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

February 4, 2009 - 3:48 am

mantismm wrote:

Hi everyone,

I purchased an vacant unimproved lot adjacent to my primary residence this year. I may sell it one day for profit, on which I would certainly pay CGT. My question is: can I deduct the legal and title fees I incurred in buying the property, since it is an investment?

Thanks,
Kevin

No – the costs will be included in the cost base of the land for CGT purposes.  If you build on it and rent out the property, the costs remain non-deductible.  You effectively get a "deduction" when the land is eventually sold.

However, depending on the size of the block, you may be able to incorporate the land into your main residence, which would mean its future sale will be tax-free (still no tax deduction for the legals and title search though).  Land up to 2 hectares (including your house) can be treated as your tax-free main residence.

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

February 2, 2009 - 6:33 am

You mentioned you have a current PPOR, so the old PPOR will be subject to CGT.  The CGT will be apportioned, however, to the CGT attributable to from the time you bought the new place to when you sell, relative to the total ownership period of the property.  Also, you will most probably be entitled to the 50% CGT discount. 

Yes, that will be a good way of "refinancing" to maximise your tax-deductible debt.  The extent of the benefit will depend on your spouse's marginal tax rate though.  Don't forget once you shifted the rental property to your spouse, you will no longer benefit from any negative gearing benefits because the property would no longer be in your own name.

Eddie
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January 29, 2009 - 7:59 am

Hi Thomas

Email me. In any case, I think hybrid trusts are probably not worth the effort relative to the risks and complexities inherent in them.

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

January 29, 2009 - 2:03 am

There are "standard" trusts that are more or less off the shelf and there are more specialised trusts where the deed is specifically drafted for a particular purpose. What exactly are you after? Also, is this just a private trust for your family or say a unit trust for multiple investors?

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

January 28, 2009 - 11:00 pm

What is the approximate dollar value of the property?

Eddie
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January 28, 2009 - 10:57 pm

PS – even so, I would still check with FIRB to see if a discretionary trust is acceptable on an anonymous basis.  Not familiar with the FIRB law myself but there are far reaching tracing provisions in the tax law that would drag related entities, including discretionary trusts, into various rules.  I would imagine FIRB wouldn't be too dissimilar.

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

January 28, 2009 - 10:54 pm

I agree.  Under a bare trust, you retain beneficial interest in the property and I doubt FIRB would permit that.  On the other hand, if you are using a discretionary trust under which there is generally no presently entitled beneficiary at any one time (unless the trustee makes a distribution of corpus), it's an entirely different proposition from the bare trust scenario.

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

January 28, 2009 - 11:45 am

The difference in GST treatment between the two scenarios is due to the concept of "enterprise" in the GST Act.

If a trust buys land, builds a house on it, and sells it to someone (whether related or otherwise), the series of activities will likely be treated as an "enterprise" under section 9-20 of the GST Act.  One of the key criteria for GST to apply to a taxable supply is the existence of an enterprise. 

On the other hand, if the three of you buy land, build a house on it for you to live in, the undertaking will not likely amount to an enterprise, which means GST will not apply.   

At law, the tax legislation treats the trust and you (as individuals) as separate tax entities (each entity is treated as if it has a mind and intent of its own).  Further, if you as individuals buy land, build home, and but do not sell the property, there is no supply.  GST is only payable where there is a supply.

Another potential area to investigate is – would the activities undertaken by the trust constitute an enterprise? It's a gray area.  There could well be scope to launch a reasonably arguable position that there is no enterprise.  If it is cost beneficial, you should perhaps consider lodging a private ruling application with the ATO but that probably wouldn't be helpful if you have time pressure to buy the land.  This is where an accountant's advice may be necessary – but only if it is cost beneficial to seek advice.

Your summary of the implications is close but not technically correct.  As I mentioned before, even if you buy the land as tenants in common under a single title, the subsequent subdivision of the single title into three separate titles may give rise to CGT.  Also, my point about no CGT discount is not time dependent – if you look at the trust as a separate entity from yourselves and its activities involve buying land, developing it, and selling it for a profit, then the transaction is characterised revenue in nature, rather than capital.  If the sale by the trust to the three of you is revenue in nature, CGT discount does not apply (the discount only applies to capital transactions). Other than that, you are very warm.

Eddie
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January 28, 2009 - 2:04 am

I agree.  You will be taken as if you have on-lent your half of the loan proceeds to your wife to enable her to buy the property.  In your tax return, you need to show an interest income and interest deduction of the same amount (being the interest charged by the bank on your half of the loan).  Your wife will then claim the interest on the entire joint loan.

Eddie
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January 28, 2009 - 1:13 am

Provided that the corporate trustee was incorporated in Australia, the trust will be an Australian tax resident.  This is so regardless of whether the shareholders of the corporate trustee are Australian tax residents or otherwise. 

Not sure about the FIRB requirements either but if you are the appointor of the trust, you may substitute the trustee at will, which gives you effective control of the trust.  Also, I would check with FIRB if you could be a shareholder of the corporate trustee. 

Eddie
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January 27, 2009 - 12:24 pm

Hi all

 

Happy Australia Day – well, for yesterday anyway.

Yes, I agree this is confusing – keeping up with the thread has been exhausting enough!

A couple of points as I go through the comments:

 

Buy through trust

 

1. Similar to Terry, I don't think having a related trust buy a property and then having you three buying off the trust will necessarily disqualify you from the grant.  Under the disqualifying arrangement provisions, the relevant rule to look out for is whether you entered into the arrangement with the sole or main purpose of getting the grant, rather than buying a home.  Given the nature of the land – the trust is akin to an intermediary, which enables the land to be subdivided, thereby allowing you three to purchase separate homes. 

2. Normally, setting up a two tier arrangement like your suggestion would entail double duty but given the first home concession duty rates, I don't think the secondary sale of the separate titles to the three of you will entail duty, provided that the market value of each property on sale is less than $550K.  In other words, there will only be one lot of duty, being the duty payable when the trust buys the land.

3. Terry's rough estimate of the GST is close.  However, the GST could be a tad lower if the trust can buy the land under the "margin scheme".  To qualify, the trust needs to have bought the land from a vendor who either isn't registered or required to be registered for GST or who is selling the land under the margin scheme.  The GST in that scenario may be:

GST on sale: $1.2M – $400K (cost of land) / 11 = $73K.
GST claimable on development costs: ($100K + $300K) / 11 = $36K
Net GST payable = $73K – $36K = $37K. 

Not exactly earth shattering compared with Terry's figure of $40K.

4. I suspect the trust will not qualify for the 50% CGT discount because it is likely that it will be taken to be carrying on a one-off profitmaking undertaking, regardless of the period of ownership of the property by the trust.  Therefore, the CGT payable will be more like $60K each.  Ouch.

5. I sympathise with your comment that the government is seeing the trust and yourselves as different people, even though in reality, all you are all trying to do is to buy a home.  However, you need the same rationale to qualify for the grant.  In other words, it is difficult to "have your cake and eat it too".

 

6. In summary, this is not a good result – you pay GST and income tax of $37K + (3 x $60K) = $217K to qualify for the grant of $14K x 3 = $42K.

 

Buy as individuals

 

7. If you buy the land together as tenants in common with a view of building a home on it, you will qualify for $21K in aggregate.  There will not be any GST issue.

 

8. However, there may potentially be CGT issues when you split the title between the three of you.  That is because, for CGT purpose, each of you may be taken as if you have disposed of two thirds of your one third interest in the land and acquired a third interest from the third interest held by each of the other two parties each (I know – very confusing!).  The CGT liability will depend on the value of the property, relative to its cost base, at the time of the separation of interest.

 

Potential Solution

 

9. Given the above issues, in my view, I would try to negotiate with the vendor (eg, pay them more) to encourage them to subdivide the land into three separate titles before your purchase.  That way, each of you may be entitled to $21K without any GST or CGT issues.

 

10. If you head down this path, you need a good lawyer to draw up the special conditions in the contract, eg, you may need to incorporate an option, which will be exercised upon the subdivision of the land, etc. 

 

Disclaimer time – as usual, the above doesn't constitute formal advice, blah, blah, blah …. Really encourage you to see an accountant to firm up the advice.  Good luck!

 

Eddie

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January 22, 2009 - 12:51 am

Linar wrote:

I have a CGT question

If I have a property in a trust that has incurred several losses over the years, mainly through negatively gearing, can see a property in that trust for a profit and offset any CGT against the losses?  Or can I only offset capital gains against capital losses?

Cheers

K

Also need to ensure that the trust has made a Family Trust Election (assuming this is a DT) at the relevant time before the carried forward losses, whether revenue or capital, can be recouped.

Eddie
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January 20, 2009 - 3:45 am

Terryw wrote:

Yes, you can reborrow the $10k. The interest would be attributed to the new property. If you are using a trust, then you would lend the trust the money and charge it the same interest as your loan and the trust gets to claim the interest in its tax return.

Speaking like an accountant.  Well said, Terry.

I do generally recommend a separate loan account for each property if possible because the Rental Schedule in the tax return requires you to show the interest attributable to each specific property.

Eddie
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January 17, 2009 - 3:38 am

When was the book published?

Eddie
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January 16, 2009 - 3:30 pm

Scott No Mates wrote:

Consider setting up your own smsf – salary sacrifice into that and use the funds at some point to purchase an IP.

Set up your own IT company and have it as the contractor – then split your income with the +1.

It may pay to see an accountant/financial planner to discuss strategies applicable to your situation.

Both good ideas.  However, they may not be suitable when further issues are considered:

1. With super, a fund can't easily borrow (as easy as individuals anyway and it is costly under the instalment warrant provisions) – then depending on your age, the money in the fund will be preserved until you turn 60, which may not be attractive if you are relatively young.

2. The IT company will be subject to the "personal services income" rules, which may not be easily circumvented.

Perhaps do it the traditional way – borrow against the equity in your home, buy the IP, and negative gear in your own name.  Having said that, need to consider asset protection if you are susceptible to risks.

I agree, time to see an accountant to tailor a solution for you.  I dare say you wouldn't find too much on the net – specific strategies are usually closely guarded by tax professionals for obvious reasons.

Eddie
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January 14, 2009 - 1:24 am

I am based in Brisbane but this forum is more like a hobby for me than a marketing tool anyway.

Good luck with your investments!

Eddie
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January 13, 2009 - 9:46 am

Thanks for the vote of confidence, Terry! Yes, of course – more than happy to help.

Eddie
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January 13, 2009 - 7:55 am

daniellee wrote:

Hi, Eddiec

The accountant is a CPA, so that helps in this case.

Good to know that an income loss can be offset again capital gains.

One more question: Does making a Family Trust Election have any disadvantages, in terms of limiting who the beneficiaries are? Or it has absolutely no effect what so ever on the Trust as a whole.

Regards
Daniel

Hi Daniel

The issues with making a Family Trust Election are:

1. It is generally irrevocable for a discretionary trust.

2. Once made, the trust cannot distribute outside the "family group".  The term "family group" is specifically defined and is generally restricted to certain generations and degree of blood lineage relative to the nominated "test individual".  If the trust distributes outside the family group, the distribution will be subject to the Family Trust Distribution Tax at the highest marginal tax rate of 46.5%.  Yes, ouch.

Having said that, it is important to make a Family Trust Election to enable the trust to recoup tax losses, pass on imputation credits to beneficiaries, etc. 

These are highly technical but your accountant should be familiar with the rules.

Eddie
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January 12, 2009 - 9:41 am

Terryw wrote:

Thanks again Eddie

My pleasure as always, Terry!

Eddie
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January 12, 2009 - 4:13 am

Or the plumber with a leaky tap at home – speaking of which, I haven't lodged my own tax return for 2008 yet!

Eddie
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