Trustee Companion vers 3staff.chan-naylor.com.au/uploads/62378/ufiles/Trustee_Companion_… · Income Tax, Capital Gains Tax, Land Tax and Stamp Duty. Purchasing an Investment Property

Trustee’s Companion

Published by Chan & Naylor Australia Pty Ltd

Suite 4, Level 2, 55 Grandview Rd, Pymble NSW 2073, Australia Phone: 1300 250 122

www.chan-naylor.com.au

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. © 2005 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, joint-venture 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 230811

http://www.chan-naylor.com.au

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 15-15 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 2011/15 ................................................... 33

©CNIP Pty Ltd and © Chan & Naylor Australia - 3 – www.chan-naylor.com.au

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.

Simply notify your solicitor that you will let them know the name to put on the contract after you have consulted your accountant.

Decide on Which

Property

Contract of Sale with your

solicitor

Latest you can see your accountant

Exchange Contracts

Settle on property



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.



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.



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




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.




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




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).



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.



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 15-15 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 15-15 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.



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 www.ato.gov.au 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 (www.chan-naylor.com.au) and follow the prompts for the names of quantity surveyors. Please ensure that you investigate them before choosing any particular firm.


http://www.ato.gov.au



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: www.centrelink.gov.au or contact your local Centre Link office directly.


http://www.centrelink.gov.au


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.

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

Partner

Client Manager

Graduate

Secretary

Cost per hour $

Time



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 re-route 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.



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 email address on our site. It is very easy do, just visit www.chan-naylor.com.au and subscribe to our newsletter. Land Tax Currently 31-Dec NSW & VIC land tax assessment date. Remember to review your land tax

values and lodge a Land Tax Return by the due date. 30-Jun 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 www.osr.nsw.gov.au VIC www.sro.vic.gov.au QLD www.osr.qld.gov.au SA www.revenuesa.sa.gov.au WA www.osr.wa.gov.au TAS www.osr.tas.gov.au ACT www.revenue.act.gov.au

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.



http://www.osr.nsw.gov.au

http://www.sro.vic.gov.au

http://www.osr.qld.gov.au

http://www.revenuesa.sa.gov.au

http://www.osr.wa.gov.au

http://www.osr.tas.gov.au

http://www.revenue.act.gov.au


Structures Explained An excerpt from the book "How to Legally Reduce Your Tax ... Without Losing Any Money!" By Tony Melvin & Ed Chan. © 2005 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.



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.




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.

(c) Ordinary Units – entitles the holder to both net income and net capital.

(d) Note net being after expenses incurred by the trust

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.

Unit Trust

Trustee (Controls the trust)

Unit Holders

Trust Split up Into Units

A Unit




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.

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.

Hybrid Trust Combination of Unit & Discretionary Trusts

Trustee (Controls the trust)

Unit Holders

Units can be allocated

Beneficiaries

Discretionary




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”.




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 www.asic.gov.au 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) $218.00.


http://www.asic.gov.au



What does the Appointor do? The Appointor (sometimes called the Principal or Guardian) has, in fact, the most powerful role in a trust and should be carefully selected. While the trustee is the one who decides what happens to the assets, funds and profits of the trust, it is the Appointor who has the power to change the trustee and appoint a new one. It is important to consult with your solicitor and include in your will the transfer of this role upon your death and that this power is passed on to the person of your choosing.

The Chan & Naylor trust deeds include a memorandum of wishes which allows you in the first instance to allocate the position on your death. Passing on this position passes control of the trust as the appointor puts in place the trustee who decides on the allocation of funds. As trust assets are not yours they do not pass on after your death as they cannot be part of your will (you do not own trust assets). This is an important concept and as much care needs to be allocated to this task as you would to the decision as to whom you would pass a physical asset if you owned it.

Note. Assets in a trust are not part of your estate and as such your will does not take them into account, similar for your superfund members interest. To pass control of your trust you need new appointors and this is achieved not through the will but other documentation which your lawyer will advise you on. The passing of the shares you own in the trustee company can be done via the will and the new shareholders will then vote in new directors. For superannuation you need to consult your financial planner on how your interests are passed to others on your death.

What does the Settlor do? The Settlor is someone who puts down a sum of money to start the trust, commonly around $10. Once the trust is established, the Settlor has no other role, entitlements, rights or connection to the trust.

This $10 is a gift to commence (settle) the trust. It takes on the literal meaning of a gift i.e. you cannot give it yourself and the giver must not get back anything in return. Therefore the settlor can never be a beneficiary of the trust. We would normally see a friend gift you the funds. The settlor will need to sign the trust deed when you get it, to confirm the gift, after which they have no involvement. If it is ever proved that it was not a gift (it was repaid, it was charged for, it was not actually given etc) then the trust may be void i.e. never existed. It is for this reason that Chan & Naylor (through one or more of its staff believe it is not wise to be your settlor. For the sake of $10 do this correctly).

Initial Beneficiaries You need to identify the initial beneficiaries by name. Depending on the deed the beneficiaries can be changed at any time and you can make distributions to anyone even if you do not identify them here. With certain deeds there may be tax consequences so get this checked before doing so.

Certain government agencies (Centrelink, Family Law Court etc) when determining eligibility of payments, (your income, your assets etc) take into account your interest/involvement in a trust. Please check with your appropriate advisor before completing this section.




Financial institutions, when looking at a loan application in the trust name or an individually named borrower, will also review this section of the trust and would normally require any named initial beneficiaries to be part of a loan application. Related parties to the initial beneficiaries are not normally party to the trust and as such are not normally part of the above review unless they have actually received distributions. The trust deed provides that the beneficiaries include such persons as are related to you as follows and as such there is no need to specifically identify them:

The spouse, children and remote descendants of such children; brothers, sisters, parents, children and remote descendants of such brothers, sisters and spouses of any of the foregoing. Note also that beneficiaries include companies and trusts associated with all the persons specifically identified as too are tax approved charities and institutions. Please refer to the list on the trust deed.

Who can be a Witness? The execution of your trust deed documents will require a witness to also sign in various areas after you and others sign the trust deed. The witness cannot be someone who is a party or identified in the trust deed including persons who are the directors of the trustee company.

What is the trust folder used for? The folder you receive contains the trust deed, which is a legal document that explains in detail what you can and cannot do with the trust. The word “deed” originates from an Old English word which means “do or act”. Information, such as who is the trustee and who are the beneficiaries, is included in the deed. The deed must be signed by all parties involved. For it to be valid, it must also be officially stamped by the local Office of State Revenue, which we normally organise for you.

The deed is usually needed when opening up bank accounts and occasionally a solicitor may wish to see the deed when purchasing property.

Any changes to the trust, must be duly minuted and signed. Such changes can incur solicitor’s fees and stamp duty. All such paperwork is best kept in the folder along with the deed. Some changes need to have the deed amended and an appropriate resolution/minute noted and again can incur fees. Changes can include changes to:

1. Beneficiaries including default, general and initial beneficiaries

2. Trustees

3. Powers of trustee

Please note that any changes to your trust deed may incur capital gains tax and or stamp duty. Please contact your Chan & Naylor office before making any change. Various state




governments’ legislation require full stamp duty to be paid on a change of trustee unless completed in line with the appropriate legislation so check first before any changes.

There are inserts in the folder that provide a place for storing tax records, bank statements and other information.

You should therefore keep the folder and deed in a safe place for future reference.

Goods and Services Tax (GST) If you are using the trust for residential property ownership to hold and rent out then you do not need to register for GST but if you intend buying commercial property or running a business (subject to minimum revenue expectations) you will need to register for GST and the appropriate form in the trust order pack will need to be completed. Note: If developing residential property for sale then this is a business and you will need to register for GST.

Loss of the Trust Deed This is a very serious issue as the only way to prove the existence of the trust is to produce a properly completed and executed original. In some rare times you may be able to go back to your supplier who can look up their records and confirm the date of sale and then sign a statutory declaration that at that time they sold a specific deed and give a copy of this for you to get stamped. As you imagine this may be difficult to obtain.

The various agencies (i.e. ATO, Office of State Revenue etc) will not accept verbal comment that a particular deed which you now show as being what you originally used is in fact the same and as such stamp duty and capital gains tax and even adjustment to previous tax returns may be required.

Make sure you at least keep completed copies duly signed and stamped as these maybe easier to prove as being what you originally used to secure the assets/business.

Why is the The Salvation Army or Other Entity mentioned in the deed? In the event that ALL the beneficiaries are deceased on the vesting or dissolution of the trust then there is a Remainder Beneficiary for the Trust assets under question which you are offered a choice to select. If you do not select an entity then we use the Salvation Army. This is a last port of call before the money goes to the government.

You can nominate another entity but please note it should NOT be a person or company that you are related or associated with as this can have unforeseen consequences with Centrelink, Trustee in Bankruptcy and Family Law Court etc.

If you wish to specifically nominate a Remainder Beneficiary please advise on the order form. You should check this entity’s legal details, including Australian Company Number/Australian Business Number and Tax Exempt Status and ensure you advise the full and correct name so that the entity chosen is in fact the one you want to name as Remainder Beneficiary. You should seek legal advice.



Glossary ABN Australian Business Number. All business need this to be able to claim GST expenses. Aggressive In the finance sense, characterizes by a willingness to accept above-average risk in pursuit of above average returns. Aggressive Tax Planning Aggressive methods of avoiding tax which usually end up being exposed and rejected by the ATO. The penalty for those involved in such schemes can range from mere fines to a jail term. For more information on Aggressive Tax Planning the reader is advised to visit www.chan-naylor.com.au or www.ato.gov.au/atp Appreciation An increase in price or value. APRA Australian Prudential Regulatory Authority. Asset A standard dictionary describes an asset as a possession, a thing of value. In the investing world an asset is something that increases your wealth, either by cash flow or capital gain. ATO Australian Taxation Office is the main revenue collection agency, and is part of the treasurer’s portfolio. Its role is to design and manage systems that fund services for Australians. Balance Sheet The list of your assets and liabilities. Used to calculate the net worth of a person or organisation (net worth = total assets - Total liabilities) see net worth in this glossary. Beneficial Ownership Allowing a person to enjoy the benefits of ownership (including; usage, income, profits, etc) even though legal title is in another name. Beneficiary The person who is entitled to the assets and income of a trust. Brokerage The fee paid for the buying or selling or something. Normally associated with the buying and selling of shares. Capital Gain The value an asset increases by. If a house is purchased for $100,000 and is sold or re-valued at $140,000 it has a capital Gain of $40,000. Cash Flow Movement of money received and spent the pattern of income and expenses. Capital Gains Tax Capital Gains tax is the tax imposed on an asset that has increased in value ie the Capital Gain, and is sold.


http://www.ato.gov.au/atp


Glossary Commissioner A Government administrator. In this book it refers specifically to the Commissioner of Taxation of the ATO. Company A Legal entity that is recognised by the ATO and therefore has its own tax and legal laws in regards to taxation. Literally means to submit. Compounding Adding to the original amount, making it larger. Conveyancing Transferring of the legal title of the property. Corporation Another name for a company. Cross Collateralisation Where the collateral (security) of a single loan is guaranteed by more then one asset (usually a house) Deciding Date A coined phrase for the beginning of the land tax year. The owner of the property at midnight on the deciding date is responsible for paying the land tax for next year. Deed A signed document that outlines the terms of an agreement. Depreciation A decrease in price or value. Director The role in a company where the person is responsible for the direction and performance of the company. A company can have many directors. Dividends Profits of a company that are distributed to its shareholders; usually paid quarterly. Due Diligence The process of checking and double-checking that an investment or a company is worth what the owner or seller says it is. It involves analysis of the profit and loss, balance sheet and cash flow statements. Often conducted by qualified accountants, although every investor needs to understand this process and realise all investing requires due Diligence. Entity A separate structure such as a trust or company. Exponentially Rapidly increasing (as in size or extent) in an extreme manner.



Glossary Fire Sale Sale of assets at very low prices typically when the seller faces bankruptcy. Fittings Furnishings; items that are added that could be removed. Example lights or curtain rails. Fixtures In real estate, a piece of the property that is permanently attached. The fixture is considered a part of the property if it shares the same useful life as the rest of the property. Example: Kitchen cupboards. Fringe benefit An incidental advantage; a benefit provided by an employer to supplement an employee’s income (such as a company car or living away from home allowance) Fringe benefit tax (FBT) The tax paid on a fringe benefit. Fundamental The foundation, the basic requirements. Gross The full of profit or salary not including, taxes, fees and other expenses. Income Tax Tax paid on income. For an individual it is a progressively increasing amount. For a company it is fixed. Incur Make oneself subject to; bring upon oneself; become liable to. Index A number or ratio derived from a series of observed facts; can reveal relative changes as a function of time: a method of measuring. For example the index of the stock market is used to determine the overall trend of the market on a daily, weekly basis or even yearly basis. Indexed for Inflation This means the dollar figure is adjusted for inflation. Inflation The name given to change in value of money. Inflation of 5% per year means our $1.00 is worth only $0.95 at the end of the first year, and only $0.90 after 2 years. You need to always take in to account inflation when choosing an investment vehicle because it helps you determine if your money is going Backwards. An economy with 5% inflation requires investment to return at least 6% because at 5% your money is neutral, and anything less is going backwards. Interest Only A type of loan where your repayments only cover the interest. Land Tax A tax on property imposed by states or territories; usually based on the estimated value of the property. See Office of State Revenue in this glossary for the states websites.



Glossary Land Tax Threshold The amount of land that can be held free of land tax. It is different from state to state. Legal Control 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). Litigable Giving cause for lawsuit: able to be pursued in court. Macro The bigger picture (the global enemy is a macro outlook compared to the Australian economy). Managed Fund An investment fund managed for a number of clients by a company, often involving a combination of fixed-interest and property investments at the discretion of the fund managers. Marginal Rate The increasing tax rate paid on income as it rises. See income tax rates table in chapter 5. Member The person entitled to the assets contained in a superannuation fund upon requirement. Micro The small picture (your personal micro financial situation compared to the nation’s financial situation). Mortgage A loan from the bank usually used to purchase a house. Mort in old French means a pledge – so put another way the word mortgage means a pledge until death! Necessarily Inevitably, essentially. Net or Nett The amount less taxes, fees and all other expenses; remaining after all deductions. Net Worth The different between your assets and liabilities equals your net worth. (Net worth = total assets – total liabilities). Office of State Revenue A department of state government that administers the state taxation, collects revenue, outstanding fines and penalties. See below for a list of the websites for each office: NSW www.osr.nsw.gov.au VIC www.sro.vic.gov.au QLD www.osr.qld.gov.au SA www.revenuesa.sa.gov.au WA www.osr.wa.gov.au TAS www.treasury.tas.gov.au ACT www.revenue.act.gov.au


http://www.osr.nsw.gov.au

http://www.sro.vic.gov.au

http://www.osr.qld.gov.au

http://www.revenuesa.sa.gov.au

http://www.osr.wa.gov.au

http://www.treasury.tas.gov.au

http://www.revenue.act.gov.au


Glossary Onus A duty or responsibility; burden. Pawn A person who is affected by the constant changes in the tax law and does nothing about it. P&I Principle and interest. A type of loan where your repayments pays the interest and only a little bit of the actual loan amount. P&L Abbreviation for Profit & Loss Statement. Personal Guarantee The permission for a financial institution to claim your personal assets and income should the entity which borrowed the money such as a trust or company) become unable to pay the loan. Plant The equipment and machinery necessary for carrying on a business. For the property investor it relates to such things as dishwashers, ovens, etc. Player A person who understands the tax is a game, knows the fundamentals of the game and continues to learn more as the dishwashers, ovens, etc. Profit & Loss Statement A list of your income and expenses. Proprietary Limited Proprietary is relating to an owner or ownership Proprietary is relating to an owner or ownership. Proprietary limited is a type of company whose ownership is limited to a certain amount of shares and shareholders; commonly abbreviated to “Pty Ltd” A company that has no restrictions on ownership is normally listed on the stock exchange where its shares can be purchased by anyone; this is called a limited type company and will have the abbreviation “Ltd” after its name. Prudential Cautious, careful and considerate. Quarantined Keep separate from something else by force; isolated. Returns The income arising from assets such as property or shares. ROI Return on investment is the amount of money your investment makes. This can expressed as a dollar amount or a percentage. ROI Gross The return on investment before taxes, fees and expenses.



Glossary ROI Net The Return on investment after taxes, fees and expense – what you really made! Ruling Decision by authority: an official or binding decision such as one made by a court or judge. Savvy Having a sophisticated understanding, well informed. Scheme Relates to aggressive methods of avoiding tax which usually end up being exposed and rejected by the ATO. The penalty for those involved in such schemes can range from fines to jail term. Shareholder A person who owns share, or a portion of a company. SMSF Self-managed superannuation fund. Where you are the trustee and one of the members. Stamp Duty A duty (or tax) applied to some legal documents especially on transfer or ownership. A stamp is fixed to a document to show that the duty has been paid and the transfer valid. Super Contribution The money paid into your superannuation by either you or your employer. Tax The charge against a citizen’s person or property or activity for the support of the government. Tax Deductible Able to be claimed against income. Tax Free Threshold Referring to the amount of tax free money that can be earned in a single year. See Income Tax Rates table in chapter 5. Tax Variation Form A form that a person can complete that allows there employer to reduce the amount of tax withheld from their wage or salary, increasing their take home pay. Tax Return The process of calculating your taxable income and submitting it to the government. TFN Tax File Number- a unique number that assists the government in monitoring and reconciling personal income and taxes. Third Party Mortgage When a loan is guaranteed by some one else’s assets, other than the assets other then the person taking out the loan



Glossary Threshold A level or point at which something would happen or cease to happen. Thwarts Hinders or prevents (the efforts, plans, or desires) of. Trust Protection A trust is basically an agreement or promise to hold assets. The basic function of a trust a trust is to separate control and ownership and as a result a trust provides asset and income distribution flexibility. Trustee The person with legal control who is trusted with the assets and decisions related to a trust or super fund. 221D The old name for a Tax Variation Form which is a form that a person can complete that allows their employer to reduce the amount of tax withheld from their wage or salary, increasing their take home pay. Yield The income from an asset.



Property Investor Trust® Product Ruling PR 2011/15

WARNING The Australian Taxation Office has issued Product Ruling 2011/15 in relation to the Property Investor Trust. You can only be sure that you can rely on Product Ruling 2011/15 and the ruling is only binding on the Commissioner if ALL of the following are met:

1. you fall within the class of entities outlined in Product Ruling 2011/15 which are covered by the Product Ruling;

2. you sign all the Property Investor Trust documentation provided to you by Chan & Naylor Australia Pty Ltd without any amendment, addition to or other alteration to such documentation; and

3. your investment in the Property Investor Trust is in the specific manner provided in the Product Ruling 2011/15.

If your investment in the Property Investor Trust does not satisfy any of these conditions then the benefit of Product Ruling 2011/15 may NOT apply to you. Product Ruling 2011/15 is only a ruling on the application of taxation law and is in no way expressly or impliedly a guarantee or endorsement of the commercial viability of your investment in the Property Investor Trust, or the soundness or otherwise of such an investment, or of the reasonableness or commerciality of any fees charged in connection with the Property Investor Trust.


Product Ruling

PR 2011/15Page status: legally binding Page 1 of 14

Product Ruling Income tax: deductibility of interest in relation to investment in a Property Investor Trust

This publication provides you with the following level of protection:

This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953.A public ruling is an expression of the Commissioner’s opinion about the way in which a relevant provision applies, or would apply, to entities generally or

f entities in relation to a particular scheme or a class of schemes. to a class oIf you rely on this ruling, the Commissioner must apply the law to you in the

t in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you – provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in

t of the matters covered by this ruling if it turns out that it does not tly state how the relevant provision applies to you.

way set ou

respeccorrec

No guarantee of commercial success

Contents Para

LEGALLY BINDING SECTION:

What this Ruling is about 1

Date of effect 11

Ruling 16

Scheme 17

NOT LEGALLY BINDING SECTION:

Appendix 1:

Explanation 22

Appendix 2:

Detailed contents list 34

The Commissioner does not sanction or guarantee this product. Further, the Commissioner gives no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based. Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling.

Terms of use of this Product Ruling This Product Ruling has been given on the basis that the entity(s) who applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling.

Product Ruling

PR 2011/15Page 2 of 14 Page status: legally binding

What this Ruling is about 1. This Product Ruling sets out the Commissioner’s opinion on the way in which the relevant provision(s) identified in the Ruling section apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

2. In this Product Ruling the scheme is an investment in a Property Investor Trust (the Trust) offered by Chan & Naylor Australia Pty Ltd by way of subscription for Units in the Trust using borrowings on arm’s length and commercial terms from an independent or related party, or both.

3. This Product Ruling does not address:

the tax consequences for any entity other than a Registered Holder;

the tax consequences of any borrowings not in relation to the acquisition or subscription for Units in the Trust, such as borrowings to pay for fees, commissions and other costs;

the tax consequences of fees, commissions and other costs paid by the Registered Holder, other than borrowing expenses incurred by the Registered Holder to fund the Registered Holder’s subscription for Units in the Trust (see paragraph 16(e) of this Ruling);

the deductibility of prepaid interest on funds borrowed to acquire or subscribe for Units in the Trust;

the capital gains tax consequences arising from the issue of new Units in the Trust, or the transfer or redemption of a Registered Holder’s Units in the Trust;

a Registered Holder’s entitlement to franking credits; and

whether this scheme constitutes a financial arrangement for the purposes of Division 230 (Taxation of financial arrangements).

Class of entities 4. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as the Registered Holder.

Product Ruling


5. The class of entities who can rely on those tax benefits consists of those entities:

that begin to participate in the scheme described in paragraphs 17 to 21 of this Product Ruling by virtue of the execution of the Property Investor Trust Deed and their allotment of Units in the Trust on or after the date the Product Ruling is published and on or before 30 June 2014; and

at the time of entering into the scheme, they must have a genuine intention of holding onto their Units in the Trust until such time as they derive assessable income from the investment that exceeds the deductible expenditure that they incur in order to invest in the scheme.

6. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who:

do not have a genuine intention of holding their Units in the Trust until such time as they derive assessable income from the investment that exceeds the deductible expenditure that they incur in order to invest in the scheme;

begin to participate in the scheme specified and are allotted Units in the Trust before the date of this Ruling or after 30 June 2014;

are General Beneficiaries other than a Registered Holder, or are Remainder Beneficiaries; or

are subject to Division 230 in respect of this scheme. Division 230 will generally not apply to individuals, unless they have made an election for it to apply to them.

Superannuation Industry (Supervision) Act 1993 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA.

Qualifications8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 17 to 21.

Product Ruling


9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

this Product Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and

this Product Ruling may be withdrawn or modified.

10. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration Copyright and Classification Policy Branch Attorney-General’s Department 3-5 National Circuit Barton ACT 2600

or posted at: http://www.ag.gov.au/cca

Date of effect 11. This Product Ruling applies prospectively from 27 July 2011, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 27 July 2011 and whose Units in the Trust are allotted on or before 30 June 2014. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2014 being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application.

12. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity’s involvement in the scheme.

Changes in the law 13. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect.

14. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued.

http://www.ag.gov.au/cca

Product Ruling


Note to promoters and advisers 15. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued.

RulingApplication of this Ruling 16. Subject to paragraph 3 and the assumptions in paragraph 21 of this Ruling:

(a) The Registered Holder is assessable under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) on so much of that share of the net income of the trust estate (as adjusted by Division 6E of the ITAA 1936) to which the Registered Holder is presently entitled. The present entitlement of the Registered Holder will reflect the Registered Holder’s fixed rights to income and capital gains derived from the Unit Asset(s) which are commensurate to the proportion of the Trust’s capital funded by the Registered Holder in order for the Trustee to acquire the Unit Asset(s);

(b) The Registered Holder is assessable under Division 102 on so much of the share of the net capital gain of the Trust as determined by Subdivision 115-C. The Registered Holder’s share of the net capital gain of the Trust will include fixed rights to capital gains derived from the Unit Asset(s) related to their Units;

(c) The Registered Holder is assessable under Subdivision 207-B on so much of its share of the franked distributions and franking credits of the Trust. The Registered Holder’s share of the franked distributions and franking credits of the Trust will include fixed rights to franked distributions and franking credits derived from the Unit Asset(s) related to their Units;

(d) Interest expenses incurred by the Registered Holder in respect of borrowings taken out to fund the Registered Holder’s subscription for Units in the Trust are wholly deductible under section 8-1 in the income year incurred;

(e) Borrowing expenses incurred by the Registered Holder in respect of borrowings taken out to fund the Registered Holder’s subscription for Units in the Trust are wholly deductible under section 25-25;

Product Ruling


(f) Section 51AAA of the ITAA 1936 will not apply to deny the Registered Holder a deduction for interest expenses allowable under section 8-1 of the ITAA 1997 or a deduction for borrowing expenses allowable under section 25-25 of the ITAA 1997; and

(g) The anti-avoidance provisions in Part IVA of the ITAA 1936 will not be applied to deny the deductibility of the interest or borrowing expenses incurred by the Registered Holder so as to fund their acquisition of Units in the Trust.

Scheme17. The scheme that is the subject of this Ruling is identified and described in the following documents:

application for a Product Ruling as constituted by documents and information received on 22 December 2010; 27 May 2011, 16 June 2011 and 13 July 2011;

draft pro-forma Property Investor Trust Deed, received on 13 July 2011;

draft pro-forma trust resolution to establish the Trust, received on 16 June 2011;

draft Information Memorandum entitled ‘Conducting a Property Investor Trust’, received on 13 July 2011;

draft Trustee’s Companion for Property Investor Trust, received on 13 July 2011; and

draft pro-forma trust resolution to issue Units and Unit Certificate, received on 16 June 2011.

Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 18. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Registered Holder or any associate of a Registered Holder, will be a party to, which are a part of the scheme.

19. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements.

Product Ruling


Overview 20. Following is a summary of the scheme:

(a) The Registered Holder or an associate of the Registered Holder causes a Trust to be established by Deed of Settlement for the principal purpose of acquiring, holding and dealing with one or more income producing assets (Unit Assets). The Trustee of the Trust may be the Registered Holder or an associate of the Registered Holder;

(b) The Trust is a hybrid trust where the Trustee has both an ability to issue Units that confer on a unit holder (the Registered Holder) fixed rights to specified trust income (including capital gains) and capital and an absolute discretion to distribute the balance (if any) of the income and/or capital of the Trust to discretionary trust beneficiaries;

(c) Beneficiaries who are able to become absolutely or contingently entitled to any interest in the Trust Fund or the income of the Trust Fund are comprised of General Beneficiaries, including the Registered Holder and persons and entities related to the Registered Holder, and Remainder Beneficiaries;

(d) The entity wishing to become a Registered Holder will subscribe for Units in the Trust at a price representing their market value. The part of the Trust Fund that represents money paid by the Registered Holder will be associated with a Class or Classes of Units;

(e) The Trustee uses these subscribed funds together with other trust funds (if any) to acquire the Unit Asset(s). Each Unit Asset acquired by the Trustee will be referable to a separate Class of Unit;

(f) The Trustee will issue a Unit Certificate to the Registered Holder setting out, amongst other appropriate information, the number and Class of Units held by the Registered Holder and the rights and entitlements of that Class of Units;

(g) Subject to the payment of proper expenses of the Trust Fund, that part of the net income of the Trust Fund (as specified or described in the Unit Certificate) that is attributable to each Class of Unit Asset will be held by the Trustee, upon trust for the Registered Holder of the corresponding Class of Units, in accordance with the rights attached to and in proportion to the number of Units held by the Registered Holder;

Product Ruling


(h) The Registered Holder’s Units confer fixed rights to the Registered Holder to that part of the net income of the Trust Fund which is represented by a formula set out in the draft pro-forma Unit Certificate referred to in paragraph 17 of this Ruling. A Registered Holder’s right to income is a right to a fixed proportion of the Trustee’s income which is referable both to the net income (including ordinary income and statutory income) derived on the Unit Asset to which the Units are related and the extent to which the amount of capital contributed by the Registered Holder via their subscription for Units in the Trust contributed to the market value acquisition price of that Unit Asset at the time of subscription;

(i) Amounts so set aside for the Registered Holder will no longer form part of the Trust Fund but will be held by the Trustee as a trust separate from the Trust Fund on trust for the Registered Holder absolutely;

(j) As a General Beneficiary, the Registered Holder may also derive income from the Trust as a discretionary beneficiary should the Trustee exercise its discretion to partly or wholly distribute the remainder of the income of the Trust Fund of a particular Accounting Period not held for the Registered Holder as a fixed entitlement;

(k) The Registered Holder’s subscription for Units in the Trust will be funded on arm’s length and commercial terms by an independent or related party, or both. The Registered Holder may during the term of a loan refinance their loan on arm’s length and commercial terms with an independent or related party, or both. The Unit Asset may or may not be used as security for the Registered Holder’s borrowing;

(l) The Registered Holder, or any other entity wishing to become a Registered Holder, may at a later time choose to use the Trust to acquire another Unit Asset. The relevant Registered Holder may borrow to subscribe for Units in the Trust to assist with the funding of such additional Unit Assets in the same manner as described in paragraph 20(k) of this Ruling. The Class of Units issued to the relevant Registered Holder in respect of an additional Unit Asset will confer on that Registered Holder a fixed right to that part of net income of the Trust Fund in the same manner as described in paragraphs 20(g) and (h) of this Ruling;

(m) The Trust is an open ended trust with a termination date no later than the time required to prevent the trust from breaching the rule against perpetuities (if applicable) in the relevant Australian state or territory in which the Trust is established; and

Product Ruling


(n) The Registered Holder may transfer, or request redemption of, some or all of their Units at market value by notice in writing to the Trustee.

Assumptions21. This Ruling is made on the basis of the following necessary assumptions:

(a) the Registered Holder and the Trust are Australian residents for taxation purposes;

(b) the Registered Holder is not under a legal disability for the purposes of Division 6 of Part III of the ITAA 1936;

(c) Units issued to the Registered Holder are issued at market value;

(d) the Registered Holder is not a trader in investments and is not treated for taxation purposes as trading in interests or Units in the Trust, carrying on a business of investing in the Trust, or holding their interests or Units in the Trust as trading stock or a revenue asset;

(e) the Registered Holder will not enter into the scheme with the intention of disposing their Units in the Trust at a time prior to deriving assessable income from the investment in excess of deductible expenditure;

(f) money used by the Trustee of the Trust that relates to the borrowings by the Registered Holder in subscribing for Units in the Trust will be used only to invest in income producing assets for the dominant purpose of deriving assessable income for the Registered Holder from their Units in the Trust which exceeds total expenses incurred by the Registered Holder with respect to their investment;

(g) the Registered Holder will derive assessable income other than, or in addition to, capital gains from their Units in the Trust;

(h) interest expenditure incurred by the Registered Holder in respect of borrowings taken out to fund their subscription for Units in the Trust is not prepaid beyond the income year in which the expenditure is incurred;

(i) the Registered Holder’s fixed rights to income and capital gains derived from Unit Assets related to their Units cannot be defeated by the Trustee exercising a discretion to distribute income and/or capital gains to other beneficiaries;

(j) Units issued to the Registered Holder will have fixed rights to income and capital gains as outlined in the Unit Certificate issued to the Registered Holder by the Trustee;

Product Ruling


(k) where additional Units are issued following the initial issue of Units to the Registered Holder, there will be no variations to the existing rights and entitlements that are attached to those initial Units held by the Registered Holder;

(l) the scheme will be executed in the manner described in this Ruling and in accordance with the scheme documentation mentioned in this Ruling;

(m) all relevant documentation pertaining to this scheme, as provided by Chan & Naylor Australia Pty Ltd to the class of entities which can rely on the tax benefits set out in this Ruling, will be executed without any amendment, addition or alteration beyond the recording of information to identify the Registered Holder, the details of the Trustee, the date when the Trust was established, the date when the Trustee resolves to issue the Units, the date of issue of Units, the Unit Asset(s), the number of Units issued to the Registered Holder and the quantities required by the formula set out in the Unit Certificate referred to in paragraph 17 of this Ruling;

(n) all dealings between the Registered Holder and Trustee in relation to the scheme will be at arm’s length;

(o) all dealings by the Registered Holder and/or Trustee with related parties in relation to the Units Assets or scheme, will be at arm’s length and not of a private or domestic nature;

(p) the loan that the Registered Holder enters into in order to subscribe for Units in the Trust will be on arm’s length and commercial terms from an independent or related party, or both, and any dealings between the Registered Holder and the lender/financier will be at arm’s length, including any refinancing of such a loan; and

(q) the Registered Holder is not subject to Division 230 in respect of this scheme.

Commissioner of Taxation 27 July 2011

Product Ruling

PR 2011/15Page status: not legally binding Page 11 of 14

Appendix 1 – Explanation This Appendix is provided as information to help you

understand how the Commissioner’s view has been reached. It does not form part of the binding public ruling.

Assessability of Trust income 22. Under the terms of the Units issued, the Registered Holder has fixed rights to certain income and capital gains derived by the Trust in respect of the Unit Asset(s) that the Units are related to.

23. To the extent that the net income of the Trust constitutes net income other than capital gains or franked distributions, the Registered Holder shall be assessable under section 97 of the ITAA 1936 on so much of the share of that net income of the Trust as reflects the proportion of income of the trust estate to which the Registered Holder is presently entitled, as adjusted by Division 6E of the ITAA 1936.

24. Where the net income of the Trust includes a net capital gain, subsection 115-215(3) will deem the Registered Holder to have made a capital gain referable to their attributable gain as calculated under section 115-225 and as adjusted under subsection 115-215(3) to take into account certain capital gains tax concessions claimed by the Trustee.

25. Where the net income of the Trust includes a franked distribution, the Registered Holder shall be required under subsection 207-35(4) to include in its assessable income its attributable franked distribution as calculated under section 207-37 and its share of any franking credit on the distribution.

Section 8-1 – Interest expenses 26. Section 8-1 provides a taxpayer with a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing the taxpayer’s assessable income. A loss or outgoing is not deductible to the extent that it is of a private or domestic nature.

27. For the purposes of section 8-1, the essential character of an interest expense is derived from the purpose of the borrowing and the application or the use of the borrowed funds. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by that taxpayer from its use (Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 488).

Product Ruling

PR 2011/15Page 12 of 14 Page status: not legally binding

28. Whilst interest paid on a borrowing used to acquire income producing assets such as units in a unit trust is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33), a portion of an interest expense is not deductible to the extent that the borrowed money has been used to both acquire an income producing asset and to confer benefits on other persons (Taxation Determination TD 2009/17).

29. The interest incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust is wholly deductible under section 8-1 because the funds borrowed are not used to confer benefits on other persons (including other General Beneficiaries or any Remainder Beneficiaries).

30. This Ruling does not apply to Registered Holders who choose, or who are required to prepay interest under the borrowing taken out to subscribe for Units in the Trust. Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in Subdivision H of Division 3 of Part III of the ITAA 1936. Any Registered Holder who prepays such amounts may request a private ruling on the deductibility of interest in relation to their investment in the Trust.

Section 25-25 – Borrowing expenses 31. Borrowing expenses incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust will be deductible under section 25-25. Where the borrowing expenses are $100 or less, they are wholly deductible in the income year incurred. Where the borrowing expenses exceed $100, the deduction is spread on a straight line basis over the period of the shorter of:

the term of the borrowing; or

five years.

Section 51AAA 32. Under the scheme, it is contemplated that the Registered Holder will derive assessable income by way of capital gains and other than by way of capital gains from their Units in the Trust. As the interest and borrowing expenses incurred by the Registered Holder will be deductible under section 8-1 and 25-25 respectively notwithstanding the inclusion of a net capital gain in their assessable income, section 51AAA of the ITAA 1936 has no application to the Registered Holder.

Product Ruling

PR 2011/15Page status: not legally binding Page 13 of 14

Part IVA – anti-avoidance 33. Provided that the scheme ruled on is entered into and carried out in the manner described in the scheme documentation and in the Scheme section of this Ruling including the Assumptions (see paragraphs 20 to 21 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and that Part IVA of the ITAA 1936 will not apply.

Appendix 2 – Detailed contents list 34. The following is a detailed contents list for this Ruling:

ParagraphWhat this Ruling is about 1Class of entities 4

Superannuation Industry (Supervision) Act 1993 7

Qualifications 8

Date of effect 11Changes in the law 13

Note to promoters and advisers 15

Ruling 16 Application of this Ruling 16

Scheme 17 Overview 20

Assumptions 21

Appendix 1 – Explanation 22Assessability of Trust income 22

Section 8-1 – Interest expenses 26

Section 25-25 – Borrowing expenses 31

Section 51AAA 32

Part IVA – anti-avoidance 33

Appendix 2 – Detailed contents list 34

Product Ruling

PR 2011/15Page 14 of 14 Page status: not legally binding

ReferencesPrevious draft: Not previously issued as a draft

Related Rulings/Determinations: TR 95/33; TD 2009/17

Subject references: - capital gains tax - hybrid trusts - income tax - interest expenses - product rulings - public rulings - taxation administration

Legislative references: - ITAA 1936 51AAA - ITAA 1936 Pt III Div 3 Subdiv

H- ITAA 1936 Pt III Div 6 - ITAA 1936 97 - ITAA 1936 Div 6E - ITAA 1936 Pt IVA

- ITAA 1997 - ITAA 1997 8-1 - ITAA 1997 25-25 - ITAA 1997 Div 102 - ITAA 1997 Subdiv 115-C - ITAA 1997 115-215(3) - ITAA 1997 115-225 - ITAA 1997 Subdiv 207-B - ITAA 1997 207-35(4) - ITAA 1997 207-37 - ITAA 1997 Div 230 - SISA 1993 - TAA 1953 - Copyright Act 1968

Case references: - Ure v. Federal Commissioner

of Taxation (1981) 50 FLR 219; 81 ATC 4100; (1981) 11 ATR 484

ATO references NO: 2011/1315

1-2LYIYJI ISSN: 1441-1172 ATOlaw topic: Income Tax ~~ Product ~~ hybrid trust

Documents

Trustee Companion vers 3staff.chan-naylor.com.au/uploads/62378/ufiles/Trustee_Companion_… · Income Tax, Capital Gains Tax, Land Tax and Stamp Duty. Purchasing an Investment Property