setting up a company, family trust and subsidiary company for investment properties and assets

Question

I’m looking at the possibility of setting up a company name ‘WM Mayer Pty Ltd’ which would become the trustee company for a family trust – ‘WM Mayer Family Trust’ – primarily for the purposes of investing (properties, shares, ETFs etc).

I bought my current two properties in Mackay:

Monash Way, Ooralea in August 2012 (initially as PPOR until November 2013) for $595,000 with a line of credit against it sitting around $100,000. It is now rented at $500pw; &

Canecutters Dr, Ooralea in January 2013 for $530,000 currently with a $488,000 mortgage against it. It will be rented for around $430pw.

I’d like to ‘sell them’ from myself personally to the Family Trust for what I bought them for, getting a mortgage within the Trust for 90% of their purchase price (but not sure if the bank will seek to value it lower because the market has dropped in Mackay?). This would mean the sale of properties to the Trust would = $1,125,000 with mortgages against them of $1,012,500 (and a Personal loan of $112,500 from me to the Trust as the deposit to be repaid at some point).

So, paying out both the current $488k mortgage against Canecutters, and the $100L LOC against Monash would leave a remaining balance of $424,500 less stamp duty and legals of roughly $24,500 which then gives me cash in my pocket of around $400,000. I then intend to use part of that for 10% of buy/build of new PPOR here in Melbourne (and the remainder would sit in an offset account, possibly used to purchase more investments or buy blue chip shares)…

I’d also like to transfer my new car worth $55K and any other vehicles and assets I have (second car, motorbike and future purchases) to the family trust so I can claim costs if that’s allowed? (Does it go in the family trust name or the trustee company name?

I would also set up a subsidiary company called ‘WMM Investments Pty Ltd’ where any profits can be retained, therefore minimising my tax. I’m wondering if it is possible to put my employment income through the Family Trust as well, considering it will not be my only source of income?

The family trust would protect my assets in the event of eventual re partnering as well, so there’s a number of reasons for considering this sort of set up.

Hope you can help, and please advise bank details for direct deposit.

Thank you,
Wendy Mayer

Answer

This arrangement is going to cost you a lot in stamp duty, maybe some CGT but I doubt it and probably lenders mortgage insurance if you only use a 10% deposit. Further a discretionary trust will not protect your assets from the family court. I can understand doing this for the property where you have all the equity so you can effectively regenerate debt on the property that will be tax deductible. I recommend that before you go to all this expense that you obtain a ruling from the ATO that they accept that the dominant purpose of transferring the house into the trust was for asset protection purposes not to increase the amount of tax deductible debt ie a tax benefit caught by Part IVA. The ATO has been known to consider wage earners to not be that much at risk of being sued so not a valid reason. They have also tried to argue that asset protection is a private expense so the interest this arrangement generates is not tax deductible. Both of these points are not exactly standard policy of the ATO but used enough to warrant a ruling application before you go ahead with all the transfer costs.
The next problem is you cannot put your wages income through the trust. Certainly the Canecutters property is negatively geared. If you put that into a trust you will not be able to offset the losses on it against your wages income. Likewise the interest on the new debt you create on Monash will only be deductible to the trust probably making it also negatively geared so the loss will sit in the trust and wait until you make a profit for it to be offset.
If asset protection is a big concern then you should consider separate trusts for each property in cases the tenant sues, then at least there is only one property exposed.
To claim a deduction for the car in the trust it would have to be provided to you in your capacity as an employee of the trust and even then Fringe Benefits tax would apply to the benefit you receive. The ATO would argue it is only provided to you as a beneficiary of the trust and therefore not deductible to the trust at all.
The sales for tax purposes would have to be at current market value.
For tax purposes it would be better to borrow for future investments such as shares, even if this means paying the offset account off the Melbourne property so you can borrow against it. Or the bank may let you lock the money in the offset account and allow you to borrow against it as if it was paid off the Melbourne loan. It is very important to minimise non deductible debt at all times.
The formal title on anything owned by the trust would be W M Mayer Pty Ltd as trustee for the Mayer family trust.

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