Legal Tip 29: Combining ownership Structures

Combining ownership Structures


In many cases there can be benefits to combining ‘structures’.


An example may be the trustee of a fixed unit trust owning the property with 50% of the units owned by a discretionary trust controlled by family A and 50% by another discretionary trust controlled by family B.


The benefit here is that the fixed trust means each family has an absolute portion of the property with their family trust receiving 50% of all income from the property. The trustee of the family trust can then distribute the income to beneficiaries within the family group.


Another example, more common in business, is for a company to conduct the risky business operations with the shares owned by the trustee of a discretionary trust.


Another example may be 2 separate parties with separate discretionary trusts buying one property. One title with 2 owners - each owner being trustee of a discretionary trust.


Even where one family group is involved it can still be beneficial. Real property could be owned by the trustee of a fixed unit trust with the units owned by a discretionary trust. The benefit over just using a discretionary trust is that the units themselves can be transferred as well as the property title. This allows for additional strategies such as discretionary trust selling the units to a SMSF later down the track (not possible to sell residential property to a related unit trust). See my post on unit trusts for addition advantages.

https://propertychat.com.au/communi...advantages-of-using-a-ut-v-personal-name.969/


In NSW a company can get its own land tax threshold. So using a company could save about $7000 each year in land tax. But related companies are aggregated and can be treated as one for land tax purposes. Property structured a couple can control one company each and get another company land tax threshold. The shares of each could possible be owned by separate discretionary trusts so as to not get caught in the aggregation.


Many also overlook the structure of spouse A and spouse B - spousal loans, spousal sales and just working separately but together. Costs virtually nothing to set up.

 

One of the problems with the DT owning units in a fixed UT in NSW is that it results in LOSS of the otherwise available and tax threshold. The issue is you must always look through to the land tax position of the unitholder not just the head entity.

Eg : If a fixed UT owns a property with land valued at $350K. So you would say its not liable to NSW duty...However in the following scenario's some or all of the land may still be subject to land tax:
1. Mrs Smith owns units and is already over threshold. She will have to pay land tax on every dollar of her share;
2. Mr Smith is $50K under threshold. The value of his units may tip him over and land tax will become payable;
3. A disc trust owns any units. Liable to land tax.
4. A company owns any units and its over threshold or subject to grouping

There is also a strong piece of advice for such multi-layers approaches... Get good advice. DO NOT rely on a tax adviser alone. I have seen these structures where for cost savings the accountant (its generally an accountant who doesnt know of this issue) uses the same trustee company for the UT and the DT....This can lead to trust merger where the UT can literally vanish. It can result in a major tax concern.

Think it through the owner of the property is ABC Pty Ltd as trustee for XYZ UT. The units are owned by ABC Pty Ltd as trustee for Family Trust. The legal and beneficial entitlement are all owned by the same entity. There is a trust merger. No more trust. But a CGT event.

 

Terry - I would avoid "transfer of units" with a unit trust. Transfer of units can be dutiable. Instead, a redemption of units and a issue of new units bypasses such a concern in many instances. Duties Act generally refers to transfer. If you don't transfer then ...no duty. (sometimes)

From my days in trust structures I learned of this very common mistake usually made by many well intentioned accountants etc.

In your example of the DT selling to a SMSF there would be a breach of s66 of the Superannuation Industry (Supervision) Act. That's the rule about acquiring an investment from a related party or a associate. I know you didn't intend that but a redemption and reissue is a bypass if its a SISA Reg 13.22C unit trust immediately preceeding the issue of units to a SMSF. Otherwise a 3 year wait may apply.

 

Paul I agree - but this is just a brief intro type post with a general outline of some possibilities. I should put a disclaimer.

 

The other advantage of redemption and issue of units is CGT. Transfer of units would be subject to CGT. If an issue of units need to consider general value shifting provisions. A deminimis of $150k so potential for CGT planning opportunities where you issue units as oppossed to a transfer.

 

Ummmm help! I have unwittingly done this, based in Vic and have two unit trusts each with single IP ownership. Trustee company same for UT as FT who own the units. Can this be undone? Or is it too late? Can I just change the trustee company as the appointer or did the trust relationship never exist?

Not the end of the world if I can't just changes land tax a little and defeats the purpose of the structure which was to reduce land tax whilst retaining asset protection and flexiblity for my SMSF to ultimately buy units out from the UT.

 

Caltan - do you mean the trustee and the unit holder are the same? If so there is no trust in existance.

 

I have 2 Unit Trusts and 1 Family Trust. XYZ Pty Ltd has been used as the trustee for both, I was told this was ok by an accountant (i know not a lawyer) and it saved the cost of setting up another corporate trustee.

It looks like this:
The trustee is XYZ Pty Ltd ATF The ABC1 Unit Trust
The trustee is XYZ Pty Ltd ATF The ABC2 Unit Trust
The Unit holder for both UT's is XYZ Pty Ltd ATF The Smith Family Trust

 

So XYZ Pty Ltd is holding units on behalf of its self. There is no difference in legal and equitable ownership and therefore no trust and has never any any trust.

It may be argued that the title holder and the unit holders are acting in different capacities but I don't think this has any merit.

You should seek legal advice asap and may have to go back and amend tax returns and 'the trust' claw back any trust distributions as they were invalid.

Don't talk to the same accountant about it at this stage as you may be suing him soon.

 

Thanks Terry. It's not a huge issue as they are both brand new UT this financial year so nothing to amend with no distributions made yet. Just means the structure is no longer relevant unless it's possible to change the trustee or beneficiary without incurring CGT or Stamp Duty.

 

It the UT trustee doesn't hold anything other than cash it would just need a resettlement and pay the $200 stamp duty again and start again with a different trustee.

If it does hold property then it would not be as trustee.

 

It does hold property in construction phase. Can I just dissolve the trust. Or can I advise SRO I incorrectly filled in the trustee relationship, I only settled the land in Feb.

 

You better seek specific legal advice on this. Technically there is no trust so you may be able to advise the SRO you were mistakenly advised them.

I have never run across a client with this situation before.