 1 day before the ex dividend date and selling the next day.....

MMMMMM...... Franking credits..... AAAAHHHHHHHHHH.....


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## AnalysisParalysis (2 June 2007)

I don't have one set up myself. The trust structure I'm thinking of is one designed for asset protection. The accountant is from 21st Century Academy if you've heard of them. It's a combination of a company/multiple trust structure, depending on if you've got property investments as well as share trading going on. 

I rang them up myself when I first did the course but they said it's not worth it unless you're earning closer to the 100K mark.

Having done the 21st Century Academy course, there are some accounting presentations in it that detail trust set-ups and some of the things that can happen if they are set up incorrectly by well-meaning accountants.

The trust structure they set up is described by the accountant as the "Rolls Royce" model. They either set up the full-on best one, or they don't do it.

They're multi-millionaire investors themselves, so they know what works and what doesn't. 

Yes, sounds expensive, but it can be more expensive if you get sued and your trust structure is incorrectly set up and you lose everything because of it.

It's expensive because they constantly try to break the structure themselves by hiring lawyers and what-not (don't quote me, I haven't reviewed the accounting section of the course for a while) to try and break it. You know, like refining it constantly. It's not a simple piece of paper with a stamp.

Maybe it's a case of getting what you pay for, but if you're dealing with a large amount of money, maybe it's better to pay a bit more for the best you can get. Then again, maybe it's more than you need. 

Look, I don't get commission or payment for referring people.  

Just consider it an avenue you may wish to explore. I'm just the street sign.


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## GreatPig (2 June 2007)

You can also get trust deeds from MGS (Macquarie Group Services) which are done by Chris Batten. A number of good accountants use his deeds.

GP


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## Baka_Gaijin (3 June 2007)

Reece

Not all trusts are the same. Different legislations are ever changing which try to lift the veil on trusts etc. Soliciors are therefore trying to come up with new ways to safeguard assets held by trusts and in order to do this you will have to pay extra money.


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## Baka_Gaijin (3 June 2007)

Greatpig

You mention unit trusts in relation to shares, I hope you have considered how to get the discounted portion of the capital gain out of the unit trust without paying tax on it.


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