Hi,
I have agreed to put in some money with my aunt (Aust citizen living and working in Singapore) on a downpayment on a new IP unit in Brunswick, Melbourne off the plan. This can be considered as my first IP. My partner and I are still renting. While my name and my aunt's name will be on the title, my aunt will be coming out with much of the money for the downpayment, an estimated 30% of the cost of the IP. Besides having my name down on the title, I (along with my partner) will be paying the negative gear if any. Here are some figures.
Cost : $395K
Guaranteed rental @ 6% : $23.7K [For first 2 yrs]
Loan repayments : ($24K) [70% of $395K – $276.5K @ 7.25% * 25 yrs]
Rates and expenses : ($4.7K) [20% of rental]
Total cost: ($28.7K)
Net rental : ($5K) [Negative geared]While the IP is still being built, the loan will only need to be taken out some time later next year. Here are my questions.
1 – My aunt will be taking out the loan and I will be paying for the negative gearing for the IP (An arrangement that we have agreed on). If she takes out a loan from say the Singapore branch of Westpac / NAB / CBA, can she still benefit from negative gearing? Or would I be able to benefit from negative gearing in some way if possible? I am wondering about the documentation required. I believe only the person whose name is on the loan can benefit from negative gearing. The reason why I am not taking out the loan is that my partner and I do not earn enough to service such a sizeable loan, and we are also looking to get out of the rental game early next year, so am not taking on any loan at present in order to be able to service a loan in our name in the near future.
2 – In regards to depreciation, I understand that one can claim building and fixture depreciation. How is the depreciation used? Would one simply claim the depreciation from ATO, or offset the depreciation against PAYG tax? I understand that the building depreciation of a new unit can be quite large. I.E: 2.5% of $395K = $9875 [1st yr]. How can this amount be used? Would I get money back from this?
It is quite a big step having even agreed to this joint venture with my aunt. My knowledge is rather fuzzy despite reading up on this forum. Currently, I am rather uncertain about these areas. Appreciate any advise and clarifications.
Cheers
Daniel Lee
Hi,
Could someone provide some answers to my two questions. This would give me a better idea when I go talk to an accountant.
Regards
Daniel LeeHello Daniel
I think the reason you have not received any answers is that this is not something that any of us may have come across as it is a somewhat unusual arrangement. As a person totally unqualified in this area I think I see a problems with it.
How will the income from the IP be split?. If you don't receive any income from the unit you will not be entitled to claim any expenses, including depreciation. If you do receive income from the unit, how are you going to use it to service the loan (and be able to claim the interest) since your name is not on the loan.
Maybe a good accountant can suggest a better arrangement and answer your questions.
Sorry, no answers just more questions.
Elka
I will have a stab at this, but please remember I'm no accountant and I am suggesting possible scenarios.
1. If your Auntie does not earn any income in Australia, she cannot claim any tax deductions from the I.P. However, I think it may be retrospective; which means that if she returns to Aus within a certain time, the years she was absent from Aus and not able to claim any tax deductions may be claimable for a certain amount of time into the past. (we are in this position ourselves and hoping to use the retrospective clause when we return to Aus next year).
2. If she arranges finance for the I.P in Singapore, and then transfers the rent across to Singapore she may be able to claim tax deductions on her income in Singapore if their Govt/Tax Office have those rules in place, but you also have exchange rates and tax laws between the two countries to factor in – she may have to pay tax on the rent in Aus first and then do the accounting on the rent when it arrives back in Singapore. It could get very messy and may not be financially viable for her. The other problem might be obtaining finance from a Singapore based lender on a property based in Aus.
2. Even though your name is on the title, you cannot claim any tax deductions for the loan interest as your name is not on the loan. You can, however, claim tax deductions from the other expenses associated with the holding costs of the property, including the depreciation. This would be split between your Auntie and yourself.
The depreciation is worked out on the cost of the BUILDING and the FIXTURES/FITTINGS only – not the entire purchase price. You will need to engage the services of a Quantity Surveyor to produce a depreciation schedule for your accountant.
3. On the flip side; you can also take half of the rent if that is your agreement with your Auntie (or whatever percentage you decide upon in the Contract), but you will be liable for tax on the rent if the rent is more than the tax deductible expenses you can claim.It may be better for you to both be on the loan somehow, but this may be hard to set up if you are in Aus and she is in Singapore.
Or maybe she can be a guarantor on the loan for you over here, she puts in part of the funds as a deposit, both names go on the title and she retains rights to a percentage of the cap gain (if any, and to be decided by both of you in the Contract) when and if you sell.
An MB may be able to clarify what you can do on that one.
Sounds very messy to me.I am not an accountant, but look at it like this:
Your Aunt is a non resident for Australian Taxation purposes, so she will not have to pay tax in Australia on her SIngapore income. But she will be earning an income from the rent. Where this money is declared will depend on whether Australia has a double taxation agreement with SIngapore – it probably does. That would mean only one country will require her to pay tax on this. If it is Australia, then she would have various deductions she could offset against this income, such as Depreciation of fittings and building and interest. This may result in a loss, which may be carried forward to future years in Australia, if this income is declared here.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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