The much maligned unit trust has a key role in families undertaking property investments.
Why most accountants do not like unit trusts
Traditionally a unit trust was used for two independent families to go into business together. The legal ownership and separation of the units, together with the trust deed, was seen as a way of dealing with arguments later on about who owned what.
However the small business capital gains tax concessions effectively meant that unit trusts paid a higher amount of tax compared to say a partnership of discretionary trusts.
Why we do like unit trusts
If you are buying property you are making a big decision. The cost of the property is typically at least $500,000 and you can stuff it up with the structuring.
A big element of tax structuring is the question of how you can deal with the asset later on. You might want to gift the property to your kids, you might want to transfer the residential property to your SMSF or you might want to sell part of the property to an associated entity to juggle around loans and security positions.
1. Stamp duty
If a unit trust has real estate worth more than $2m you will pay stamp duty on the transfer of the units (basically). However if you transfer the title itself you will pay stamp duty on the market value of the property transferred.
Sarah has a factory worth $1.4m. She wants to transfer the property to her daughter (Zara) so her daughter can continue to use the factory in the family business.
If Sarah transfers the factory title to Zara: Zara will pay $63,215 in stamp duty.
If Sarah transfers the units in the unit trust that owns the factory to Zara: Zara will not pay any stamp duty.
Strategic, family orientated, tax advice has saved the overall family a lot of money.
Most property investors start off with high debt levels. And as time progresses the portfolio debt is reduced.
Eventually the family will look towards their superannuation fund. And they will want to sell their residential property portfolio into their superannuation fund.
Sadly a superannuation fund cannot buy residential real estate from a SMSF family member.
The SMSF can however buy units in a unit trust. The requirements are that:
• The unit trust must be debt free;
• A SMSF family member cannot live in the property;
• The unit trust cannot use any of its assets as security for a loan.
This is a great strategy as the SMSF (or another superannuation fund) can build up cash in a tax effective way (15% tax rate compared to 47% tax rate) and the cash can then be extracted out by selling properties back into the SMSF.
It is a bit complicated and good advice is needed.
3. Land tax
We often find that many families just keep on buying property. And the “tax agent type” of accountant just keeps on adding another rental property schedule to the tax return.
However – what about land tax?
Well in WA land tax is assessed on marginal rates. So the more land you own the higher the rate of land tax you will pay.
But the catch is that each legal owner is a separate person. So if Mum owns one property she benefits from the lower land tax rates. If Dad owns another he benefits from the lower land tax rates.
Ultimately a family will have more properties that they have people! In this case a unit trust, with a company trustee, will count as another “person” for land tax rates.
The land tax savings can be significant.
4. Estate planning
Many people have all of their property assets in one entity (like a trust or company). But when you want to splitting the assets up later on (either on death or pre death) the family is required to break apart that company or trust.
That could create large capital gains tax liabilities.
If you own multiple properties in multiple unit trusts you can transfer the unit trusts to different family members without having to break-apart a single large holding entity.
It is also easier to understand who is getting what – especially when the families property portfolio is changing regularly.
Long term family business planning requires lateral thinking beyond the immediate. However if done properly the flexibility to create an ongoing legacy for your family is immense.
In this instance key advice from a tax advisor focussed on families in business is critical to property structuring. For strategic tax advice contact our tax planning accountants today!