Trustee s Companion. No part of this book may be reproduced without the permission of the copyright owners.

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1 Trustee s Companion Published by Chan & Naylor Australia Pty Ltd Suite 4, Level 2, 55 Grandview Rd, Pymble NSW 2073, Australia Phone: Copyright Chan & Naylor Australia Pty Ltd. All Rights Reserved. Certain sections of this book have been excerpted from the book "How to Legally Reduce Your Tax... Without Losing Any Money!" By Tony Melvin & Ed Chan Tony Melvin & Ed Chan. All Rights Reserved. Used with Permission. No part of this book may be reproduced without the permission of the copyright owners. Disclaimer The material in this publication is of a general nature, and neither purports nor intends to be advice. Readers should not act on the basis of any matter in this publication without taking professional advice from a licensed Financial Planner, with due regard to their own particular circumstances. The authors and publisher expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this publication. While every care has been taken to provide readers with the most up to date information at time of publication please be advised that neither the authors nor the Chan & Naylor Australia its, directors, office holders, staff, franchisees, jointventure partners or representatives are able to guarantee that the information contain in this publication is true and correct. Due to the fact that the law is constantly changing readers are advised to consult a licensed tax agent or solicitor before embarking on any of the information contained in this publication. Property Investor Trust Deed is trademark owned by CNIP Pty Ltd and is used with its permission. Version

2 Table of Contents Step One Starting Out...3 Property Related Acquisitions...4 Step Two - Legal, Banking & Finance...5 Banking & Finance...5 What name goes on the documents?...5 And Or Nominee...6 Opening up a bank account...6 How do I get money out of the trust?...7 Can the trust apply for a loan?...7 Borrowings in Personal Names:...8 On Loan Agreement...8 Can the trust apply for a credit card?...9 How to pay for your property expenses...9 Negative Gearing and Trusts...10 Applying Tax Instalment Variation (formerly called the 221D)...11 Depreciation...12 Quantity Surveyor s Certificate...12 Centre Link...13 Chan & Naylor Services...14 Team at Chan & Naylor...14 Financial Strategic Consultancy...14 Annual Financial Strategic Consultancy...15 Wealth For Life Plan...15 Company Registered Office...15 What do you give your accountant at tax time?...15 Important Reminders...16 Structures Explained...17 What is a Trust?...17 What is a Discretionary Trust?...18 What is a Unit Trust?...18 What is a Hybrid Trust?...20 What is a Property Investor Trust Deed?...20 Naming The Trust...21 What does the Trustee do?...21 What does the Appointor do?...23 What does the Settlor do?...23 Initial Beneficiaries...23 Who can be a Witness?...24 What is the trust folder used for?...24 Goods and Services Tax (GST)...25 Loss of the Trust Deed...25 Why is the The Salvation Army or Other Entity mentioned in the deed?...25 Glossary...26 Property Investor Trust Product Ruling PR 2011/

3 Step One Starting Out Wealth Creation, Asset Protection and Tax Minimisation should be paramount to your strategic thinking. The importance of the correct structure in which to hold your investment, (be it property or any other) and its correct use could mean the difference between losing or retaining your assets and the paying or not paying of hundreds of thousands of dollars in excess tax over the longer term. As a by-product of properly protecting your assets, tax benefits may also be enjoyed. There are four primary Taxes that could deplete your nest egg of investments. They are Income Tax, Capital Gains Tax, Land Tax and Stamp Duty. Purchasing an Investment Property is completely different to buying a home to live in because your principal place of residence (PPR) has no investment tax consequences while it remains your PPR. Note: on sale, or even subdivision this may alter depending on the circumstance. We see on a daily basis thousands of dollars lost by the incorrect structuring of property. A client often tells us that they have purchased a property after they have exchanged Contracts. It s too late to see your accountant after the contract has exchanged. You need to get advice and if required implement before the exchange of Contracts. It's absolutely imperative that you see an Accountant who specialises in property, such as Chan & Naylor, to advise on the correct structure and its use to maximize your asset protection and estate planning and to minimize some or all of the above taxes. This meeting with a Chan & Naylor Accountant should be held anytime before the Contract of Sale is exchanged and any accepted recommended action implemented completely prior to exchange. The trust and the trust deed must be completed and executed before it can be used. Please take into account the time it will take to prepare and complete the trust and you need to check the approximate timing with Chan and Naylor to ensure you give yourself plenty of time. If you are using a company as trustee it must be set up and registered before the trust is set up (as you must nominate an existing entity as trustee, NOTE it can be done simultaneously). The trust documents must be then completed, executed and stamped before you start using it. This all needs to be completed before you exchange contracts. YOUR TRUST DEED MUST BE SETUP BEFORE YOU EXCHANGE CONTRACTS OF SALE ON A PROPERTY. THIS MEANS THE TRUST DEED MUST BE EXECUTED BEFORE THE DATE ON THE CONTRACT OF SALE. Note the exchange date is the time in question when the trust set up needs to be completed. Settlement date is irrelevant to this exercise. Decide on Which Property Latest you can see your accountant Contract of Sale with your solicitor Exchange Contracts Settle on property Simply notify your solicitor that you will let them know the name to put on the contract after you have consulted your accountant. CNIP Pty Ltd and Chan & Naylor Australia - 3

4 Step One Starting Out Property Related Acquisitions When securing property related assets you need to consider asset protection, estate planning and all the major tax charges. To manage these issues for property related assets a Property Investor Trust (PIT ) is used. Chan & Naylor have developed this trust to maximise the potential benefits of using a trust for property while, at the same time, eliminating the inherent disadvantages of other types of trusts if used for property. The structure of the PIT allows for units to be issued so it can facilitate the unit holder to negative gear. The ATO position including Tax Determination TD 2009/17 on this subject as discussed below must be considered if this is the case. Please note: if securing non property related assets, you cannot use a PIT but must use an alternate trust structures on which Chan & Naylor will advise you. CNIP Pty Ltd and Chan & Naylor Australia - 4

5 Step Two - Legal, Banking & Finance What name goes on documents such as a Contract of Sale, Bank Statement or a Loan Document? Banking & Finance What name goes on the documents? While this is a legal area and readers are advised to consult their solicitor on such matters, we thought we'd share with you our experience. From our experience, when it comes to purchasing property through a trust, many people get confused as to what name goes on the contract of sale. Hopefully the following will help remove any misconceptions. If you are purchasing for (or via) a trust, the name that goes on the contract of sale is the trustee. The trustee is the one who is registered as the legal owner. Before finalising how you will sign the contract you must get specific advice from your lawyer as the rules often change and if you sign incorrectly then you could be subject to two stamp duties. There are only two different types of trustees; one is a company as trustee and the other is an individual (or individuals) as trustee(s). To help clarify this concept, here are two examples. In figure one, John and Sue Smith are trustees for the Smith Trust, therefore on the contract of sale you would write John Smith and Sue Smith. If your structure has a company as trustee, as in figure 2, then the contract will show the legal owner as XYZ Pty Ltd and that is it, that's all you write. In both these circumstances above the words "as trustee for the [name of trust] trust" are not needed, only the name(s) of the trustee(s) is needed. Queensland and Western Australia The exception to this rule is when you purchase in Queensland and Western Australia where it's a requirement to stipulate if the person or company is a trustee. Again we advise you to get specific advice from your lawyer prior to signing as the rules can change and other states may change their requirements to have the trust identified. CNIP Pty Ltd and Chan & Naylor Australia - 5

6 Step Two - Legal, Banking & Finance In Qld and WA, the name on the contract of sale would be: (name of trustee) as trustee for the (name of trust) trust. For example, John Smith and Sue Smith as trustees for the Smith Trust. Currently this is only necessary for the State of Queensland and Western Australia, however other states are in the process of adopting the same policy, so be sure to consult with your solicitor. So why is this important? Firstly, for those who are in the process of establishing a new structure, as soon as they know the name of the trustee, they can proceed with the purchase of an investment. Secondly, if you have a trust structure it s important that you use the correct name of the trustee, to avoid any ownership and tax complications in the future. We hope that has clarified things for you. As mentioned, this is a legal area and readers should still consult their solicitor on such matters. And Or Nominee The use of the term And Or Nominee is sometimes used on a Contract of Sale eg John Smith and Sue Smith and or nominee. It is used to substitute a different legal owner at settlement than was used when the contracts were signed at exchange ie the substitute name to go on the title deed. You must seek legal advice if contemplating this usage as double stamp duty may apply if incorrectly or inappropriately used. In simple terms the entity that is to take over if the term is triggered at settlement must have been in legal existence at the time the contract of sale was executed and the entities were appropriately connected or associated. Opening up a bank account To open a bank account for the trust you will need a copy of the stamped Trust Deed. They usually need to see proof that a valid trust exists and that stamp duty on the trust has been paid. The latter is evident by a special stamp on the cover or just inside the deed and is proof that the stamp duty has been paid and the deed is official. This stamp will also show the date of stamping. Banks will often photocopy the deed for their records. The bank will also want to see a copy of the company registration if a company is the trustee. Normal ID proof for setting up a bank account will be required. The name of the bank account is: Individual Trustees = John Smith & Sue Smith as Trustee for Smith Trust or Company Trustees = XYZ Pty Ltd as Trustee for Smith Trust Often you will see the above abbreviated like so: John Smith & Sue Smith ATF Smith Trust or XYZ Pty Ltd AFT Smith Trust CNIP Pty Ltd and Chan & Naylor Australia - 6

7 Step Two - Legal, Banking & Finance Depending on the bank, you will see something similar to the above written on your statements. Don t be too alarmed it your bank labels the statement The Trustee for the Smith Trust and doesn t include the individual trustee s names; this is common practice for some banks and is fine. The money and paper trail We recommend you open a bank account for the trust in the name of the trustee and trust as described above and if possible, pay the vendor s deposit (seller of property) from this account. You may need to firstly bank the deposit into this account prior to paying the vendor. We need a paper trail to prove that the "Smith Trust" paid for the property. If it is necessary for any deposit monies or other settlement funds to come from another account including your solicitors trust account (ie not the trust bank account) additional documentary evidence will be required to support the fact that these funds are the trust funds and that it has directed you to pay to another entity. If required this will be an additional service and additional cost. It will also need to be noted in the trust register that it was paid on behalf of the "Smith Trust". After Settlement: You should get your real estate agent to automatically deposit rent, less the expenses, into the trust account. All income and expenses associated with the property must pass through the trust bank account. The surplus (rental income less costs related to investment property) from the trust bank account needs to be paid to unit holder and then unit holder needs to pay the interest on the loan because as per the concept the unit holder is a borrower (whether directly from bank or via On Loan Agreement from trust) and the interest should be paid by unit holder to claim the negative gearing in the individual s income tax return. How do I get money out of the trust? Once you ve opened up a bank account, money will be received and spent via that account. Should you wish to take money out of the trust for your own personal spending you can withdraw cash or transfer the money into your own personal account. Note interest on funds borrowed for personal spending will not be tax deductible. Of course, you will need to track the income and expenses including noting how much money the beneficiaries/unitholder received so at tax time it can be easily determined who got what. However it is perfectly ok for you (the beneficiaries/unitholders) to withdraw money as you please and at year end these will be classified in the appropriate manner. Can the trust apply for a loan? Yes it can, although the individual trustees or directors of corporate trustees are most likely required to personally guarantee the loan. Please note an original stamped deed will be required as part of the documentation for any loan where a trust is involved even if the trust is not the actual borrower but maybe only the beneficial owner. Refer below where we discuss borrowing in the person s name not the trust name. CNIP Pty Ltd and Chan & Naylor Australia - 7

8 Step Two - Legal, Banking & Finance It s important to note, that if you intend to purchase an investment (property for example) in the trust that is likely to be negatively geared and you wish to claim the interest as a tax deduction in your own name, then it is simpler if the trust doesn t get the loan. Where the individual wishes the interest expense in their name then it is simpler if the loan be is in their name. The bank will normally require the individual trustee or directors of the trustee company to act as guarantor. In the above circumstances the loan is usually applied for by the individual(s) who then makes an investment in the trust by subscribing to units in the trust. For example if the trustees are John Smith and Sue Smith but we want the units to be in John's name then the loan has to be in John's name i.e. John has borrowed the money to purchase units in the trust. The trust uses these funds to buy the property for cash. The funds supplied by John Smith will come from one or various sources ie line of credit for deposit and costs and the mortgage loan for the actual property. The landlord is the trust and the unit holder is John. The rent will flow to the "Smith Trust" and after paying for expenses such as water, land tax & council rates the net rent is distributed to John and in John's Tax Return we show income from the Property Investor Trust Deed (related to the units secured) and claim the interest paid to the bank (i.e. negative gearing). Borrowings in Personal Names: Whilst some lenders will only write the loan in the trustee names your first action should be to have the finance written as agreed with your accountant. As stated above, this will usually be in personal names in order that interest expense from the loan rest in the individual's hands rather than being locked in the trust. There is a range of lenders who are used to writing loans in this way where trustees and unit holders are the same individuals. Recently more lenders are looking at reviewing their policies to accommodate the requirements of Property Investor using trusts. Your use of lenders willing to structure loans where borrowings are in personal names encourages this trend in the finance industry and will make structuring your finance correctly an increasingly easy path to follow. The flow of funds is that the trust bank account receives rent and pays expenses, the individual then receives the net rent (their income from having the units) and applies interest expense from borrowings associated with the loan to secure the units. As the borrower, you are, in effect, borrowing the funds to secure the units not the asset. You then receive the net rent as income from the trust and it passes to you as you are the unit holder. As such you must be satisfied that this income from the trust is commercially acceptable to you in return for the funds you borrow to secure the units. Contact your accounting Chan & Naylor office or client manager if you need assistance. On Loan Agreement Unfortunately, some banks or individuals processing the loan application, still do insist on having the same name on the loan facility as on the contract of sale or refuse to accept security property which is held in unit, hybrid trusts, property trust or property investor trust deed. Where banks insist on having the same name on the loan facility as on the contract of sale any negative gearing from loan interest payments lies locked in CNIP Pty Ltd and Chan & Naylor Australia - 8

9 Step Two - Legal, Banking & Finance the trust and can pose a problem for tax efficiency purposes. This can also cause other problems later on so it is imperative to discuss this with an accountant at Chan & Naylor. If the bank does insist, then you may need an On Loan Agreement prepared. This is a relatively simple but legally prepared document that states that the loan is for the individual as opposed to the Trust (trustees) or entity shown on the loan agreement. You are effectively passing the payment requirement on. The banks legal rights do not change and the entity who is on the loan document is still the one liable. Since the bank still holds the original entity liable there is no need to advise the bank of the on loan agreement. There is an additional charge for this agreement as it needs to be prepared by a solicitor which Chan & Naylor can assist you with but if you happen to be caught out this way, with insufficient time to redo the loan correctly; this may well need to be the option for you. Please note that the on loan agreement must be executed at the same time that the loan offer from the bank is given to you. For clarification on this matter speak with your Client Manager who will be more than happy to assist. Can the trust apply for a credit card? Yes it can, although the trustees are most likely required to personally guarantee the credit. If using a credit card, you can spend money for personal expenses and expenses relating to the trust. Expenses relating to the trust will be tax deductible to the trust, money spent on personal items will be considered income for you as a beneficiary. How to pay for your property expenses You should get your real estate agent to notify Councils, water board etc to have all invoices sent to the real estate agent for payment. Try not to pay anything yourself. The reason for this is simply that at the end of the year all expenses are summarized on one sheet of paper. This saves a lot of time at tax time. You will then pay for interest yourself so the annual statement from the real estate agent and your bank statements should be sufficient information for tax preparation. Please note that the settlement sheet ( balance sheet prepared at settlement) showing adjustments and any other charges (legal fees, stamp duty on mortgage etc) will also be required in order to complete the trust tax returns, as these costs are also deductible over various time periods. You should also have prepared a depreciation schedule from a qualified Quantity Surveyor for inclusion in the trust tax return (refer below). CNIP Pty Ltd and Chan & Naylor Australia - 9

10 Negative Gearing and Trusts One of the disadvantages of a discretionary trust is the loss of some benefits associated with negative gearing investments through the trust. Namely, if a discretionary trust acquires a property and borrows to invest in that property, then any losses generated are accumulated in the trust and cannot be distributed to the beneficiaries. This is not such a problem if the discretionary trust itself has other sources of income but can give rise to significant problems for, say, PAYG-type taxpayers who wish to acquire a property and negatively gear at the same time. Obviously, the advantages of having the property owned by a discretionary trust may be outweighed in this case by the disadvantage of any negative gearing being generated in the trust itself. The development of a hybrid trust (one where the discretionary nature is preserved in the trust deed but allows the issue of units) is an attempt to overcome this negative gearing problem. The hybrid trust is simply a discretionary trust with the additional power granted to the trustee to issue units which confer on a unit holder fixed entitlements to income and capital gains made by the trust. In this case, units could be issued to, say, an individual and that individual borrows moneys for the purposes of investing on those units. This may allow negative gearing to be obtained by the individual (the unitholder). The Commissioner of Taxation on 26 March 2008 issued Taxpayer Alert TA 2008/3 in respect of hybrid trusts of which the Property Investor Trust is a variant. A Taxpayer Alert is released by the Commissioner of Taxation as an "early warning" of significant new and emerging tax planning issues or arrangements that the ATO has under risk assessment. The Commissioner s views in the Taxpayer Alert were then refined in Taxation Determination TD 2009/17. In TD 2009/17 the Commissioner suggested that in respect of certain hybrid trusts, interest expenses incurred by a unitholder to acquire units in the hybrid trust were not 100% deductible. Rather such a unitholder could only deduct an apportioned amount of their interest expense. This is because some of the monies used by the unitholder to subscribe for their units was used to benefit other beneficiaries, rather than used solely by the unitholder to acquire units in the hybrid trust. The following Example which is drawn from Example 3 in TD 2009/17 illustrates a situation where the Commissioner considers an apportionment of interest expense deductions is required: Example Paul arranges for his accountant to set up a trust for himself and his family. Paul and his wife control the corporate trustee. Paul borrows $1 million from a bank, in his own name, and settles it on the trust. The trustee issues 1 million units to Paul. Paul's wife and children are also beneficiaries of the trust. The trustee uses the $1 million to purchase a rental property. The trust deed provides that the trustee holds the income of the trust for the benefit of the unit holders at the end of the accounting period. The deed also provides the trustee with a discretion to appoint realised capital gains amongst Paul, his wife and his children. CNIP Pty Ltd and Chan & Naylor Australia

11 Negative Gearing and Trusts The units Paul acquires are redeemable at the trustee's discretion. The units are redeemable for an amount equal to the sum Paul settled on the trust. Any remaining trust capital is held for the benefit of the other beneficiaries. Finance Paul's interest expense is not deductible in full. The terms of the trust indicate that Paul has used the borrowed money, in part, to create a fund for the benefit of his family. Accordingly, some of Paul's interest expense will not be incurred in gaining or producing his assessable income. Because Paul has also used the borrowed money to acquire income producing units for himself, part of the interest expense will be deductible. An apportionment calculation is therefore required. Since there was uncertainty as to whether TD 2009/17 applies to the Property Investor Trust Product Ruling PR 2011/15 has been obtained in relation to the Property Investor Trust. At this stage no other type of trust is covered by PR 2011/15 and if other types of trust are used you should consult with your Chan & Naylor as to the appropriateness of the trust for its required use including the tax consequences. Provided that a unitholder subscribes for units in the Property Investor Trust in exactly the same way, exactly the same circumstances and exactly the same assumptions as described in the Scheme section of Product Ruling PR 2011/15, then the Commissioner has ruled that the unitholder may wholly deduct interest expenses and borrowing expenses which they incur on borrowings used to subscribe for units in the Property Investor Trust. Product Ruling PR 2011/15 only covers deductibility of interest expenses and borrowing expenses in the circumstances outlined in the Scheme section of Product Ruling PR 2011/15. It does not address any other taxation issues and you should seek specific taxation advice in respect of your own particular circumstances if you are unsure about any other taxation aspect of your Property Investor Trust. A copy of Product Ruling PR 2011/15 is attached to this document. Importantly for an individual to be able to deduct the interest expenses they incur on borrowings used to acquire units in the Property Investor Trust, amongst other things, they must expect to derive rent income from their unit holding in the trust and not just solely capital gains. Additionally the individual must have an intention to hold their units in the Property Investor Trust on a long term investment basis even after the negative gearing turns tax positive. Applying Tax Instalment Variation (formerly called the 221D) Instead of waiting until year end to receive your refund you can apply to get this refund per pay period. The way it works is your tax rate is reduced in accordance with your tax deductions resulting in you receiving more money with each wage or salary payment as less tax is taken out. If you do apply for a Certificate, this has to be done each year. We recommend that we do the first one for you and thereafter you apply for them yourself based on what was done in the first year. CNIP Pty Ltd and Chan & Naylor Australia

12 Negative Gearing and Trusts Around 50% of clients apply for a Tax Variation during the tax year to assist with cash flow. The rest wait until the end of the year to get a larger refund and use it as a forced savings plan. There is no right or wrong way and the end result is the same tax is paid; it is simply a matter of personal choice and finances. To apply for this you must complete a PAYG Variation form available at or contact your Client Manager for assistance. Depreciation Depreciation is effectively the wear and tear on assets. For property there are two types: 1. Division 43 (Capital Works). This is the rate applied to the building 2. Plant and Equipment This includes all other assets such as Fixtures and Fittings and excludes land. Depreciation allows you to write off as an annual expense the costs of the asset over its effective life. The effective life is used to create the rate at which you write off the asset. In simple terms if the asset would last 10 years the annual write off rate would be 10% per year, if 20 years then 5% per year and so on. There are various rates that apply to different assets and this is further complicated with different rates depending on purchase date. Depreciation is calculated using one of two methods being Diminishing Value or Straight Line yielding completely different annual figures but both reducing the asset value to Nil over time dependent on the rates used. Depending on the value of the asset purchased you may be able to have an immediate write off or you can group certain value or cost assets into a pool or group of assets for different treatment. When selling an asset that was held in a trust the depreciation on Capital Works expensed to date may need to be added back to reduce the cost base of the asset in the trust and the units issued (in some cases causing double taxation if incorrectly administered) before calculating Capital Gains Tax. Quantity Surveyor s Certificate You should contact a qualified and ATO approved Quantity Surveyor to prepare a Report on Depreciation of the building and fixtures and fittings who will take into account the various methods etc as described above. We have names of Quantity Surveyors should you require one. This is extremely important as it can provide you with thousands of dollars of additional tax deductions. Please refer to our web site ( and follow the prompts for the names of quantity surveyors. Please ensure that you investigate them before choosing any particular firm. CNIP Pty Ltd and Chan & Naylor Australia

13 Centre Link You should contact the appropriate Centre Link Officer to understand how assets and income from a trust could impact any Centre Link payments you currently receive or may receive in the future. In many situations assets and income are treated as your assets and income when held in a trust even if not directed to you. The way debt is treated by Centre Link can often mean that Gross Assets are not reduced by debt and so the Net Asset Value can be the same as the Gross Asset Value even when debt is used to secure the asset. This situation is further complicated if units in the trust are issued. Please note that your circumstances may change and your position today may differ at some latter stage and so while you are not currently receiving some sort of assistance you may in the future and your involvement in a trust could impact your eligibility. To understand your rights and responsibilities please refer to the Centre Link WEB site as follows: or contact your local Centre Link office directly. CNIP Pty Ltd and Chan & Naylor Australia

14 Chan & Naylor Services Team at Chan & Naylor To ensure that you receive first class service at a reasonable cost, we will allocate a team to look after you consisting of a secretary, a graduate accountant, a Client Manager and a Partner. Cost per hour $ Partner Client Manager Graduate Secretary Time The Partner handles all strategic matters such as STRUCTURES (designing the architecture), the Client Manager prepares Tax Returns and Accounts and handles the day to day issues (Builder, to put the pieces together and to "hold your hand") and the Secretary handles all secretarial matters such as making appointments. Financial Strategic Consultation A Financial Strategic Consultation is an assessment of your current situation and future plans. In this meeting we will determine which structure is the most appropriate for the purchase of your investment. We will assess the 4 main taxes and determine how we can minimize their impact on your investments for the short and long term. The various structures that you could use are: 1. Individual ie sole trader 2. Partnership- variable % ownership depending on circumstances. Partnerships can be between individuals, trusts companies etc. 3. Discretionary Trust 4. Unit Trust 5. Property Trust 6. Property Investor Trust Deed 7. Hybrid Trust 8. Business Enterprise Trust 9. Company 10. Limited Partnership 11. Self Managed Superannuation Fund and or Enduring Family Superannuation Fund 12. A combination of the above CNIP Pty Ltd and Chan & Naylor Australia

15 Chan & Naylor Services After a thorough examination we will determine which of the above structures are the most appropriate to hold your investment or assist in the management of your business. Once the structure is established then you have the name you can use on the contract of sale! Annual Financial Strategic Consultancy It is advisable to meet annually with your accountant to determine whether you are still on track with your plans. This involves revisiting our Wealth For Life Plan to ensure that any changes in your circumstances be addressed. Wealth For Life Plan This involves designing a plan that will assist you in creating wealth and financial security (please note that this is NOT done as a financial plan for which you would need to see a licensed financial planner, but a process which shows your cash flow management and identifies the various safety nets you can use to create security for your investments). It covers the various taxes for which you will need to plan and minimise where appropriate. Everyone is different thus every plan will be different. Changes may be necessary over time as your circumstances alter. Once the plan is worked out (this usually takes about 2 hours) you then carry it out yourself. Alternatively we can assist you in the areas of finance, cash flow management, taxation, property acquisition (via an appropriately qualified person) and insurance (via a Financial Planner). The choice is entirely up to you. The Wealth For Life Plan gives a basic road map. Whether it be towards greater wealth or a more comfortable financial future makes no difference, because it s your plan and your Road to Wealth. Company Registered Office Every company is required to nominate a registered office that receives all correspondence from ASIC, tax department and other interested parties. You can nominate a Chan & Naylor office to be the Registered Address, and we will receive and reroute all mail to you. The benefit is that you have a stable office address for ASIC and the like. Keep in mind we do charge an annual fee for this service. If, however, you wish for your business or home to be the Registered Office, then it needs to be open to the public during normal business hours. Please note it needs to be an Australian physical address and not a PO Box. Place of Business Every company and or business needs a place of business and this is the same for your company which acts as trustee for your trust. We normally find people use their home address. Again note that this needs to be a physical Australian street address. What do you give your accountant at tax time? Note, even once the trust deed has been stamped, the setting up of a trust is not completed until your next tax return when it is identified as to the number and class of units which need to be issued in relation to the property purchased. Please note you need to complete an authority for the trustee to act as trustee each time you acquire an asset. The relevant forms are in the trust pack and are all but complete, you only need to identify the asset and the date you gave the authority and this should be completed prior to exchanging contracts. Please keep this completed document in the trust file and give to the accountant at tax time. CNIP Pty Ltd and Chan & Naylor Australia

16 Chan & Naylor Services Your investment property should be a passive investment and should simply make money for you without being a burden. If you get your real estate agent to pay for everything, it will minimize your workload. If you have to pay for something yourself, please keep a list on a sheet of paper. We do not need the receipts, but you do need to keep them in case the ATO asks for them. 1. In the year of Purchase and Trust Establishment you need to bring with you the following: a. Quantity Surveyors Certificate b. Solicitor s settlement sheet & Memorandum of Professional Fees c. Real Estate rental property summary d. Bank statements for the Loan. e. Summarise extra payments made that were excluded from (c) above on a single sheet of paper. We do not need to initially sight receipts. You need to have and retain them in case of an audit from the Tax department who may require them. 2. Second and Subsequent Years. All the above except (a) unless additional work was done on the property necessitating a new certificate and (b). Important Reminders It is your responsibility to lodge an Income Tax Return each year for yourself and all the entities that you control. Be aware that the lodgement deadline changes from year to year; to find out more contact your Client Manager. Keep in mind that the tax return preparation takes a minimum of 6-8 weeks during the busy period of July through to March of the financial year. Due to the tax laws constantly changing, Chan & Naylor provides free updates via our newsletter and website. To receive these updates it s important that you register your address on our site. It is very easy do, just visit and subscribe to our newsletter. Land Tax Currently 31-Dec 30-Jun NSW & VIC land tax assessment date. Remember to review your land tax values and lodge a Land Tax Return by the due date. QLD, SA, WAS & TAS land tax assessment date. Remember to review your land tax values and pay the land tax. Here are the websites NSW VIC QLD SA WA TAS ACT Warning Most clients lodge their own land tax returns and unless you specifically instruct us to do it, we assume you will handle it. However, land held in a trust may be a little complicated hence it is advisable for you to request that we do the first land tax return for you. The way you lodge the initial return could adversely affect the amount of land tax payable. NOTE: Different states have different treatment for land tax, particularly in relation to the threshold for which no land tax is payable. When deciding in which structure to use (i.e. payable purchase in individual name, company or trust) you must ensure you take the different treatments into account. Chan and Naylor will assist you in this decision by identifying the different treatments possible and determining the most effective and suitable one for you. Be advised that not all trusts receive a land tax threshold in a particular state. CNIP Pty Ltd and Chan & Naylor Australia

17 Structures Explained An excerpt from the book "How to Legally Reduce Your Tax... Without Losing Any Money!" By Tony Melvin & Ed Chan Tony Melvin & Ed Chan. All Rights Reserved. Used with Permission. What is a Trust? A trust is basically an agreement or promise. A person or company agrees to hold assets for the benefit of another. The one who holds the assets is called the trustee; those who benefit are called beneficiaries. A trust is not a legal entity like a person or company and as such it needs a legal entity to enter into agreements for it on the trusts behalf. This is called the Trustee. Trustees are therefore either individual/s or a company. The directors of the trustee company effectively act as the decision maker when a company is used as trustee. The trustee has legal control, which is legal title only. (A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership, such as income or usage). It s the trustee s name that appears on all legal documents, bank accounts, etc. The beneficiaries are not mentioned on such documents and have beneficial ownership (allowing a person to enjoy the benefits of ownership, including; usage, income, profits etc - even though legal title is in another name.) Therefore the beneficiaries are entitled to the assets and profits of the trust. The basic function of a trust is to separate control and ownership. The result is that asset protection and estate planning is possible and profits distributed in the most tax effective way. It can also allow you to stream various cash flows to a particular entity via the issue of units or leave it discretionary (ie the trustee decides to give the funds to) The part you need to get your head around is that, when you establish a trust of your own, you have both legal control and beneficial ownership. Most people don t separate the roles, they think they are one and the same but they are not. CNIP Pty Ltd and Chan & Naylor Australia

18 Structures Explained For example, asset protection occurs because even though legal title is in the name of Joe Bloggs, Joe is trustee for a trust and therefore doesn t own the asset the assets are held in trust for the beneficial owners hence nothing can be taken from Joe because he doesn t own it. Ownership plays a key factor in not just asset protection but with in the tax system too. This is why investors and business will endeavour to own nothing and control everything! To describe the relationship of legal and beneficial owner in another way it is like a guardian looking after a minor child. The guardian buys and signs for things but does not have the right of enjoyment that belongs to the minor. Unlike this relationship when minors get to a certain age they can take over but the trust will always need the trustee to sign. What is a Discretionary Trust? Discretionary describes the ability to choose or judge. A Discretionary Trust allows the trustee to decide who gets what! The trustee has full discretion to distribute both income and capital to whoever it decides and can vary it from year to year. As all distributions are discretionary in nature loans outside the trust cannot be deemed to be part of the trust business and as such payment of interest on a loan outside the trust cannot be netted off any trust income. This is why loans are in the name of the trust. If income is less than expenses then the trust generates a loss which cannot be distributed. Someone however needs to pay these costs and as such any of these payments cannot be claimed as a tax deduction to the person paying. They are in effect paying expenses with after tax monies. Not necessarily a good thing. What is a Unit Trust? Unit trusts offer many advantages to the investor. A unit is a portion of the trust which gives the holder the right to profits. Profits and income are distributed via the units to the individual (and or other entity). Beneficial ownership is determined by the amount of units held by a person. Units can be sold to other people, entitling them to the profits or capital of the trust. Unit trusts are very useful, especially for investors because different types of units can be issued. In simple terms (not legal) it is like having shares in a company. CNIP Pty Ltd and Chan & Naylor Australia

19 Structures Explained This type of trust is sometimes preferred to using a company to operate the business. Please check with your Chan & Naylor Office. In this type of trust there is no discretionary powers available to the trustee. All income and capital must have allocated unit holders. The units can be defined as: (a) Income Units entitles the holder to net income only. (b) Capital Units entitles the holder to net capital only. Unit Trust Trustee (Controls the trust) Trust Split up Into Units (c) Ordinary Units entitles the holder to both net income and net capital. (d) Note net being after expenses incurred by the trust A Unit Unit Holders Chan and Naylor has developed its own unit trust for property called the Property Trust. Use of this Property Trust would be when: 1. You wish to work with other parties but have specific allocations between people 2. In NSW and Victoria this trust with some modifications can also act as a fixed trust if land tax threshold is required. Please discuss with your Chan & Naylor Office 3. Please note that since capital entitlements must be allocated (no discretion) then asset protection would normally be lost. For non property related purchases, where specific allocations are required (i.e. business etc where different parties are involved) the unit trust would normally be used. CNIP Pty Ltd and Chan & Naylor Australia

20 Structures Explained What is a Hybrid Trust? Hybrid Trust is a cross between a Discretionary and a Unit Trust. This type of structure is quite appealing because it includes the benefits of both and is an extremely useful structure. You can split the trust up into units while also having beneficiaries to distribute to at your discretion. Chan and Naylor have derived its own Hybrid Discretionary Trust to hold shares and manage businesses. We would not recommend that you operate your business through the same trust that owns assets i.e. shares, property, goodwill etc. Please consult your Chan & Naylor office to assist you in this area. Hybrid Trust Combination of Unit & Discretionary Trusts Trustee (Controls the trust) Units can be allocated Discretionary Unit Holders Beneficiaries What is a Property Investor Trust Deed? The Property Investor Trust Deed is a deed created purely for Property Investor and provides the following benefits: 1. Asset Protection. 2. Estate Planning (allows you on death to pass control of the trust and therefore effectively the property to your children with no Capital Gains Tax (CGT) and stamp duty and provides a measure of protection from any future divorce). 3. Passes trust net income to the holder of units who may then claim interest expense associated with funds borrowed to acquire the units, effectively allowing the unit holder to get the negative gearing in their name i.e. negative gearing claimed by the individual. 4. Allows for the flexibility in the ownership of the asset without unnecessarily triggering stamp duty costs. CNIP Pty Ltd and Chan & Naylor Australia

21 Structures Explained 5. It is the only Trust specifically set up for property whereas other Trusts were not initially created specifically for property and each one has some shortcomings when adapted for use with property. 6. Allows anonymity with your assets held by a corporation as trustee. 7. Provides a land tax threshold (except in NSW). Note the ACT has no land tax threshold and the NT has no land tax. 8. Unlike the significant majority of other trusts that vest after 80 years (trustee has to sell assets and pay CGT) this trust arguably has no vesting date when used in conjunction with a specially registered company (not individual) as trustee. 9. The Property Investor Trust (PIT ) has other attributes which you can discuss with your Chan & Naylor office or client manager. Naming The Trust You will need to name the trust. Unlike a company that needs a unique name you can chose any name (care must be taken to not use a name similar to an already registered company or business name. You can be prevented from publicly using such a name). We recommend adding the words that describe the trust (i.e. Smith Property Investor Trust or Smith Property Trust). This will allow us to answer future questions about the operations of the trust without necessarily reading the deed to determine what sort of trust you are using. (Please note it may sometimes still be necessary to read the deed first.) What does the Trustee do? 1. The trustee controls and manages the trust. The trustee does not own the asset, but controls them on behalf of the beneficiaries. A trustee can be an individual or company. We have given some insight into questions normally asked on this topic below in general terms only. Please consult your lawyer or accountant for specific advice as it relates to your circumstances. 2. Who will be Trustee? a. Will I use a company as trustee? Note as the decision maker, the trustee will be held responsible for actions by the trust, as is the case with any owner. We would normally recommend a company to be the trustee as the company would not own any assets and as such gives you an extra layer of protection, especially if you own assets in your name. If you as an individual are trustee, then your personal assets may be at risk in the event of a successful law suit against the trust which insurance will or does not cover. b. If I use a Company as Trustee what are the implications? i. You need to set up the company and pay ongoing fees to ASIC. There is no need to complete and lodge a tax return if the company is only acting as trustee, provided the ATO has been notified that a return is not necessary. CNIP Pty Ltd and Chan & Naylor Australia

22 Structures Explained ii. Who will be the shareholder? In normal circumstances the family decision makers i.e. husband and wife, but this is a personal choice. The entities identified as shareholders would be allocated one ordinary share each i.e. equal voting rights. iii. Who will be directors? The shareholders will choose the directors. This can be anyone and is not limited to the shareholders but remember the directors will be the day to day decision makers so they will effectively control the trust. Normally we see our clients choose the shareholders identified above as the directors. Again talk to your solicitor or accountant if you have specific concerns. iv. Consent to Act as Director. You will need to agree to act as a director and we will send you the appropriate forms to sign and return before the company can be registered. v. Note the trustee company must have an Australian street address for both registered office and place of business vi. Note the majority of directors in the trustee company must have Permanent Residence/Australian Citizenship and have an Australian street address as their contact. Also note that if individuals are trustees the majority of these must also have Permanent Residence/Australian Citizenship and have an Australian street address as their contact address. vii. A company also needs a person to be the contact for delivery of mail etc. This is the Public Officer. Someone must also be responsible for sending off appropriate correspondence and administering the running of the company (with assistance from accountant etc), this is done by the Secretary. It would not be unusual to see the same person doing both tasks from ASIC and ATO ect. Correspondence would be addressed to the Public Officer and as Secretary they would complete anything required. While this is a simplified version of requirements it shows the overall concept. viii. Choosing a Company Name. This will be a legally registered name and you cannot use what someone else has already chosen. You can give us 3 choices in order of preference for us to review and then advise if available or you can go to and follow the prompts in starting a new company and see if the name you want is available. If it is not you can sometimes add the word Group or Holdings etc to make it different and then use it. ix. Tax Returns. If the company is acting as a trustee only there is no need to lodge a tax return as long as a tax return has never previously been submitted. x. Ongoing costs. If the company is only acting as a trustee there would normally be no costs for tax preparation as no tax return is submitted. There will however be a need to pay the annual ASIC fees which are currently (Oct 2010) $ CNIP Pty Ltd and Chan & Naylor Australia