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

November 7, 2008 - 2:32 am

leoau wrote:

If I refinance the investement, and start claiming the increased interest – will ATO ask me what the hell is happening?

As I said it is a positively geared property, and I need to redraw 200K, so, it will be significantly negatively geared one – will ATO start questioning me?
I am probably being naive here, but can I claim that these 200 K are for further property investing, hence this redraw and losses are business related?

My suggestion was to establish a new trust to buy half of the property off you.  As the trust will need to borrow to do this, it will be entitled to a tax deduction on the interest.  The idea is – the trust is "owned" by you anyway, so it doesn't matter that you and your trust both own half of the property respectively.  However, this will not be a good option if the trust will be negatively gearing the property, unless there is a means to inject other income into the trust to soak up the negative gearing loss.

Let's say the trust needs to draw down $200K to buy half of the property from you, the interest will be say $200K x 7% = $14K per year.  Would half of the annual rent exceed $14K? What about other claimable expenses, eg, building allowance, holding costs?

Eddiec
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November 6, 2008 - 2:17 pm

leoau wrote:

Hello,

A simple question. I have an investment property, I am in Victoria. The title is under my name, but in reality two of us invested in it. Well, that other person wants to pull out and I have to either refinance the investment property, or redraw my home loan to pay him.

 

At the moment it is already positively geared. So it would make sense to refinance the investment. However, I want to be able to continue claiming the interest against my personal income tax.

 

SO, the property is under my name, everything stays the same except I want to somehow increase the loan, and claim the increased interest.

 

Is selling the only option??

Have you considered using a discretionary trust to buy half of the interest in the property? The trust can borrow and claim the interest and will be assessed on half of the rental income. Not a good option if the property is negatively geared but if it is positively geared, it will be an option without having to sell the property to a third party. Should see an accountant who can walk you through the options available to your specific circumstance.

Eddie
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November 5, 2008 - 4:52 am

donkey33 wrote:

Hi all,

I just want to make sure that I've done my tax correctly because at the end of the last financial year, I purchased a block of land to build a house on and rent out so for Investment purposes.

I paid all bank fees and over $30,000 in deposit prior to June 30 and all interest charges up to that date. I know that if it is not income producing then there isn't a lot that can be done but I just wanted to make sure. Can anything be claimed given it is intended to be a rental property or do I have to wait until it is built and income is coming in before I can make any claims at all? Can those things be claimed next year when it is income producing perhaps?

Thanks

My view is the interest is deductible from day one because your intention has always been to build the house in return for rental income (ie, the purpose behind the borrowing has always been of an income producing nature), pursuant to the Steele's Case.  This is so even if there is no rental income derived in that year. 

This contrasts the scenario where someone has a house but it is not available for rent; in which case, the interest is only deductible when the house becomes available for rent. 

Be careful with borrowing costs (eg, bank fees in setting up the loan, etc). They are usually deductible over the term of the loan or 5 years, whichever is shorter (unless the particular cost is less than $100, which is immediately deductible).  In other words, you can't claim those costs all at once. 

Eddie
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November 4, 2008 - 11:46 pm

fishngym wrote:

Thanks Eddie.
I'm doing some big days at the moment. Hopefully I'll get into it tomorrow and read the sections.
Thanks for putting in the extra effort mate.

No worries. I'm probably one of the very few people in this world who think tax is fun!

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

November 4, 2008 - 2:39 am

Best to see an accountant to deal with the structuring options. The most common is probably a unit trust but it can create some tax issues (eg, CGT event E4).  An alternative is a partnership of trusts – it works pretty well and provides flexibility in terms of income tax on annual net rental income and CGT.  However, it may not be the best structure if you wish to negative gear.

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

November 4, 2008 - 2:35 am

To claim the full interest on the rental property, you should be the sole owner of the property but the loan may be in your name or joint names.

If the loan is in joint names, your wife will need to "on-charge" her half of the interest to you (ie, in her tax return, she will claim her half of the interest paid to the bank as a tax deduction and include in her assessable income a corresponding amount of interest income received from you).  As you will be incurring the interest on both "loans" (ie, half from the bank and half from your wife) that are used to fund the rental property, the entire interest charged by the bank is effectively tax-deductible in your hands.

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

November 4, 2008 - 2:28 am

There may be a way to achieve negative gearing by way of a "gift and loan back" arrangement even if the trust does not have any income.  It involves buying the property in an individual's name but having the trust take a second mortgage over the equity in the property. 

You need to talk to an accountant and/or a lawyer to investigate if you could use the arrangement in your specific circumstance.

Eddie
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November 4, 2008 - 2:24 am

fishngym wrote:

Thanks for the reply guys.

Eddie, would it make any difference that the misses' loan (I'm currently guarantor) is now being changed to both our names on the mortgage via refinancing? Followed by the addition of my name on the title?

It sounds like perhaps I've complicated things beyond my level of knowledge.
Are there any sections of the ITA Act that are aplicable to my circumstances? If so, I'll have a read.

G'day V8ghia, it is all a matter of definitions. We were eligible for the FHOG due to the length of duration and classification of our relationship. The FHOG Act has a specific definition of spousal relationships. We then had to occupy the residence to be eligible for FHOG. I think that taxes are paid by the dumb and the poor, hence I am on here trying to climb out of those categories.

Cheers

The issue with "refinancing" is that the financier usually advances a separate new loan to pay out the old loan that was previously in your spouse's name.  The deductibility of the interest on the new loan will depend on how the funds from the new loan is directly applied. In my view, if the funds are used to retire a debt on a rental property, the interest on the new loan will likely remain tax-deductible. However, if the funds are used to retire a debt on a private home, the interest will not be tax-deductible.  If the property was a rental property but will become a private home, again, the interest will not be deductible as the loan will be supporting a property  that does not produce assessable income in future. 

The relevant section in the ITAA 1997 is section 8-1 but you might find TR 2004/4 more helpful in explaining how this section applies:

http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~2004%2F4~basic~exact&target=EA&style=html&sdocid=TXR/TR20044/NAT/ATO/00001&recStart=1&PiT=99991231235958&recnum=4&tot=29&pn=RDB:::RDB

Of particular interest will be the bit about refinancing.   Hope the above helps!

Eddie
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October 30, 2008 - 6:37 am

Qlds007 wrote:

Hi again

No i would switch theP & I loan  to an interest only loan with a 100% offset account and pay as much as you can into the offset account.

Once you buy the new PPOR and rent the place out switch the offset account to the new loan as the interest will not be Tax deductible.

Also if you redraw the available funds in the loan the interest will not be deductible and your accountant will have a nightmare trying to work out the proportion which is deductible and that which is not.

Not an idea situation so i think careful nuturing of the structuring is probably required. Get you Broker to outline the plan of attack for you and impliment it now rather than in 3 years time.

Agreed and well put, Richard. It IS a nightmare when a formerly tax-deductible loan account is "tainted" by a non-tax-deductible purpose.  Would also pose difficulties in explaining to the tax man if they want justification for the amount of interest claimed in future.

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

October 30, 2008 - 6:20 am

There are two issues here – Fringe Benefits Tax (FBT) and GST.

If an employer provides accommodation to an employee, a fringe benefit has been provided, which would generally attract FBT.  However, if the accommodation is provided due to the fact that the employee is living away from home or the accommodation is situated in a remote area, FBT concessions/exemptions may apply.  It seems to me that your bookkeeper was quite switched on to suggest this.

For GST, it will depend on the nature of the accommodation.  If the accommodation is "commercial residential premises", such as serviced apartments, hotels, motels, etc, there will be GST on the "rent".  As an employer paying the "rent", you can claim back the GST.  On the other hand, if the accommodation is residential premises but not "commercial residential premises" (ie, generally no ancillary services and manager provided on site like a hotel, motel, etc), the supply of the accommodation is "input taxed" (not quite "GST-free" – there is a difference).  As an input taxed supply, the "rent" on such accommodation will not be subject to GST and you can't claim back any GST.

Your accountant should be able to provide you with more definitive advice based on the facts.

Eddie
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October 30, 2008 - 6:00 am

PosEnterprises wrote:

Can someone please advise opionions – If you really need a Trust to do your business – What if you wanted to hold shares and trade shares and hold property in the same Trust.  Is that a good idea?

Or would you set up separate Trusts – for Trading for Income and Holding Shares for dividends – and  Trust for just holding property!

It is generally not a good idea to hold valuable property and operate a business via the same trust.  Doing so exposes the property to the trading risks of the business, ie, if someone sues the business, the trust may lose the property upon litigation. 

However, if you are talking about share trading, which is relatively low risk, I don't see any issues with holding shares for trading, shares for dividends, and properties in the same trust.

Eddie
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October 28, 2008 - 9:34 pm

Qlds007 wrote:

eddie you will be suprised there is a fair number of Company Title blocks over in the New Farm area which i have had a lot to do with.

Really? Are these new or really old blocks? I actually live in New Farm and have owned two units and both are stratas. 

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

October 27, 2008 - 2:56 am

Hareluya

Let me know if you are looking for an accountant in Brisbane, rather than the Gold Coast.

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

October 27, 2008 - 2:53 am

If the property is in the name of your partner, no, you won't be able to claim the rental expenses, even if you make repayments. For tax law purposes, the repayments will either be taken as a gift from you to your partner or a loan.

To ensure that you can claim the rental expenses, including interest, you need to draw down a loan to buy the rental property from your partner.  The law takes a very lateral and direct view and traces where the borrowed funds are applied to determine the tax deductibility of the interest. 

For instance, if you have previously drew down a loan to make repayments on the property held by your partner, the interest on your loan would not have been tax-deductible.  Even if you change the title of the property to your name and use the previously borrowed funds to pay off your partner's mortgage, there will be issues regarding the deductibility of the interest because the borrowed funds are arguably used to extinguish your partner's loan, which is private and non-deductible. 

You need to be quite careful in structuring the title change to safeguard the interest deductibility because the tax law often takes a form over substance approach.

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

October 27, 2008 - 2:19 am

We don't have much company title schemes up here because strata title schemes are far simpler! In other words, we Queenslanders are far more efficient and modern in the way we deal with things!

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

October 27, 2008 - 12:53 am

In addition to Terry's comments, a put and call option is also handy in "deferring" a capital gains tax  (CGT) event.  Normally, if you sell a property, the contract date (not settlement date) is deemed to be when the property is sold for CGT purposes. If you merely execute a put and call option, you are not deemed to have sold the property until the option is exercised.  This is important in the context of the availability of the CGT discount.

Eddie
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October 27, 2008 - 12:44 am

Hi Anders

Shoot me an email – I can help.

Eddie

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October 22, 2008 - 10:42 pm

Scott No Mates wrote:

You've lost me on the question…You can only claim the interest if it is an income producing property ie if it has been recently purchased and is vacant, you can't claim an interest expense until it is tenanted – doesn't matter if it is a personal or business asset (unless you have numerous properties and conducting property rentals is your business).

As for caital gains tax, cgt is charged when you sell, income tax or payg is annually. CGT is handled differently if you own the property personally as opposed to within a company (no discount).

Agree in principle.  Technically, you can start claiming interest when the property is available for rent, ie, when it is actively marketed for rent but is presently vacant. 

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

October 21, 2008 - 10:43 pm

No Joseph, the trust will need its own ABN and registered for GST. On the other hand, if the corporate trustee doesn't do anything else, it shouldn't be registered for GST.

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

October 20, 2008 - 1:23 am

Generally, these are the remaining interest on the lease/HP that hasn't been expensed.

For instance, if you buy a car under a lease, every repayment you make consists of principal and interest components.  The unexpired interest charges are merely the remaining interest over the remaining term of the lease that hasn't been written off yet.