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January 30, 2005 - 12:49 pm

West Pennant Hills (Sydney)

[betterbizParticipant@betterbizJoin Date: 2003Post Count: 47]

January 28, 2005 - 10:21 am

Originally posted by malik_nikunj:

Thanks for all the help guys,

one more question:
If i take out a personal loan to pay Stamp Duty then would that be tax deductible as well (i mean interest paid on it).

yes.

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January 26, 2005 - 1:27 pm

Originally posted by Brisbane 04:
If you purchase a property for $360000 and borrow

ummmmm Martin. Hate to be picky but Serf said $260k (or do you think that was a typo?)

I wouldn’t have a clue about Rocky prices to spot whether there was a typo by Serf or not although $260k and renting for $390 doesn’t sound right either.

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January 26, 2005 - 1:19 pm

Bird dog … an Americanism

The selling REA is no more than a bird dog for the seller – they just happen to be licensed to act as a sales agent. (In some places you also need to be registered to act as a bird dog – check with the appropriate authorities)

The REA gets paid a fee to sell the property. That commission (fee) is secured by written contract and is paid at settlement.

Let’s say I wanted to buy NZ property.

I tell you what I want. We agree on a fee and when it is payable. You go find it or perhaps you already have the right animal from your research.

Provided I buy the property I then pay you the agreed spotter’s (bird dogging) fee at the agreeed time. That agreed time could be upon exchange of contract, it might be at settlement – it’s whenever you and I agree it is.

How much is that fee? It’s whatever you and I agree it will be.

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January 26, 2005 - 9:14 am

Whether the HDT uses it for income generating purposes or not is (almost) irrelevant

That, I think, is the prime question here (and with the Div7a issue). How little income back to the unit holder (relative to the amount of CG going elsewhere discretionally) might make the ATO question …..

Irrelevant GP, forget all about the capital gains of the HDT and what happens to them – you have invested in INCOME units so the amount of capital gain and who it’s distributed to doesn’t matter. As to how little income is being received before it would otherwise attract the fiscal fiend’s attention?

1. no worries as long as the Deed is adhered to
2. can be zero in the year/s that the HDT makes a (taxable) loss.
3. you credit the ATO with far more analytical nouse than they deserve. They’re not stupid but nor do they have the resources to undertake the analysis that worries you so.
4. the tax return of the HDT says income of $x. The distribution schedule of the return allocates that income to whomever. So long as $x equals distrubted dollars then the HDT pays no tax, AND there is nothing that automatically causes the HDT to pop-up on a report that could either generate a question, and certainly not an audit.
5. heck, there’s nothing in the tax return that even discloses the fact that we’re talking about a HDT. In the eyes of the ATO it is simply a trust lodging a trust tax return.
6. don’t forget that we operate under the self-assessment regime.

At the end of the day, all you need to do is follow the Deed and you won’t have a problem

it is the COMPANY investing in the income units

Yes, in its own name.

GP, break the ‘transaction’ down into layman’s terms. The company is making an INVESTMENT in income units in a HDT. End of story. Hey, think of it as my HDT (it’ll help you see the two legal parties involved here)

It is NOT using/applying it’s money for YOUR benefit and therefore (imnsho) Div7 & 109 do NOT apply. If they don’t apply then you don’t need to worry about their subclauses or the need to meet one of the exemptive fine print issues.

then paying a fully franked dividend to a low income shareholder

Unfortunately I’m the only real shareholder and am on the top tax rate, which is why I’m having all this hassle in the first place [].[/quote]

Then you may want to consider your domestic situation, or alternatively study the beneficiary classes of your HDT a little more closely <g>

Thanks a lot for your detailed response! Much appreciated.

You’re welcome. Let’s see if your paid advice concurs <g>

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January 26, 2005 - 8:33 am

Hi Shelley,

Coast’s advice is good, and as Terry said, don’t forget to factor in the stamp duty on your loan contract.

Another minor charge could be the lender’s loan application fees which are usually non-refundable even if you don’t (need to) proceed with the loan ‘cos the simultaneous settlement you plan on did in fact happen.

And what about your Pest & Building Reports. You may not plan to do them but you’d have to assume that any buyer would. You don’t want them to discover termite damage or structural imperfections that you too should have been aware of before the end of the ‘cooling off’ period of your contract lapses.

If a NSW property have you counted on the new vendor’s tax? (introduced July 2004 from memory).

What about Land Tax? Does it apply in your situation?

Just a question – what makes this property so cheap that you’re considering flipping it? And have you read the current market correctly?

All part of the learning experience I ‘spose.

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January 26, 2005 - 8:12 am

Hi Mark

I’ve never heard of Intertax so I can’t report any good/bad news of them.

At 40% I’d probably have my fingers crossed for a failure ! <g>

Just remember that a guarantee is only as good as the mob giving it.

That being the case I’d want to see their financial statements for the past 3 years together with their tax returns (so that I could make sure that the two agreed).

Is the investment being offered under an ASIC approved prospectus? (or are they keeping the participation offers limited so as to fly under the ASIC radar on publicly offered investments).

Development type finance (without pre-sales) from mainstream lenders, whilst not impossible is not a stroll in the park either – and for good reason. Every man and his dog can produce paperwork that shows fantastic profits from a development project. It’s your job to find out how believable/accurate these projections are.

Unless you either
1. have some experience with developments (and can therefore assess their projects properly), or
2. can afford to lose your investment (cos the guarantee turns out to be worthless).

then whilst I wouldn’t start running just yet, I’d certainly want to do my due diligence properly. And then for the first project at least I’d probably only invest under (2) above until I became more comfortable with them.

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January 26, 2005 - 5:30 am

I didn’t feel you were “attacking” per se, although I could have sworn there was a podium watermark on your post!!!

Sorry, sometimes I appear to be on the soapbox but it’s just my chatty style of writing. It’s as though you were sitting across the table and my verbage is intended for professional clarity, not lecturing.

Besides I’m way too versed to EVER lecture a lady …. their handbags can hurt !!! [baaa]

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January 26, 2005 - 5:07 am

Originally posted by GreatPig:

One thing I’d be interested in your view on, since you have a tax practice, is something Julia brought up on Somersoft.

Then perhaps we should ask Julia to respond? I’m not familiar with her writings and the circumstances behind her comments. However, with that said, let me take your questions as they now stand and in isolation to what Julia may or may not have said. OK?

Are you familiar with hybrid discretionary trusts, and the personal borrowing of money to buy income units in the trust for investing and then claiming the interest as a personal tax deduction?

Yes I am.

Her point there was essentially if capital gains from trust investments were being distributed discretionally rather than back to the unit holder, could the ATO perhaps try and argue that not all of the interest should be deductible since effectively it’s not entirely being used to earn an income for the borrower (in that some of the gains are being discretionally distributed elsewhere)? Specifically she was asking if anyone doing this had been audited to test it.

GP, can I respectfully suggest that you need to separate and straighten out in your own mind just who is borrowing the money and who is doing the investing… they are two distinctly different entities (both legally and for tax purposes)

GP, I don’t see a problem here. YOU have invested in income units which (ordinarily, depending on the Deed) do not attract any sharing of capital gains. The purpose test (for deductibility of the interest) is applied against you, NOT the trust.

In your scenario above, the HDT has NOT borrowed. It has issued income units (to you).

Whether the HDT uses it for income generating purposes or not is (almost) irrelevant, although I wouldn’t like to see there being NO income generated back to the income unit holders. Why not? Because you’d could hardly argue your case for deductibility if there was NO LIKELIHOOD of you receiving a +’ve income stream from the HDT income units at some stage in the future. That is not to say that there MUST be an INCOME payout by the HDT EVERY year <g>

I’m looking at a similar issue with div7a, where I have funds in a company and want it to buy income units in an HDT with capital gains in the trust being distributed elsewhere (no borrowings though). I’m wondering whether similar to above, the ATO could argue that for the percentage of total returns being distributed elsewhere as capital gains, that percentage of the company funds would fall under div7a since they’re effectively being used to generate returns for individuals rather than the company – even though the company would still receive all trust income as the units entitled it to.

Firstly, the income/captial MIX of earnings by the HDT is irrelevant. If the Deed is properly drawn, then the income units and the capital units are completely separate beasts, each having distinct rights as to income, capital & capital profits. Indeed you can often find some units in a HDT that are a blend of the two primary types of units – ie a hybrid unit in a HDT – a sorter double whammy if you like. These ‘mixed units’ were very popular back in the 80’s with unlisted property trusts. But that’s another topic. However it is a reminder to be completely aufait with your Trust Deed and what it allows/doesn’t allow.

Now, back to your question…..

Let me be sure that I understand the circumstances – it is the COMPANY investing in the income units and not YOU using the company funds to invest in the income units in YOUR NAME?

If it is the latter circumstance (units in your name having used company funds) then yes you would have a Div7 problem and therefore should make a dividend distribution first.

If it is the former case (ie the company investing in its name) then, I don’t see a Div7 problem. Why? Because there has been no loan to you which might otherwise be contrued, or deemed (under DIV7) to be a dividend to you.

Just another thought…. on the basis that the (same) company was a discretionary beneficiary under the same HT, it might be worthwhile running the numbers to see whether you’d be better off:
1. distributing some (unadjusted – for the 50% exemption) capital gain.
2. paying 30% company tax rate (as opposed to the 24.5% personal tax rate)
3. then paying a fully franked dividend to a low income shareholder

…. just something to cogitate over your rice bubbles.

I am getting professional advice on this, but I’d still be interested in your opinion.

Well there you have it GP

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January 25, 2005 - 2:18 pm

Hey Jo, I’m not in attack mode …. ‘onest injun [biggrin] (Ferangii are gentle creatures now!!!)

I’ve worked in my own tax practice for almost as long as you have been investing. Not to mention the obligatory few years working in another practice before I cut loose and set sail on my own.

It’s been fun but doing and overseeing approx 600 investor-style returns a year has its moments.

Maybe it’s time for a seachange.

Prolly time I joined the Grey Army or Jims Dogwash

As for Keating as Treasurer…. yes he did kill it for the property investors for a few years, but he also gave us the dividend imputation system.

I look forward to the year that I pay $1m in tax.

Just imagine what I would have earned if I could get the bill down to a mill [baaa]

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January 25, 2005 - 10:01 am

Hi Nick,

The interest on all the loans you outlined would be tax deductible against the income generated by the property.

The taxman applies what he calls the ‘purpose test’. If the purpose of the borrowing is to generate taxable income then the interest associated with that borrowing IS tax deductible.

You’d need to be careful apportioning the interest on any mixed-purpose loan. eg the credit card funding – so that you were only claiming that portion of interest that related to the income generating purpose. File your calculations along with your other tax working papers for that year with your file copy of the return.

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January 25, 2005 - 9:42 am

Originally posted by Monopoly:

All in all, ANY loss (property or shares) is best offset against your income.

Ahhhhh, but to achieve that you’d have to demonstrate that you are IN THE BUSINESS, and hence the ‘loss’ is a trading loss.

This can be a two-edged sword. Once you are (successfully)accepted as being in business, you can’t then argue for a CGT position (on the same type of activity) in future years.

Sometimes it might be better, after considering your options, to carry-forward the capital loss.

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January 25, 2005 - 9:13 am

Hi Jo & GreatPig,

Jo, sorry to have confused you. As GreatPig correctly picked up my ball and ran with it … all I was saying is that ‘income tax rules’ as opposed to ‘CGT’ rules would apply in Gumshoe’s case.

Assuming there is a gain made, that gain will always be taxed unless it meets the (only) current EXEMPTION rule – that rule being the PPOR exemption.

As GreatPig suggested, intent is a nebulous thing to definitely pin down. It was correctly suggested that it would be difficult to claim (tho not entirely impossible) that you had invested for CG when you’re turning over 6 properties a year.

Would you believe that a self employed builder would have a devil’s job to convince the ATO that s/he had bought for CG and NOT with an income purpose?

One’s intent at the start of doing something IS VERY IMPORTANT in tax land. As is being able to demonstrate WHY/HOW that ‘intention’ changed along the way perhaps.

Monopoly, talk to any tax professional worth their salt, and they will tell you just what a turning point “intent” can be. If nothing else it’s often the cornerstone for arguing for/against the application of Part IVA of the Tax Act (as it is more commonly known as). Intent and dominant purpose (for doing something, or not doing something) can sink a case.

When the 50% exemption rules for CGT were released (in their draft form)many of the better tax commentators predicted mass tax evasion through people claiming that the 50% rules applied to them.

As time goes by, ATO audit activity in this area will increase. The ATO (in the 2004 tax year and beyond) is already focussed on property investors and the liklihood that investors will receive firstly the standard questionnaire followed by a closer audit is now dramatically increased.

If you happened to have disposed of a property (in the year that you are being audited on) AND have claimed the 50% CGT exemption, you can bet your bottom dollar that the investor’s INTENT will be examined very closely.

The larger your (property) portfolio the more likely it is that you will have to defend the position that you are NOT conducting a BUSINESS. Because if you are (in the business of) then as GreatPig rightly said – “all your gains become taxable”. Now whether you want to call those ‘gains’ “CGT with no 50% exemption” or income is a case of semantics (notwothstanding that the money you made would be reported in a different section of your tax return).

Contact the ATO and ask them for their little booklet – “Am I In Business”. Have a read of that then tell me – At What Point Will A Property Investor Be Running A Business?

Monopoly, I’d rather throw a triple, go to jail and wait out my 3 turns. You think Mayfair is the best property on the board? THAT’s where the taxman lurks – just before you look like getting a payout for passing go. He’ll either slug you with the rent if you step foot on his property or he slugs you with the $200 tax bill instead.
[baaa]

p.s. Hey, if you want a really great debate, let’s talk about the (effective) removal of allowing a deduction for negatively geared properties. Mr Keating (when he was our illustrious Treasurer) did it from approx 1983 thru 1985 tax years inclusive.

Over the past 3-4 years they’ve done the same thing to small businesses that make losses.They can no longer offset those losses against other income.

IMNSHO it isn’t a great leap to extend those tax rules to our property portfolios. Heck they could even do it on a property by property basis and not allow the aggregation of a property portfolio where some are +’ve and others are -‘ve.

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January 24, 2005 - 2:28 pm

Hi Adam,

What you propose is not ILLEGAL (as Terry said) however as CRJ correctly points out the interest you then pay is not deductible because you don’t meet the ‘purpose test’.

Selling the property to your Trust will trigger Stamp Duty but provided it was your PPOR then it will not trigger CGT.

The trust however would have as its Cost Base the purchase price that it paid you for the property (which needs to be its true market value or you’ll have Stamp Duty issues to explain).

When the trust disposes of the property in the future then there will be a CGT position to consider and to cope with.

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January 24, 2005 - 2:19 pm

Hi CRJ (& Gumshoe)

Thank you for the summary on the issue.

One issue that was not mentioned, and one that Gumshoe needs to be careful of, is that of the investor’s intent when the asset (in this case property) was purchased.

In Gumshoe’s case the stated intent is to settle on the land, build a dwelling and then sell it for gain.

This places it clearly in the ‘income’ bracket and NOT the ‘capital gains’ bracket. This being the case Gumshoe it wouldn’t matter if you held the property for 5 years after it’s completion (renting it out in the meantime), the original INTENT was one of profit.

You may want to review and perhaps document your intentions [biggrin]

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January 24, 2005 - 1:36 pm

Originally posted by Lucifer_au:

If you are buying +CF properties a trust. (15% discount on CGT, plus adds extra layer of protection from lawsuits)
If you are buying neg geared prop. a hybrid trust.(see above + can still offset tax losses to other personal income).

If you will be buying allot of CF+ or neg. geared properties use a corporate trustee (a non-trading company runs the trust, you own shares in the company). This will add a further layer of asset protection.

If you are doing a wrap you cam use either a company or a trust (as the tax situation is the same for both entities (i.e. no CGT due to “emerging profits + trading stock”, rather all profits are seen as income) .

Hi Lucifer

I think you’re getting a Discretionary Trust mixed up with a Superannuation Trust insofar as the 15% CGT discount is concerned.

Also a Hybrid Trust does not allow you to mix (offset) personal income with the Trust Loss – unless you mean that the borrowing is outside the Hybrid and hence the Trust is +’ive income at the point of distribution.

I also wouldn’t be too concerned with the ‘income tainting’ issue, and as for tenant claims – that’s what you have insurance for.

There are also tax differences between a company and a trust. Your statement about doing a wrap thru either structure and not making a difference (presumably in the tax result) has me confused.

I agree that the profits (from a wrap) are most likely to be income, however it would be unusual for all the trust beneficiaries to have (exactly) a 30% average tax rate and therefore have the same tax consequence as the company.

Can you shed a little more light on what I’ve missed in what you said?

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January 23, 2005 - 12:38 am

Hi Julia,

I agree with your sentiments.

I’ve been a CPA long enuff to have experienced 2 or 3 attempts to merge the two bodies – each attempt being thwarted by the CA’s desire to protect the sanctity of their precious Royal Charter.

And yes, we are the larger of the two accounting bodies and that brings with it the advantages you mention.

Unfortunately the majority of our members are in commercial accounting roles as opposed to public practice (as you and I are).

My personal belief (although this is not the forum to debate this issue) is that you and I (and those like us that share the public accounting stage with our CA brethren) should have been hived off to the CA 20 years ago. We would then have had an accounting body that specialised in public practice and another that focussed on the needs of the commercial accountant – which I’m sure you’d agree the needs of which are quite different.

I don’t think the merger will ever happen and that the fragmentation will continue to divide the industry – to the detriment of our public clients.

I DO KNOW that any future overtures will NOT come from the CPA’s

[betterbizParticipant@betterbizJoin Date: 2003Post Count: 47]

January 23, 2005 - 12:00 am

Hi Rick,

Thanks for the detailed account – very informative.

I wasn’t having a shot at you btw. I was simply trying to help Sansue evaluate what s/he would want as a return on their money if they were the silent investor instead of the active partner in the deal.

Based on your information such an investor would need in the vicinity of 19% per year, let’s call it 20% for ease of calculation. Over 3 years then you’d be paying them back $60,000 on top of their $100k.

Given the 3 year timeframe (that Sansue suggested) I’d be wanting a whole lot more than 19% AND I’d want the agreed rate to be a compund rate.

Why? Because investing for a 3 year period is (in my view) a helluva lot riskier than investing for one year.

Your project was well under way when you went to the private investment market for the funds to complete. This reduced the risk profile of YOUR project.

As you said, each project is different and must be assessed on its own merits.

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January 22, 2005 - 12:22 pm

I belong to a property investment ‘club’ which says that all SMSFs are not equal, and charges members $1750 to set one up that is supposed to be able to do everything. Do you think that’s ridiculously expensive, or is it within the ballpark?

Hi Cruiser,

Interestingly the most flexible funds ARE equal. You need to be very careful of being too cute with the Trust Deed.

The better funds are established with reasonably simple Deeds that aren’t going to need reviewing/rewriting every few years.

As to whether your price is reasonable would depend on what that included

1. a corporate trustee or not?
2. all the ATO registrations?
3. some training for you on your responsibilities as a Trustee and how to operate the beast (the SMSF)?
4. whether a SMSF was really warranted for what you wanted to do and therefore your $ were totally wasted? (I’ve seen these heavily supported by my brethren accountants when they are not necessary/appropriate for the circumstances)

[betterbizParticipant@betterbizJoin Date: 2003Post Count: 47]

January 22, 2005 - 12:11 pm

Originally posted by garrymartin18120590:

Derek
You seem to know a lot of accountants, and recommendation for the Newcastle area.
Thanks Garry

Garry, wouldn’t you like a tax deductible trip to Sydney every so often ?

Perhaps your new accountant can only see you on Friday afternoons [biggrin]

or perhaps first thing on a Monday morning that would necessitate you staying in a motel overnight on the Sunday night after driving down on Sunday morning?

What you do with the rest of the time you’re in Sydney is of no interest to the taxman. [baaa]