I have clients in NSW who recently bought a B&B business and were advised by a previous financial adviser to hold both the freehold property and the business in a DFT with both of the individuals named as trustees and beneficiaries. They are unable to recall the specific reasons they were advised to use this structure.
When purchasing the business they looked at previous owners trading results which showed modest profits, however previous owners had no gearing; new owners are 70% geared which results in a loss after interest around $20k. There is no other income in the trust and consequently the losses generated are unable to be utilised as tax offsets to the beneficiaries both of whom have other salaried income, one being in the highest marginal bracket, the other in the lowest bracket (Both aged mid 50’s).
Can you conceive a means to restructure the business for both asset protection, loss deductibility and flexible profit distribution?
Any advice would be appreciated.
They already have the best structure for Profit distribution flexibility so this will be sacrificed if they were to transfer the B&B into the high income earner’s own name to offset the losses against his or her own income. This would also involve considerable stamp duty costs. If they intend to retire soon the stamp duty will probably outweigh the tax benefits but it is worth applying to the stamp duties office in NSW to see if they will reduce the stamp duty as it is all within the family. The current structure can easily provide asset protection by replacing your clients with a corporate trustee. So the DFT is worth hanging onto if we can just overcome the loss deductibility problem.
Utilising the loss depends a lot on their particular circumstances. It is a shame for the one in the highest tax bracket but if this is only going to be for a short time don’t lose track of the fact these losses can accumulate and be used in the future.
Considering their ages they may not have non deductible debt so could concentrate on reducing the debt on the B&B till it becomes positive, then it can utilise the losses accumulated to date, though I think if you did the numbers they would still be better off salary sacrificing into super and reducing the loan when they retire. This depends on whether they can put any more into super ie the $100,000 limit and how long till retirement.
Do they have any shares they own outright? They could sell these while the market is down hopefully resulting in very little CGT then borrow to buy back a similar portfolio. The proceeds of the sale could be used to reduce the debt on the B&B. They may even have money sitting in the bank that could do this much more simply.
I don’t suppose they have another profitable DFT sitting around that can distribute profits into this one.
If they have debt for personal investments that is deductible but none that is not deductible consider capitalising interest (but not for the tax benefit) on that loan so they can reduce the debt for the B&B. I can provide you with much more detail on that strategy if they are in a position to take advantage of it. There is also a lot of information on this topic in our Claimable Loan Booklet which is under Free Publications on this site.
The low income earner could consider quitting work (possibly changing his or her mind later) and draw out $140,000 of their super to reduce the debt on the B&B to the stage it makes a profit. At the same time the high income earner, if they have enough of their threshold left could increase his or her super contributions and later transfer it across to the low income spouse.
I am disappointed that the business isn’t at least breaking even with only 70% borrowings. Maybe the operation of the B&B needs to be examined or the low income earner work in the business making it more profitable. Even if the profit isn’t high enough for them to draw a wage the high income earner will at least be able to claim them as a dependant spouse.
It is very hard to be more specific without knowing more about their circumstances, I hope this has given you some ideas.