[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 11, 2011 - 5:42 am

Thanks Terry

That is a good thing then if the principal part of the loan repayments is not considered a deduction/loss which will offset the rental income – otherwise I will go from neutral/positive geared within the trust to negative!

If this is the case then it’s prob worthwhile considering this 80%IO+10% P&I without LMI, so I won’t have to fork out existing savings to cover the 10% myself upfront.

Have appointment with accountant next week to double check all the the issues/questions so far with trust loans. Any other curly questions I should be asking the accountant?

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 10, 2011 - 2:13 pm

Thanks Terry.

I forgot to clarify:

The offer of 80% at IO for 5 years and additional 10% at P+I to be paid down in 3 years would not require any lenders mortgage insurance.

Using a round figure of 450,000 property cost this means I have to pay down 45000 in principal in 36 months.

Within the family trust, I understand that the interest portion of the 90% total loan is considered a “loss” to be offset against “income” – being the rental income.

However I wonder if the principal payments (45000/36= 1250 per month) is also a “loss” to be offset against the rental income? I understand the answer is “NO” in a normal personal investment setting but what about in a family trust?

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 10, 2011 - 7:46 am

Another update on obtaining finance from the bank, basically they are not able to offer anything above 80% LVR without LMI unless I cross secure with the existing property. Their best offer is to lend 90% with 80% IO for 5 years and the rest 10% at P+I (paid down in 3 years).

They were even offering to contact my accountant to explain why they think cross securing is a good idea. I said no, I will approach the accountant myself. It’s a bit frustrating as there does not seem to be any good reason apart from the bank’s own interest to do so.

I am considering their offer of 80% IO and 10% P+I. Even though I can provide the 10% from my existing savings, there seems to be an advantage if I’m using the bank’s money towards the 10% (even if it’s P+I)

However, I am not sure if this “combination loan of IO + P&I” for the one trust property can complicate things eg accounts/calculations in the future.

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 8, 2011 - 10:28 pm

Ok I will ask the accountant about the tax implications of a trust gifting to beneficiaries and see if its worthwhile getting the lawyer to help review/amend the trust deed. My initial layman’s thinking is that it would still be perceived as a distribution hence taxable. Although I think if I set up other trusts in the future (eg for other properties) then I should be able to “gift” between trusts.

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 8, 2011 - 10:14 pm

Thanks Terry

Ok I will ask the lawyer about deeds of gift and also ask the accountant. I am not sure about what you’ve written as follows:

“You would need to check the trust deed about whether the trust can gift to beneficiaries. Also check with your accountant if this creates any tax issues.”

How is whether the trust is able to gift to beneficiaries relevant to the setup? I had a look at the trust deed but it only mentions distributions (income and capital).

The intention was if we needed funds in the future for personal use/investment then the trust would loan us the monies at market rate, hence the interest income made by the trust can be distributed with tax savings.

bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 8, 2011 - 5:43 am

Thanks Terry. I’ve attached a post you made recently in relation to gifting cash below:

hi Jack
Since you have a high income you should be able to knock that PPOR loan debt off in 1 to 2 years. After that you should have considerable cash available so I think you should seriously consider a discretionary trust. You can start gifting cash to the trust and park it in a 100% offset account and this will quickly reduce any losses. it will also offer significant asset protection and long term tax benefits.
Whereas if you get the property 99% in your name, then when it turns positive you will be paying 47% tax on the rent and you will cop all the CGT too. It may turn positive faster than you think once the PPOR is paid off.
Terryw

For now our intention is to gift rather than loan to the family trust to achieve neutral/positivity in the trust loan. I will have to check if the constitution allows the trustee to gift the funds back to me. If I needed money from the trust offset account it would be arranged as a loan from the trust.

It seems from your response as though rather than having wages go directly into the trust fortnightly, I need to make “lump sum” gift contributions (say monthly) from a separate account (eg. the offset account linked with my personal IP). What kind of “proof” is required when we gift to a trust? The trustee is a company with my partner and I as appointors/directors. Does that mean we cannot gift money to the trust because we are the directors?

Re: further advice, is the accountant or the lawyer a better source of knowledge to further clarify these aspects?

Thanks again
bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 8, 2011 - 5:16 am

Luke – discretionary trust

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 8, 2011 - 5:03 am

Hi wanted to update on my progress seeking finance.

So far the bank has offered a separate choice package with the same 0.8% discount for the trust. They remain reluctant to offer more than 80% LVR without LMI, and want to know why we won’t cross secure the loans. Not sure if this offer is standard “market rate”. I am not sure if I should be seeking other offers – mainly from the perspective of what you guys have been advising, to keep loans separate.

Richard – the trust perusal fees are around $400 – not negotiable unfortunately. They will waive the first year package fee though so it works out to be the same?

In relation to the trust offset account, we intend to put our wages into this account to try to achieve neutral or positive balance which can be distributed. If these wages are “gifts” then does this have to be done through an intermediary account (eg. the personal offset account), and how does this affect asset protection for the trust property?

Thanks
bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 2, 2011 - 2:21 pm

Thanks Terry for the information. It would be terrible to have to pay tax on the trust offset amount again. However I just thought of a disadvantage in “gifting” the money into the trust offset account. Basically that money will be locked within the trust from thereon and can only be “moved” between or within trusts, because say for example down the track if I needed that money for other personal investments etc then transferring the money out of a trust account to a personal account would be like personal income which is taxable (again). Unless the trust “loans” me the money by paying down its loan then redrawing and charging me slightly higher interest than its paying.

Thanks Richard for the legal fee information, I had no idea about this as the banker made the process sound like a routine background/credit check nor did she mention any fees involved when we asked. Will let you know how I go.

bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

March 2, 2011 - 12:11 pm

Thank you very much Terry for the reply.

We will try to negotiate with the bank re: fees.

We plan to transfer money from the offset currently linked to the personal IP to the trust offset account, as a gift not a loan. However thank you for pointing this out as it does raise another important question –

As a lump sum “gift” to the trust offset account is that considered as “income” and have to be distributed to beneficiaries at the end of each financial year? If so there is serious disadvantage b/c that is a substantial amount to have to distribute to beneficiaries and pay tax on each year!

We don’t plan to “loan” the money to the trust – think that it’s too complicated for now, and from reading previous posts that means it would best be “redrawn from the existing loan”, and also we would have to make sure the interest oncharged to the trust is “reasonable market rates” to avoid it looking like tax evasion

[bb8Participant@bb8Join Date: 2009Post Count: 30]

February 11, 2011 - 8:09 pm

Hi Terry,

Sorry to be responding to an old post but I have 2 questions in relation to your example as below.

1. option two below is a better choice as the 50000 redraw to pay the IP deposit is tax deductible.  Is this the same as using a LOC (if the PPOR has increased in value) to pay the IP deposit?  If so, what do people mean by getting the LOC on a separate loan – is that a separate loan package from the PPOR one?

2. how does the below example apply if the 2nd property was an investment property purchased in a family trust?

Thanks for your opinion,

bb8

Terryw wrote:

hi Darren

You can do it on a PPOR. But you need to be careful there.

Best with an eg again.

Say your PPOR loan was for $100,000 and you had $50,000 in the offset. You would have 2 choices if buying an IP

1. use the $50,000 in the offset as a deposit.
or
2. pay the $50,000 into the PPOR and then reborrow it for the deposit for the IP.

2 is much better as the interest on the $50,000 will be deductible. ie your home loan is now $50,000 and  you have reborrowed $50,000 for investment.

With option 1 your home loan would still be $100,000 and you would be paying interest on the full $100,000 because the deposit for the IP wasn't borrowed.

So why use an IO loan with offset for a PPOR?
You would be no worse off in terms of interest by using the offset and IO, but you have the flexibility to pay the loan down if you need to.

After a few years you may want to upgrade to a bigger PPOR and keep the existing one as an IP. If you had paid down the loan all your money may still be available as a redraw, but the interest on this money when taken out would not be deductible. But if you have used the offset option the loan won't be going down so all the interest on the full amount would be deductible if you converted the house to an IP.

Does this make sense?

With an IO loan you can also pay extra off it at any stage. So you could even keep the loan IO and pay the equivalent to PI if you wished to. if you were going thru a tight period you could reduce the repayments (if you had a PI loan you would need to reapply to do this). The repayments are lower than a PI loan so you can afford more investments.

[bb8Participant@bb8Join Date: 2009Post Count: 30]

August 4, 2010 - 4:46 am

thanks.. I will have a look through the website.  McMaster's and Bongiorno are based in Melbourne but also have offices in NSW +/- QLD so I will explore them as well.

[bb8Participant@bb8Join Date: 2009Post Count: 30]

August 4, 2010 - 3:55 am

Thanks Terry

Have been doing lots of reading into service trusts.  A few accounting firms have released newsletters in relation to setting up service trusts and their general advice is that as a sole practitioner with minimal overhead (general admin only, no office leasing or major equipment required), much like an anaesthetitst, that service trusts are not recommended due to the tax ruling in 2006.  I went to the ATO website to read more about this and I am trying to work out if my situation can justify that a service trust is "commercially viable" if the main activities are handling job searches, booking travel, magazine/internet subscriptions, and limited medical equipment.  Even with a reasonable markup for these services provided, the ATO may not view basic admin work as "commercially viable".   As a locum or if I work at a practice I will be a subcontractor with agreed %'s paid (e.g 60-40, with the 40% deducted from the practice to cover for nurses, rooms, etc).  My job is very portable and so won't need nurses.
As a young doctor my income is still limited so have to factor in the expense of setting up and runninng a service trust – which is fine but not sure if I fit the criteria that ATO has set.

I am not sure if I should be speaking with a tax lawyer or another accountant for a second opinion, and there seems to be quite a number that advertise themselves to specialise in the health field.  I'm sorry if I'm tracking off the topic but it looks like I will have to keep the family property trust losses for now until I save up enough for the offset account

Do you know of any recommended accountants/tax lawyers in Melbourne that I can seek a second opinion with?

Thanks
bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

August 3, 2010 - 7:43 am

Hi Terry,

Just wanted to thank you again for your advice and also to followup my meeting with the accountant yesterday.   As a sole personal service provider even if I set up a company the tax office will still see the company as a personal service company, and b/c I'm the only employee (not counting a "bookkeeper") all the profit will still have to be distributed to me – therefore no tax benefit. 

However he did talk about setting myself up as a provider of medical services through a "service trust" (managed by a company), which means my earnings can be distributed by the service trust directly to the family trust with the investment property, which in the earlier stages will be in negative balance.  This means effectively I can negative gear indirectly. 

He also mentioned onlending my personal loan to the family trust property could be an issue if I am sued, b/c they will go after the property as the family trust owes me money.

bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

July 21, 2010 - 2:31 am

Thanks Terry,

Sorry I misinterpreted the tables.  Thank you for the clarification. 

In regards to interest only loans, I was reading your advice in other threads about extending beyond the general 5 year maximum.   The banks would re-evaluate your financial circumstances (presumably like re-financing?).  I got the impression from NAB last time that 5 years is the absolute maximum for that loan.

Is it a common thing for investors to apply for extension of IO loans beyond the 5 years?  I suppose if the banks says no then one can approach another bank?   It would not be ideal to be reverting to P+I on an investment property after 5 years b/c I wouldn't intend to sell the property after 5 years if I can avoid it.

I thought more about your comment regarding increasing a loan on a property (say if my existing IP property is now valued more that what I paid for), that the additional interest incurred is only tax deductible if used for investment purposes :

1.  if that money is not used directly for the same property, but being used to offset another IO loan on an investment property which is held in a family trust, is that interest not considered tax deductible? 

2. if one was to maximise the loan on the existing property (we'd borrowed 600,000 at the time but now b/c the property is worth more, 80% of it's current value is 720,000 so we are considering to borrow an extra 120,000)  – do we apply for a new loan of 720,000 or get a line of credit? 

thanks,
bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

July 20, 2010 - 6:38 am

		NAB Choice Package and NAB Portfolio Facility4
	Interest Rate	Comparison Rate	Interest Rate	Comparison Rate
Interest in Advance/ Interest Only in Advance
1 year 2 years 3 years 4 years 5 years	6.84% pa 7.19% pa 7.19% pa 7.69% pa 7.89% pa	7.35% pa 7.41% pa 7.43% pa 7.65% pa 7.81% pa	6.74% pa 7.09% pa 7.09% pa 7.59% pa 7.79% pa	7.01% pa 7.12% pa 7.18% pa 7.44% pa 7.64% pa

Sorry Terry, I am a bit confused.  So it's not the above table for interest only loans I should be looking at?  For example, if I intend to get an IO loan up to 5 years, do I basically stick with the 1 year rate of 6.74% and then that just gets readjusted by the banks like with the variable rates?  And does the 7.79% rate refer to if I wanted to pay 5 years of interest upfront/all in one go?

bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

July 20, 2010 - 4:24 am

I'm sorry Terry I may have misinterpreted NAB's (who we're with under the choice package) interest rates list.  The IO rate is the same as the standard variable rate at 1 year but it depends on the number of years – the rates get higher as you approach 5 years.

Does one decide how many years they want an IO loan and so then you pay higher interest rate from the beginning (eg. 1 year is 6.74% and 5 years is 7.79%) .  Or is the rate charged based on how many years you've held an IO loan hence slow goes up over time?

bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

July 20, 2010 - 4:01 am

the other question is, given IO loans attract higher interest rates, is there any benefit in keeping the 1st loan on the existing personal property that's rented out as P+I?  Am I allowed to just tax deduct the interest portion?  the reason I ask is that down the track, we intend to keep the home and will have to move back after few years anyway to avoid CGT.

thanks
bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

July 20, 2010 - 3:45 am

Thanks Terry for your advice.

Will be meeting with the accountant in 2 weeks but it has been really helpful at least to learn the basics.  I will speak with him about the service trust but my work equipment is so portable and admin fairly straightforward that I would only be able to justify a small amount of fees to use the service.

In regards to maximising the loan on the existing PPOR now rented out as IP, if we don't do this then won't have enough money to move over to the family trust to "break even".   So technically by increasing the loan amount on the existing property it isn't directly related to the existing property, just being diverted to offset the new one in the family trust to "break even".    Does that mean we cannot tax deduct that portion?

bb8

[bb8Participant@bb8Join Date: 2009Post Count: 30]

July 19, 2010 - 3:08 pm

Limited Recourse – thank you for your comment. I am certainly hoping to achieve a long term goal to accumulate assets and if this means short term losses than so be it, as long as the initial structure is set up correctly..

Terry, thank you for directing me to read about the alienation of PSI rule and in doing so also looked at the general anti-avoidance rules. I think I fall into the category of a personal service business and will not be able to divert my income into the trust without breaking the anti-avoidance rules. I work as a medical practitioner and can elect to be paid as a employee or through my ABN. If someone sues even if I was earning income through a Company B (with myself as the director) I would anticipate the person will sue the company as well as myself personally. So that’s why I wasn’t sure how setting up my earnings through a company entity would offer more asset protection.

I have also read your comments in the threads about family trusts. I think I may have come up with a loan structure based on your advice but not sure if I have understood everything correctly:

We are based in Victoria. Currently my husband and I own a PPOR worth 900,000. We have a P+I loan for 600,000 with an offset account that contains 100,000. Right now we have only paid off about 20,000 of our loan – 580,000 outstanding. Our combined income is 160,000. No kids.

So, we have just leased out our PPOR at 600/week because we will be housesitting for our parents for at least 1-2 years.

We have also paid a deposit for an off the plan apartment in Victoria which will be finished next year. The purchase price is 450,000. We anticipate rental income to be 400/week. The apartment is intended to be our first investment property, and this has been purchased under a family trust – with a company acting as trustees and us being the directors.

The issue is that with the family trust there is no negative gearing. So in order to minimise loss in the trust (which is not tax deductible) my understanding is to ensure the loan repayments for the investment property either equal or exceed the rental income (positive gear).

1. For the PPOR – Change the PPOR P+I loan to interest only loan and maximise the loan to 80% of = approx. extra 140,000 (0.8×900,000 – 580,000) in loan funds. Although the interest is higher with this IO loan of 720,000 – it can be negatively geared against our income given we are renting it out for 600/week.

2. For the Investment Property in the family trust – Get an IO+offset loan, for 80% of the property ie. 360,000. The 20% remainder will come from the extra 140,000+100,000 existing in the bank. Everything that is left (roughly 240,000-45000= 195,000)is put into the offset account for the investment property, so that in fact we will be paying interest on 195,000 not the full 360,000. This will ensure that we are breaking even and in fact, base on 8% interest rates may even mean some positive gearing..

I hope I am on the right track but please point out any deficiencies..

Thanks bb8