All Topics / Legal & Accounting / Tax: Do you pay/claim your spouse as a bookeeper or property manager?

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  • Profile photo of emptyvesselemptyvessel
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    @emptyvessel
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    Hey folks,
     just wondering if anyone is claiming/paying their spouse as a bookeeper and/or property manager?

     I have read this in a few different books and my accountant suggested it may be an option a while back. Seems to be related to how many properties I have. i.e. A couple is not enough, but 4 or more is, roughly.

    My missus does a tonne of work locating and managing our expanding portfolio, I think it is reasonable for me to pay her for the efforts.

    Special note: I am not looking for legal or tax advice here, just wondering what others are doing.

    Thanks for sharing,
    EV

    Profile photo of TerrywTerryw
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    If your wife owns the properites with you it may be hard to her to pay herself!

    Even if the wife doesn't own any properties with you it may not be possible to pay her.
    see a recent case, Brown and Commissioner of Taxation [2010] AATA 829, http://www.austlii.edu.au/au/cases/cth/AATA/2010/829.html

    1. Allan Brown (“the taxpayer”) was the owner of a rental property. He says he employed his wife to assist with the paperwork and other issues associated with the property during the 2006-2007 year of income. He claimed a deduction in respect of the wages he paid her and in respect of a large contribution to her superannuation. The Commissioner disallowed the deductions in the objection decision. The matter has now come before the Tribunal.
    2. I am not satisfied Mr Brown and his wife have discharged their obligation under s 14ZZK of the Taxation Administration Act 1953 (“the TAA”) to demonstrate that the Commissioner’s objection decision was excessive. The decision is therefore affirmed

    It is a short judgment and worth a read. Maybe your accountant should read it too!

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of emptyvesselemptyvessel
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    Thanks Terry.

    I can see some key differences here to what we are considering. I am not an expert, of course, but these things seem obvious;
    1) The number of properties being managed. 4-5+ versus 1 with the Browns.
    2) No other employment or businesses, like a "fish and chip shop" are involved. This made the Brown case very dodgy because his wife did not get paid for her work there.
    3) The sums of money that this Mr Brown claimed were ludicrous. $25,000 for wages and $35,000 for super contributions were always going to raise alarm bells.

    The fact that an employment contract is not necessary was a particularly useful piece of information. All the same, I think that writing one up would make things much clearer.

    The fact that I find this interesting is disturbing! Maybe I should have been a tax lawyer afterall? Nah…they work too hard.

    Profile photo of TerrywTerryw
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    Yeah, that guy really did go over board didn't he!

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of luke86luke86
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    I have no experience in this, but common sense would suggest that as long as you were paying your spouse a reasonable hourly rate, and the hours allocated are in line with the amount of work required, than all would be fine.

    Cheers,
    Luke

    Profile photo of Dan42Dan42
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    luke86 wrote:
    I have no experience in this, but common sense would suggest that as long as you were paying your spouse a reasonable hourly rate, and the hours allocated are in line with the amount of work required, than all would be fine.

    Cheers,
    Luke

    It depends on the type of income. Businesses which come under the Personal Services Income rules are not allowed to pa  aspouse or child for administration work.

    Renting residential property is not normally considered a business, and wouldn't fall under the PSI rules.

    It's a grey area, because the ATO could easily argue you are just trying to split income. If you do it by the book, and don't pay too much, you should be ok.

    Profile photo of emptyvesselemptyvessel
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    Thanks guys. I was thinking of this type of setup as being reasonable. It maintains a clear separation, description and payment of duties;

    – Temporary position employment contract. Includes list of duties, hourly rate, payment frequency
    – Maintain timesheets showing hours. Signed off on a monthly basis by both parties
    – My wife maintains a separate bank account for this income to be paid into on a monthly basis.
    – 1 hour per week per property
    – Rate equivalent to junior property manager or book keeper. Maybe $25 per hour.

    Let me know if you think this is a bit light.

    Profile photo of TerrywTerryw
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    Is your wife a joint owner of the property?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of emptyvesselemptyvessel
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    Profile photo of TerrywTerryw
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    What you say sounds reasonable to me. Keep it t arms length and commercial rates. make sure you run it by your accountant first though.

    If only you had used a discretionary trust!

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of emptyvesselemptyvessel
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    Ahh, but if I had a DT, i wouldn't get the negative gearing and thus no positive cashflow. (Of course, I could borrow and then lend money to the trust, but I haven't found someone that can walk me through how this looks in 5,10,15 years.)

    And HDT's appear to be a minefield for tax and bank lending.

    I can only see a trust making sense for me under these circumstances;
    1) Positive geared property (which is 5+ years away for me. Except if I buy in the US, which could happen sooner rather than later)
    2) I intend to sell i the short-medium term. Which I don't. Long-term I don't want to either.
    3) I move into a self-employed, business owner and/or a job where I have a reasonable chance of being sued.
    4) I am an idiot –> No/poor/wrong liability insurance. Or not managing my properties correctly.
    5) I become a developer. I don't and it falls into a similar CG category to (2).

    Other than that, trusts seem to be just a drain on time and cashflow due to the extra management time/cost. Which is a damn shame, because between absorbing Trust Magic (Dale GG), Chan & Naylor and Michael Yardney trust stories, I initially thought they were an absolute must. That's how the rich do it, right? Well, sort of, is the real truth. Most of them didn't start out that way. the trusts and fancy structures came later.

    Profile photo of TerrywTerryw
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    emptyvessel wrote:
    Ahh, but if I had a DT, i wouldn't get the negative gearing and thus no positive cashflow. (Of course, I could borrow and then lend money to the trust, but I haven't found someone that can walk me through how this looks in 5,10,15 years.)

    And HDT's appear to be a minefield for tax and bank lending.

    I can only see a trust making sense for me under these circumstances;
    1) Positive geared property (which is 5+ years away for me. Except if I buy in the US, which could happen sooner rather than later)
    2) I intend to sell i the short-medium term. Which I don't. Long-term I don't want to either.
    3) I move into a self-employed, business owner and/or a job where I have a reasonable chance of being sued.
    4) I am an idiot –> No/poor/wrong liability insurance. Or not managing my properties correctly.
    5) I become a developer. I don't and it falls into a similar CG category to (2).

    Other than that, trusts seem to be just a drain on time and cashflow due to the extra management time/cost. Which is a damn shame, because between absorbing Trust Magic (Dale GG), Chan & Naylor and Michael Yardney trust stories, I initially thought they were an absolute must. That's how the rich do it, right? Well, sort of, is the real truth. Most of them didn't start out that way. the trusts and fancy structures came later.

    Hi EV

    If you were to borrow and lend the money to the trust then you couldn't claim the interest. You would be onlending to the trust and the trust would claim the interest with the interest received by your self being income which would be offset by the interest paid by yourself = you nil, trust claims interest.

    If you want to work it out just assume the trust is a person with no other income.

    True you would not get any negative gearing benefit, personally anyway, by using a discretionary trust. But if your property is postive geared after tax back then it is very close to being fully cashflow positive as rents rise. Then you will start having the tax problems.
    If you don't sell that means you are building up greater gains which means greater tax.
    trusts work well for the self employed. PAYE pays get sued to, and often for unfortunate events or accidents.
    Not sure about being an idiot. Insurance won't help in litigation very often.
    Don't think trusts cost that much extra to run. (you forget to include land tax which can be another high cost of using a trust)

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of emptyvesselemptyvessel
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    @emptyvessel
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    Darn. There goes the borrowing to lend to trust option.

    I wish I was close to positive after tax! Quick sums tell me I need to raise at least an extra $550 per week to make up the shortfall across the current portfolio if I can't claim borrowing interest. Even at an optimistic average 10% p.a. rise in rents across the board, I am looking at 5 years. (Give or take depending on interest rates) Of course, I will be adding further properties into the mix as I go, and they are likely to have a similar timeframe. Eventually the older positive geared ones help to pay off the newer positive cashflow ones and the whole portfolio tips to positive geared and accelerates away from there. 13 years is the conservative estimate, assuming all goes well. If it goes really well, much sooner. At which point I go part-time or free-time, thus taking away the income tax created by PAYG. Now, if I am making enough money off my investments to be paying tax when I am not working, I am happy to pay for it. Why? Well, I have reached the goal I set out to achieve.

    If someone can show me how this same cycle can be accelerated with a trust structure, I am all ears. Seems to me it might, at best, match the current outcome.

    Of course, if I start developing or selling, things have changed and the structure needs to change to match.

    The asset protection is interesting, but not compelling. I spoke to a few lawyers and accountants, all of them tell me, "you can do it if you want, but I cannot see a real need." A couple of "trust-centric" ones said I may like to consider it after a few more properties. Most said they had never seen any PAYG employees get chased through their investments and were familiar with the "it does happen" argument.

    So I think I will do it, I just need to make the numbers work to match with the asset protection "piece of mind".

    As for state land taxes. Don't you just setup multiple trusts? Chan and Naylor push this as a core benefit over individual ownership.

    Profile photo of TerrywTerryw
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    hi EW

    Using a trust would definitely be slower and cost you more in the initial stages. Unless the trust had other income and it could therefore negative gear. If no other income then it would just have losses which would be carried forward, but would not result in any immediate tax savings. $500 pw is a large short fall.

    Using a trust in NSW means the trust would pay land tax on land values greater than $1, unless the trust is a fixed trust. You generally wouldn't want a fixed trust as there is no asset protection and no flexibility.  ie there is no threshold like an individual. This means more land tax initially, but an individual will reach the threshold soon and then start paying the same land tax amount on anything over that. Multiple trusts won't really help. Multiple states might, but most states hit trusts harder on land tax now.

    Setting up a trust later is too late. Transferring property means CGT and Stamp duty and there will be little to no asset protection. You could buy subsequent properties in the trust, but the first ones will still lack flexibility and asset protection.

    re getting sued. I am a lawyer and see it all the time. You can get sued for something very innocent. eg one man bought a car, which was a dud, so he sued the seller. He fought hard and lost. He now has to pay the judgment, his costs and the other party's costs and is looking at $500,000.

    You probably won't get sued in relation to your properties, but things happen. eg there is a post here somewhere about a investor who had his handyman replace some glass next to the front door. The tenant put his hand through it and was badly cut. It turned out that the glass was not up to the safety standard and the tenant was awarded about $800,000 (agent was also liable as he arranged the handyman from memory.) If this was held in a trust the trust would be liable for the money so properties in this trust could be at risk, but assets in other trusts could be safe).

    Anyway, using a trust would cost you more and slow you down initially. But you are creating a time bomb. What will happen in 20 years, You will be on a fortune and will be paying a heap of tax while your wife has little income and there will be little you can do to split the income. You will also be a very attractive target if someone considers suing you (one of the first things people should do when considering to sue is to see if any properties are owned, if none then it is not worth pursing usually as there will be nothing to pay a judgment with).

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of emptyvesselemptyvessel
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    @emptyvessel
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    Thanks Terry.

    You mention that "setting up a trust later is too late."

    Well, it is too late for me. But I read all sorts stuff, like that from Chris Batten's team, that says I can significantly benefit from a trust going forward.

    Can I redirect all my individual-owned property and put it into a unit trust that later converts into a discretionary trust? And use this vehicle going forward as my main investment and asset protection?

    Profile photo of TerrywTerryw
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    Hi EV

    Yes you can significantly benefit from a trust. But getting the assets that you already own into the trust will be a problem. To get existing properties in a trust you would have to sell them to the trust which would mean stamp duty and CGT payable at market rates.

    This is the same whether going into a unit trust or a discretionary.

    If the trust is a unit trust and it is converting to a discretionary the trustee of hte unit trust will have to buy back or redeem the units. The units will need be sold at market value. So if your unit trust had one property worth $500,000 and had issued 100 units and 5 years later it had increased in value to $1,000,000 the units would now be worth $1,000,000. So you the unit holder would need to sell them for $1mil and you would have a capital gain of $500,000 and would need to pay tax. But you could minimise this by transferring the units over several years.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of emptyvesselemptyvessel
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    Interesting.

    Could I just keep the current properties in my name and just extract the equity to fund the purchases inside the trust going forward?

    That way, anyone wishing to sue me as an individual would see that I owe far more money than I have in equity. Thus negating the benefits of chasing me.

    This is why I need a top notch accountant that has time to work with me. I haven't got time to become an expert on this stuff without holding back my investments until I am.

    Profile photo of TerrywTerryw
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    Yes

    But any equity would still be yours as the trust would owe you the money if you loaned it to the trust. If you let the trust mortgage your property it would still be essentially the same, but it may look like you have less or no equity on on first glance.

    it is still a good idea though.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of emptyvesselemptyvessel
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    What if I gift it to the trust?

    Unit trust initially. Me as income unit holder. Mrs and kids (or family trust) as capital unit holders. Unit trust borrows using the equity I gifted. I pay the interest payments, thus any negative shortfall I can claim as negative gearing. Then after a few years, as the property goes neutral to positive geared, it transfers to being a discretionary trust over a period of time.

    Although I am not sure what I do about accessing the extra equity within the trust for future purchases.

    Profile photo of TerrywTerryw
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    Gifting is good, but there are problems you need to consider such as the claw back provisions of the Bankruptcy Act – if you go down the money can be clawed back indefinitely if you gifted with the intention to avoid creditors, up to 10 years otherwise. Also unless you have paid off your home loan you will face the dilemma of whether to pay off the home loan first and saving you interest, or just gifting your cash. (you could also gift to the trust and then borrow it back interest free to pay down the home loan – depending on your deed).

    Unit trust is good but I am not sure you would be able to claim all the interest on the loan to buy the units if you only had income units. Its not a matter of you just paying the interest, you actually have to borrow to buy the units.

    Did you see the thread about hybrid trusts by Chris Batten on somersoft? very interesting

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

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