[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

August 5, 2009 - 12:07 pm

Agreed. The deductibility of an outgoing is wholly dependent on the purpose for which the outgoing was incurred.  Therefore, the interest incurred on interest that is attributable to a loan originally taken out for an income producing purpose is generally tax-deductible. 

Dan42 is right though – if the sole or dominant purpose of letting the first lot interest be capitalised is to obtain a tax deduction on the second lot of interest, it could be argued that the second lot of interest was incurred for the purpose of obtaining a tax benefit.  It follows that in the absence of an income producing purpose, the second lot of interest will not be tax-deductible. 

Practically though, it shouldn't be difficult to argue otherwise.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

August 4, 2009 - 8:35 am

Terryw wrote:

eddiec wrote:

Terryw wrote:

If may be difficult to borrow the money in your own name unless you use your own property as security. It is difficult to borrow in your name if the company is the owner as this will be 3rd party lending.

But, assuming you can, and you charge your trust more than you are paying, then you will be making a profit and diverting money out of the trust into your personal income. So you pay more tax

If you charge your trust less, then you probably cannot justify the claiming of interest as it is not commercial – you are making a loss. And if your trust is a discretionary trust there is no guarantee you will get any return from the trust in the form of a distribution so you probably could not claim the interest at all. This is the problem with claiming interest under hybrid trusts.

Agreed with most of this, Terry. However, my view is that you can on-lend money to a discretionary trust and get a tax-deduction for the interest on the loan you drew down from the bank in the first instance, provided that the trust pays you interest on the on-lent funds.  The nexus that gives rise to the deduction in your hands, in this circumstance, is the derivation of interest income by you on-lending the funds you obtained from the bank to the trust.  This is in contrast to the situation where you borrow to buy units (fixed entitlement) in a unit trust, which is one of the issues with certain hybrid trusts.

I do agree that third party borrowing is harder these days.  Having said that, my bank did that for me recently without too much hassles.  If the issue is the corporate trustee, perhaps use an individual trustee who is also the borrower. 

Also agree with you that there is no point charging more interest to the trust because the amount by which the interest paid by the trust to you exceeds the interest payable by you to the bank will only give rise to tax in your hands.

Incidentally, there is no point negative gearing in a trust unless the trust derives other income.  Otherwise, the net loss is trapped within the trust until the trust derives income in future, if any, to recoup the carried forward tax losses.

Eddie
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Hi Eddie

Thanks for that. I agree, but ….

If the trust borrows money from an individual the trust would pay interest and the individual will need to declare this as income. So the net result for the individual is + – = 0 and it is the trust that gets the deductions of interest. This is assuming the interest rate is the same for the person borrowing from the bank and the amount charged to the trust.

If the individual was to borrow at, say, 5% and lend to  the trust at 2% the individual will make a 3% loss and this could enable the individual to lose income and reduce tax. But to be able to claim a loss there must be a commercial prospect of obtaining a profit. With a discretionary trust there is no guarantee any one beneficiary would get a distribution (because it is at the trustee's discretion) so the situation is not commercial and the ATO wouldn't allow the deductions.

What do you think?

Thanks

Agreed, Terry, although in practice, we will always on-charge the interest at exactly the same rate. 

If the individual intentionally creates a loss by way of differential interest rates as you described, the interest attributable to the interest rate difference will be taken to have a non-income producing purpose (the purpose is to obtain a tax benefit), which will not be tax-deductible.  In other words, I think we agree on the outcome, albeit we got there via different ways.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

August 3, 2009 - 3:06 pm

Terryw wrote:

If may be difficult to borrow the money in your own name unless you use your own property as security. It is difficult to borrow in your name if the company is the owner as this will be 3rd party lending.

But, assuming you can, and you charge your trust more than you are paying, then you will be making a profit and diverting money out of the trust into your personal income. So you pay more tax

If you charge your trust less, then you probably cannot justify the claiming of interest as it is not commercial – you are making a loss. And if your trust is a discretionary trust there is no guarantee you will get any return from the trust in the form of a distribution so you probably could not claim the interest at all. This is the problem with claiming interest under hybrid trusts.

Agreed with most of this, Terry. However, my view is that you can on-lend money to a discretionary trust and get a tax-deduction for the interest on the loan you drew down from the bank in the first instance, provided that the trust pays you interest on the on-lent funds.  The nexus that gives rise to the deduction in your hands, in this circumstance, is the derivation of interest income by you on-lending the funds you obtained from the bank to the trust.  This is in contrast to the situation where you borrow to buy units (fixed entitlement) in a unit trust, which is one of the issues with certain hybrid trusts.

I do agree that third party borrowing is harder these days.  Having said that, my bank did that for me recently without too much hassles.  If the issue is the corporate trustee, perhaps use an individual trustee who is also the borrower. 

Also agree with you that there is no point charging more interest to the trust because the amount by which the interest paid by the trust to you exceeds the interest payable by you to the bank will only give rise to tax in your hands.

Incidentally, there is no point negative gearing in a trust unless the trust derives other income.  Otherwise, the net loss is trapped within the trust until the trust derives income in future, if any, to recoup the carried forward tax losses.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

July 11, 2009 - 7:47 am

Terryw wrote:

hi CRJ

I think I recall hearing something about that now – will look into it

For the 50% bonus the asset needs to be over $1,000 for small businesses and to be classed as a small business the turn over needs to be less than $2mil.

That "double dipping" thing was a thing of the past, Terry.  It was sanctioned by TD93/145 for years but someone in Treasury wised up. Damn.

In relation to the investment allowance, I think the employer company can claim the 50% additional deduction, provided it was the employer who incurred the expenditure (eg, the invoice should be in the employer's name) and the employer is a small business entity. 

If the employer merely reimburses an employee who incurred the expenditure in the first instance, I am not entirely convinced that the allowance will apply because the reimbursement may have recharacterised the nature of the outgoing.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

April 14, 2009 - 11:38 pm

navyboy wrote:

hello all,
just wanting to clarify a point
if you purchase a PPOR and happen to subdivide it, the sale of the new block has CGT with it. Yes?
But what if you live in the house, subdivide, sell the house you live in ( CGT exempt) whilst building on the new block. which will become your PPOR once complete.
will this help someone avoid CGT whilst making a profit and having a nic new PPOR?

sorry if it sounds a little twisted but i have my eye on a property atm which this could apply to ( If it works)

welshy

This is theoretically correct.  You generally have 6 months to treat both properties (the one with the house on it and the new block on which you are building) as your tax-free main residence, subject to certain timing conditions.  You need to satisfy yourself that you qualify – the law is in section 118-140 of the Income Tax Assessment Act 1997 (alternatively, speak to your accountant). 

On the other side of the coin, if you have always had the intention to profit from executing the arrangement, there is a risk that the transaction may be treated as a one-off profitmaking undertaking, which means that the entire gain will be taxed as normal income, rather than CGT.  In which case, the main residence exemption will not be relevant. 

Again, I recommend that you speak to your accountant to ensure that you are comfortable with the tax implications before proceeding.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

April 14, 2009 - 11:23 pm

Terryw wrote:

if the renos were done to improve the house that you are going to be making rental income out of, then the interest should be deductible.

I agree with Terry – the interest on the loan in relation to the renovations will become tax-deductible when the property becomes available for rent.  Should also see if you could claim the capital works deduction in respect of the capital expenditure incurred on the renos. 

For future CGT purposes – you are taken to have acquired the property at its market value when it becomes a rental property.  In other words, any value increase in the property from that time to when you sell may attract future CGT.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

March 30, 2009 - 8:22 am

Be mindful though that transferring the assets from the existing company to a new trust may give rise to income tax (eg, CGT) and stamp duty. 

To manage the income tax and/or stamp duty, consider setting up a holding company a unit trust and form a tax consolidated group.  Once consolidated, any intra-group transactions (eg, transfer of assets) will be disregarded.  There may also be some relief for stamp duty under the corporate restructure exemption – however, I think there will be difficulties in respect of assets transferred to a unit trust.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

March 30, 2009 - 8:15 am

jsawtell wrote:

Hi,

Apologies if this has been posted previously.  Did a quick search.

Question,
I have an investment property which we are breaking the Fixed interest.  Are the Break cost tax deductable as an expense or capitalised until sale?

Thanks
Jason

Hi Jason

I believe the "breaking cost" is usually characterised as "penalty interest".  It is very rare for interest to be treated as a capital outgoing.  Provided that the property for which the loan was drawn down is available for rent, my view is that the penalty interest will be fully tax deductible.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

March 8, 2009 - 10:56 pm

Terryw wrote:

Why wouldn't it? Most trust deeds allow a trust to pay an income to a trustee for managing the affairs of the trust. Most trusts are also allowed to run a business and pay wages as well. They are usually very flexible.

But why pay a wage? Why not just pay a distribution instead. If you pay a wage then you need to worry about superannuation and tax.

Good point, Terry. The only instances I have seen wages being paid was when the trust consisted of several big personalities in families and everyone wanted to deal with the DT at arm's length, so the "active manager" who looked after the trust was treated as an employee under a bona fide employment arrangement.  Also, paying wages may come in handy if the person is an outsider of the family for the purpose of the Family Trust Election and any distribution to whom may have triggered the Family Trust Distribution Tax. 

But you're right, it's just easier to pay a distribution in 99% of the cases.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

March 5, 2009 - 7:01 am

perpetrator wrote:

Hello All,

Can anyone recommend a reliable property law expert that can advise on a JV agreement between a land owner and a property developer please? Prefer Brisbane based, however, will travel to the Gold Coast if required.

Please send through an email if you are still looking.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

March 3, 2009 - 11:11 pm

Agreed – provided that the trust deed does not prohibit the arrangement.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 25, 2009 - 12:56 am

No, you don't have to move back in.  The law says as long as it was your main residence before you moved out, you have up to 6 years to continue treating it as your main residence even though you are renting the property out, provided that you don't own another main residence elsewhere.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 23, 2009 - 5:16 am

There is a strategy I am aware of that protects the equity of a property in an individual's name.  However, you will still need to use a trust on the side. 

The property will be treated for income tax purposes as if it is owned by the individual, not the trust.  If you go travelling, the potential tax implications will depend on whether you have ceased your Australian tax residency, whether you earn other income while you are overseas, etc, etc. 

All these issues are starting to get quite complex and I encourage you to see your accountant to resolve. 

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 22, 2009 - 11:09 pm

duckster wrote:

Apparently it depends on when prior to 1 July 2008
deductible expenses on an overseas property can only be deducted against foreign rental income or other foreign modified passive income such as royalties and dividends.

After 1 July 2008
http://www.ato.gov.au/individuals/content.asp?doc=/Content/00107951.htm&page=5&H5
It can be claimed against domestic income

I do not know what the term domestic income means,
 an accountant would know what this actually refers to.

Actually, before 1/7/2008, the interest would have been deductible against domestic income but yes, from 1/7/2008, the entire net loss can be used to offset domestic income.

The term "domestic income" refers to income sourced in Australia.  They have to differentiate it from "assessable income" because the worldwide income, as opposed to just domestic income, of Australian tax residents is assessable. 

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 18, 2009 - 11:21 pm

Don't recommend artificially inflating the rent – the Commissioner can apply the general anti-avoidance provisions in Part IVA to unravel the arrangement.  On top of that, they can hit you with penalties up to almost double the tax shortfall.  Definitely worth it in my view. 

For future planning, you need to ask yourself: Am I doing this with the dominant purpose of obtaining a tax benefit? If so, Part IVA can arguably apply.  There is of course of a lot of grey in many circumstances – that is why there are so many court cases between the Commissioner and taxpayers.

The CGT main residence exemption will be relevant if you intend to hold for the medium to long term.  As a rule of thumb, if the expected future capital gain is material, I generally advise people to buy in their own name and use a separate strategy to protect the equity.  If capital gain is not an issue, it is probably okay to buy in a trust and get the trust to rent you the property under market rates.  But this will only provide a tax benefit if the trust derives other income to effectively negative gear against the property.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 17, 2009 - 2:52 pm

Yes, the arrangement is legal but there are two key issues:

1. As Terry pointed out, the trust must have enough income to utilise the negative gearing loss.  Otherwise, any resulting tax loss will be trapped in the trust.

2. The future sale of the property will not be sheltered by the main residence exemption for CGT purposes.  If an individual owns and lives in a property, it will be tax-free when sold.  However, the exemption does not apply if a trust owns the property.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 12, 2009 - 2:24 pm

Sounds fine from a tax perspective because no cash actually moves in and out of the actual investment loans, which means that any interest incurred on the loans will remain tax-deductible, albeit the interest incurred may be reduced when there is money in the offset account.  This is so regardless of whether the spare money gets put into you or your wife's or both of you offset accounts.  As long as you don't actually touch the loan accounts, your proposal sounds ok for tax purposes.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 11, 2009 - 11:00 pm

It will be dictated by the contractual terms of the sale.  Unless you carry on a property business or you are doing this as a one-off profit-making undertaking, any profit on sale will likely be taxed under CGT.  If so, the date of the contract is when the sale is deemed to have occurred.  Because of this, it may be worthwhile to use an option to structure the transaction to defer the taxing point.  The purchaser is protected by the option because they can be given the right to exercise.  Also, if the option is exercised after 12 months, you may then be entitled to the 50% CGT discount, which you wouldn't qualify at the moment because you have only owned the property for 3 months.

Best to get a property savvy accountant involved before you sign anything for the sale.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 5, 2009 - 5:34 am

freelance2020 wrote:

Hi Everyone,

I've heard about this method a few years back called a 1031 Exchange in America. The following is a brief outline:

Overview: Real estate owners or investors expecting to acquire property subsequent to the sale of existing property can indefinitely defer income taxes by utilizing a 1031 exchange. In a typical property sale, an owner has to pay taxes on any gain. In a properly executed Section 1031 exchange, the realized tax is deferred. These transactions are sanctioned under Section 1031 of the Internal Revenue Code and are often referred to as "1031 exchanges," "Like-kind exchanges" or "Tax-deferred exchanges".

Source: http://jobfunctions.bnet.com/abstract.aspx?kw=1031&docid=346982

Is this applicable in Australia?

Thanks!

There are certain "roll-overs" in the tax law, which provides for a similar tax outcome but the roll-overs are limited to very specific circumstance, eg, a small business selling its premises and buying a replacement property, matrimonial breakdown, etc.  In general, these roll-overs are not available to every day buy/sell transactions between arm's length parties.

Eddie
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[eddiecMember@eddiecJoin Date: 2004Post Count: 113]

February 5, 2009 - 3:26 am

If it is just business structuring, a tax savvy accountant would do.  If there are specific legal issues that will need to be dealt with, the accountant will refer you to a lawyer anyway.

However, if there are contracts involved, eg, shareholders agreement, contract with third parties, it is best to get a lawyer to review these documents in any event. 

Eddie
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