Trust structures are on the way out?
Published by Jacob Field on 8 April 2022How do Trust’s impact lending and how and when should we set one up?
What are the key criteria that make this something that is viable or profitable?
Why would we do this in the first place?
How does this impact our loans and tax implications for trust structures?
Now, before I write more, I need to mention, this is general observations, my general thoughts.
I’m not an accountant, I’m not a tax advisor.
I have seen how this works for others and I’ve obviously employed these strategies and vehicles for myself extensively.
Having said that, I did have a very close relationship with an accountant, he’s very well versed in our strategies, my strategies and also strategies of clients of ours.
His name is Scott Knuckey and..
..he basically said… “Trust structures are over”
It was only a 15 minute conversation, if not less than that. He basically said that the A.T.O are coming down on trusts like a ton of bricks.
Once again, this is general advice.
But there is talk of trust structures even being grandfathered in this new legislation back in to the previous, the previous major tax changes around trusts, which was 2014 from memory.
A lot of these distributions tax benefits, it’s all going to potentially be diluted if these changes are finally and enacted.
So, big pause button from my perspective on trust structures as of now we’ve got to wait for the dust to settle.
We’ve got to wait for these proposed changes to be enacted.
We’ve got to understand them on a deeper level at a high level, why a trust structure is good.
These sort of points I write here are for pre-budget.
Trust structures are really good for three main reasons.
Family planning, family succession, passing assets down effectively through families.
Obviously tax minimisation and then also asset protection.
Generally with asset protection unless you’re in a high risk industry or self employed generally they’ll be overkill.
You don’t really need a tax structure, you’re not exposed to that level of risk once again generalisations, family planning tax structures do provide that benefit.
The advice that’s been given to me in the past though to get the full benefit of a tax structure for these types of benefits, you don’t just have one trust.
That one trust as a mothership, think of it you know associated with many different properties. It’s not going to give you those family planning and asset protection benefits.
You’ve actually got to have a multilayered approach.
The advice that was given to me is you have a property owned by a trust which is then owned by a corporate trustee and then that corporate trustee is then owned by the mothership that extends and expands and survives all the different assets that you have with the other packages.
So when you want those full benefits of a trust structure you do need to have three tiers.
You pay the mothership once per annum.
You know you may have running costs of $1,500. If not more for that mother ship ,you might have 10 properties running through that, but each individual property then therefore to get the full benefits of a trust structure need to have its own individual trust, which you then pay benefits and accompany trustee.
That is something that you have to pay to set up and then to administer each year.
It might be $2,000 or $3,000 each year per property.
Remember if you’re buying a residential dwelling, it’s giving you two or $3,000 positive net cash flow per annum, you’ve just wiped away your profits.
It’s impacting your after net cash flow dramatically.
What’s impacting your gross cash flow dramatically for that type of asset?
So generally for a P.U.S.H approved property, generally for a $400,000 or $500,000 investment that’s giving you good cash flow 5%..
..a little bit of spending money in your pocket each week.
Trust structures really do wipe that out. And for the benefits tax minimisation brings, is it worth it?
Not usually asset protection, not usually for most people, family planning benefits. Well yes, there is a benefit there, but you’ve then got to look at what is the cost of administering that structure for the next 50 years.
And is that offset by your tax savings from you?
No more effectively being able to pass that on to your family members when you do pass on.
Not usually once again really high level advice when trust structures really do come into the equation, you know, buying a $2 million commercial property with a $90,000 a year net positive cash flow.
Well, suddenly $2,000 a year. Administration costs is a drop in the ocean.
You want to hold that asset for the long term, you want to pass it down through the generations.
The trust administration costs are a small percentage of your overall net cash flow position from that asset.
It’s a no brainer to lock that away in a trust and protect it to distribute returns etc etc
That becomes a no brainer.
Lending if you’re going through a good lender or a good broker, they can usually structure things to achieve similar levels of lending or similar terms of lending in or outside of a truss structure.
You are sometimes able to move or purchase assets in structures to navigate land tax considerations, once again, not advice, but you know, it is definitely a consideration in some cases.
Everything I just said then though, big pause, not even really applicable at the moment based on, we have to let the dust settle from the latest budget and the changes to trust to come into effective.
It is looking like a lot of the reasons why we have previously got trusts are looking like they’re going to be locked down.