What to do?
Here is a brief overview of our situation.
We are a youngish professional couple who together earn about $120K
We have these assets/liabilities
PPOR owe 157k, worth 300k
Land owe 90k, worth 135k
Unit owe 72k, worth 140k
Shares freehold worth 30k
LOC of 95k available 15k all our finances run thru here.
We have made the mistake of using the LOC for deposits and share purchasing.
We are currently in a state of confusion about which direction to head with our investing. Before we move ahead I would like to get our structure set up to do so, but am confused about this also.
I have a couple of things I would like to discuss.
Firstly I am confused about the idea of trusts and their relation to asset protection.
I have read Steve’s books 0-130 and 0-260, and I think they were both brilliant.
I found the issue of protecting assets through trusts interesting and I think that it is an important one.
What I am confused about is that when I suggested to my accountant that I want to look at asset protection via a trust, she told me that trusts as a whole are no longer effective in asset protection as things have changed to a point where they no longer do this effectively. Not knowing too much about trusts I am not sure what to think here?
I know we have to be able to protect any future property somehow, but how?
Any advice would be appreciated, particularly Steve’s.
Also, We are thinking about selling our PPOR in about 18 months if things are looking up, then renting for a while so we can go full steam ahead investing in +CF property. We figure this will allow us to develop our block also as we will have more cash flow and be able to pay off the block in full as well as most of the LOC. We need to finish landscaping in this time to get maximum return for our house.
What do people think of this as an idea? Keeping in mind we need to spend around 35k to finish our house and by then I would estimate its value to be around $360k.
I would really appreciate some guidance with these things as I am not quite confident as to what the best course of action is here.
Thanks.TerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
Is your new house going to be your main residence? If not, it would not be wise to pay the loans down. Selling maybe a good idea. But don't rush into it as you may be just selling one property to buy another and incurring costs unnecessarily.
Trusts are still the best structure for asset protection available. Your accountant may be referring to a recent case, Richstar v ASIC I think, in which ASIC sought to get access to the trust assets of a person who had the role of appointor. The case has been discussed by various legal firms (eg see the newsletters of http://www.lawcentral.com.au) and there seems to be ways in which the trusts can be worded so that make this less likely. eg the appointor automatically losing their role of appointorship if they become insolvent etc.
I should point out that we will be building units, and selling two to keep one.
Are you saying that the LOC was used for shares and deposits although you current have your incomes paid into the LOC and then redraw from it to live off ?
Richard, that is correct. We are looking at refinancing to separate this mess, but at the time we knew no different.
We are wondering what the best structure is for our situation at the moment.
Ok would be a good idea to refinance quick smart and pretend it never happened.
I can see a few things I would do immediately but transferring the properties to a trust structure is probably not that high on the list due to the stamp duty and potential CGT issues.
By all means look at a Trust structure for future acquisitions.
The equity you have in the current properties should enable you to establish some good access to fund further acquisitions and funded correctly will go along way to boosting your portfolio.
I would try and keep the loans separate and do not cross collateralise the securities.
Let us know if you need further assistance.Mikey88Member@mikey88Join Date: 2008Post Count: 3
I suggest having your situation reviewed by accountants experienced in property related matters. Check out this website http://www.chan-naylor.com.au This firm has a unique approach to reviewing an investor's situation called a Financial Health Check. You can book this via their website. They have offices in most states. They were voted the fastest growing accounting firm in Australia by BRW magazine in 2007. This was particularly due to their focus on property related matters.
They also have a unique property ownership structure which they have developed in consultation with leading property lawyers and Special Counsel (SC). This structure addresses such issues as assets protection, estate planning, tax minimisation and numerous other issues.
Ed Chan has co-authored a number of books on tax, superannuation and wealth creation. I particularly recommend reading How to achieve Wealth for Life through Property Investing. It is a best seller because it dispels a number of myths and is easy to read.
An Accountant certainly maybe able to advise you on your Accounting options but is unlikely to have an idea on loan structuring.
Certainly they are unable to advise you on most areas of Financial Planning.
Any amendments to the title such as Transferring the property into Trust will incur Stamp Duty and possibly CGT and therefore is probably not worth merely to protect your current assets.
Structuring it correctly will avoid future and past mistakes and will set you up for the future.
This is the domain of a Mortgage Broker.
Thanks Rich and Mike,
You are both right in thinking we need structure in both finance and property ownership, but as Richard pointed out we certainly wouldn't go to the expense of transferring our current properties. What we are wanting is to set in place the correct structures for future purchases and acquisitions.
Is it ethical/logical to have one accountant for tax purposes and another for this type of thing? I have an tenacious tax accountant, but my faith in her advise on this sort of thing is limited.
Who do Adelaide people see for good advice on property structure? This Chan- Naylor firm sounds promising.
I dont think having 2 Accountants is really feasable as the advice maybe different from each firm.
Chan Naylor are an Accounting firm like many others however there have carved a niche in the market with heavy marketing and book publications etc but there fees are charged like a wounded dog.
You can do just as well with a smaller specialised firm at a fraction of the price.
Would firstly get your lending structure done properly before you spend to much on moving forward.lucky88Participant@lucky88Join Date: 2008Post Count: 25
My partner and I have just used Chan & Naylor to set up a hybrid trust for the purpose of IP stuff. We have also set up a line of credit with the intention of using this to fund our first purchase (as a deposit). We will then be looking at securing a construction loan as we have our eye on land that can be sudivided. Richard, I see you have issues with using the LOC for deposits? Do you mind explaining why? I would really like to know before we barrel ahead. We haven't got the construction loan yet. Our line of credit (through the bank that gave us the money for our PPOR) is $460,000. We have no debt.
No no i have no problems in using a LOC to fund the deposits in fact this is the normal structure i put in place for clients.
I do however have a problem in using a LOC to have your income and rents paid into and then redrawing it for a mix or personal / investment expenditure.
It is simple do it this way and the interest will not be deductible.
Yeah lucky, we made this mistake as we used our everyday LOC for deposits. This makes it near impossible for an accountant to differentiate between daily expenses and investment related ones. Our pays went in as well as rent and all expenses come out . If you have an LOC used for investment purposes only, this is the way to go.lucky88Participant@lucky88Join Date: 2008Post Count: 25
Hi Richard and Scotty
How good is this forum? So… does this mean I should make within the LOC a sub-account for personal matters and a sub-account for investment purposes? Is this the best thing to do? And hey Richard…. you are so good. I will email you about the investment loan that I haven't set up yet pending my trust structure..
This forum rocks!
Yes you should DEFINATELY (Sorry didn't want to use caps but had to make my point) have separate sub accounts for the two.
In saying that Lucky when you email me I will convince you dont need a LOC for personal purposes anyway – lol.mixedupParticipant@mixedupJoin Date: 2008Post Count: 79
Richard – I'd be interested in your comment re whether one is better off saving the extra 0.1% for a LOC (well this is what it seems to be in the St George bank products) and run with a standard packaged arrangement with variable rate loan, and then use the draw-down and 100% offset appropriately. Apart of ease of use is there a case to prove that the LOC approach saves more than the 0.1% extra in other words?Finance GuruMember@finance-guruJoin Date: 2008Post Count: 9
You should definently seperate out your accounts into personal use and investment use. You may not have to refinance to achieve this tho. You can quite likely go back to your existing lenders and ask them to set up a split for you. Your accountant can then claim the tax deduction for the investment split from that date forward.
As to the questions about trusts.. What's that ad? Oils ain't oils? The same with trusts. Some trusts don't provide the asset protection qualities you're asking about. Do you know the difference betwen them? Neither do I but that's why you go to the experts. I'd suggest Chan & Naylor as well. There are probably others out there who know what they're doing too, but I KNOW that Chan & Naylor know what they're doing regarding the trusts.
Richard, we appreciate your concern about customers asking an accountant for advice regarding loans. As you suggest, an accountant is an accountant, and such advice is best coming from a mortgage broker, or other lending professional. Chan & Naylor do work closely with Chan & Naylor Finance, a mortgage broker company, so please lay your fears to rest on that score.
Thanks for that info, this is pretty much what we are doing atm.
We have set up a split on our portfolio and negotiated a drop in acct fees and fixed some of our loans.
Thanks all for your input.
What do people think of interest rate situation? I think it's top of the cycle for now.BasilakisParticipant@basilakisJoin Date: 2008Post Count: 4
My parents purchased two blocks of land 4 years ago as an investment, financing them through a LOC.
During this period of time, they have been able to make their monthly repayments and the balance has remained the same ever since they purchased them (in other words, they only pay the Interest every month; no principal)
Both blocks are financed through the same LOC.
They have just recently increased their LOC limit to subdivide one of the blocks (Block A) and are looking at building two small units on the subdivided property. The other block (Block they are looking at selling it and purchasing a larger block in the same area to also subdivide. (But at this point in time, only a priority if something attractive comes along on the market).
Unfortunately they are not in a position to finance the construction of the units, however on the other hand, I will be able to at the beginning of 2009.
The plan is to build one house on one of the subdivide blocks, sell it, pay off all debts and have one subdivided block and Block B debt free, allowing me to build on them at a later date or keep as land.
As my parents are in the low 15% and 30% tax brackets respectively, I on the other hand, will be earning $70k in 2009 alone.
I am confused in which direction to go:
a) Do they transfer the titles into my name, I pay the stamp duty and open a trust fund with my parents, me as the trustee and them as the beneficiaries (to minimize tax and to ensure that all expenses, i.e. interest repayments) are claimed for?), and register for GST
b) Engage in a joint venture with them, them providing the capital and me the equity (i.e. me pay the loan)?
At this point, I am still unsure the differences between a joint venture and a trust? I believe it hasn't been clearly identified.
c) Leave it as it is and me make the repayments as the beneficial owner for the construction of the units?
I am thinking the best way is to transfer the titles in my name and set up a trust fund, whereby i pay the maximum profits to my mum (15% tax bracket), my sister (15% tax bracket) and then to my dad (30%) tax bracket.
Does transferring the titles in my name mean that I just pay stamp duty and that they don't need to pay CGT? In other words, they can't claim for their expenses once they have transfered the titles in my name? They have accumulated $40,000 in expenses over the last 4 years.
What price do they transfer the titles to? The balance of the LOC so they can eliminate all debts?
Any advice would be greatly appreciated as I am very confused in which path I should take
ThanksTerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
They must transfer the land at market rates – or at least pay stamp duty and pay CGT at market rates. Transfer = sale.
Having a trust would allow the least amount of tax to be paid by allowing the distribution to relatives on lower tax rates, but you would have to pay stamp duty to do so. So weigh up the costs and see if you will save enough tax to justify the move.
Once the property is transferred your parents will no longer be the owners and won't be able to claim any expenses from that point, but they may be able to claim expenses up to the sale.
Another thing to consider is if you leave it as is and you fund the construction – how will you pay for this? can you pay cash as if you are not on title you will not be able to borrow using this property. Your parents may have to borrow and you fund the repayments etc.