Jane and Mike

Jane and Mike had a successful business which they both worked in. They had recently sold 20% of their shares to one of the senior staff members. The shares in their business were owned by a trust and the trust also owned their family home. Jane and Mike had three teenage children, one at intermediate school, one at high school, and one just about to start at university next year.

They had worked hard in their business over the years. They had bought the business from Jane’s father when he retired and grown it beyond their expectations, so the 20% share sale left them with a sizable amount of cash. Coupled with their savings over the years they had a substantial sum. They had always been interested in investing in residential property. Jane had a keen interest in interior design and was eager to try her hand at doing up a couple of properties. But their intention was to keep the properties for the long term. 
Mike and Jane went to a couple of auctions and within a few weeks had contracts on two different properties. They had bought them in their own names “or nominee”. They weren’t sure what ownership structure to nominate. They knew several of their friends owned rental properties in companies and had heard the terms LAQCs and LTCs bandied around over the years but didn’t really know what that meant. They decided to take some advice so thought they would start by talking to their lawyer.  
Mike and Jane’s lawyer advised that when looking at ownership structure, asset protection and tax were the greatest considerations. She said sometimes tax and asset protection were like oil and water – they didn’t mix, and they may have to choose one over the other. She advised that while companies were still popular vehicles for owning rental properties, they weren’t as popular now because of the reduction in taxable deductions in relation to rental properties. Interest on mortgages could no longer be a deductible expense except in certain circumstances and investment properties were much less likely to make a loss. Jane and Mike were buying the properties to generate income, not losses, and so this was much less of a concern for them.  
Their lawyer thought that asset protection should be their greatest driver and advised that a trust gave the greatest flexibility and asset protection. She also advised that a trust would give them tax efficiency as well. As it was expected that the rental properties would be generating income, the tax rate for the trust would only be 33% as opposed to 39% in Mike and Jane’s personal names as they were both earning over the threshold which tipped them into the next tax bracket. She recommended that they talk to their accountant but said that there was also an opportunity to “income split”.  
When Mike and Jane asked what income splitting meant, she said that trustees had a choice when receiving income as to whether the trust would pay tax on the income at the trustee rate of 33% which would mean the income was declared as trustee income, or whether the income could be allocated to one or more of the beneficiaries at their personal tax rate (beneficiary income). She gave the example of their eldest daughter who would be starting university next year. Jane and Mike had always been meaning to help her out with her university fees, and their lawyer said that the trust could do that instead. This would mean income could be allocated to her and tax would be paid at her lower marginal rate which would create greater tax efficiencies.  
Their lawyer didn’t think that they would necessarily need to set up a new trust, but if they were thinking about buying more rentals and borrowing money, a new trust might be a good idea, as if they used the same trust that their family home was in, it would be likely that the bank would want security over the family home as well.
Jane and Mike weren’t 100% sure what they might do in the future, but decided to set up a whole new trust for their residential properties, just to keep them very separate from their family home and business. They were very happy that this was one case where they could achieve both asset protection and tax efficiency within one structure.

Tammy McLeod, Managing Director, Davenports Law

Issue 125 November 2021