Hi – I'm a new member, have been reading through the forums but first post!
Hopefully someone can help me on the following.
Currently have a PPOR, Value = $600k, Mtg o/s = $300k. Have $60k in re-draw facility and currently overpay the mtg by $12k per year.
Looking to move out in 2011 as need bigger space so will either: 1 – turn current PPOR into IP and RENT elsewhere 2 – turn current PPOR into IP and buy new PPOR
If scenario 1 – should I still be continuing today to pay down the mtg quicker or change to IO and do something else with the money? Also what are the implications if I was to re-draw the $60k in terms of negative gearing once it becomes an IP?
If scenario 2 – what would be the best way of structuring this transition from PPOR to IP and using the equity towards new PPOR?
On an unrelated issue, my wife and I are looking at setting up a business (partnership) but worried about asset protection. Currently both the title and loan of PPOR in both our names. Would it be better to set the business up as a sole trader in one of our names then move the title of the property to the other?
Thanks v much in advance for your help. Looking forward to using this forum much more in the future!
In both scenarios you should isolate the debt now so you can claim on it in the future. To do that you could do as follows. (Assuming the loan balance has never been lower than $300K?)
Loan 1: $300K interest only loan – with linked 100% offset account Loan 2: $180K line of credit (with $0 drawn) – you could do this later if you wanted also.
Total loans $480,000 = 80% of value (that way no mortgage insurance)
You then have your pay etc paid into offset account and pay just the minimum repayment on the loan. This leaves your options open.
If you end up buying a PPR you use whatever is in the offset account as your deposit first and the line of credit second. Then borrow the balance required for the new PPR solely against the new property i.e. stand alone deals / securities. That way you can then claim the full interest on the invetsment loan of $300,000 and will have stand alone securities.
If you end up renting the line of credit just sits there no costing you anything and you build up the offset account without making principle reductions to the current loan meaning when you do evenetually buy something else you can do as above.
Maybe a family trust structure on the new purchase or set up the business as a company with both of you as shareholders but just 1 of you as director, then put the title in the name of the non director.
There are a number of issues that you need to consider with asset protection.
Firstly, never enter into a partnership. It is extremely dangerous as all partners are liable to debts of the partnership. So you could both end up losing your assets if you get in trouble. You should look at using a pty ltd company as this limits liability, usually, to the company. The company is a separate legal person and If the company goes down the shareholders cannot be liable (unless given gurantees etc), and even the director is generally not liable unless something illegal has happened (insolvent trading, not paying PAYE tax etc). Def have just 1 director.
As for transferring assets, you have to be aware of the various claw back and voiding provisions of the bankruptcy act. Transfers can be voided within for up to 5 years if you go bankrupt and the transfer was at less than market value, s120. Transfers done to defeat creditors then the transfer can be voided – with no time limit. s121.
the NSW conveyancing Act also has voiding provisions for transfers done to defeat creditors. s 37.
Even if you owned a property in the wife's name only and she takes no risk at all, then the property may not be completely safe. An argument could be raised that your wife owns the property as trustee for your share. This would especially be the case if your funds were used to purchase the house, or deposit, and if you contribute to the mortgage.
This all needs to be considered in addition to the tax aspects.
I would suggest you immediately stop paying down the loan and change it to IO while you work out what to do.
There are a few issues raised above that might or might not be relivant depending on the industry you are looking to start a business in.
For example the structure e.g. Sole trader, partnership, pty ltd or trading through a disc trust will all depend on: expected turnover, how you plan to get funds in and out of the business, how many customers you will have, how you want to be taxed and the types of risk relivant to the industry etc. You also need to think about how this will impact your ability to raise finance moving forward and what provisions you can set in place on your current income (lines of credit etc).
I agree with keeping the debt interest only and using offset. The rest will depend on what sort of business venture you are considering…
Intend to change to IO immediately. With the re-draw, am presuming if we were take out the 60k for other purposes, we could still only claim a tax deduction of Int on the current $300k, not the new bal of $360k.
The advice on the ltd co and 1 director is excellent. As the business will take time to grow (i suspect v low sales in first 2 years as we establish a name/brand) I was thinking of starting it as a sole trader (partner's name) to keep it simple and avoid co set up and annual admin fees/requirements for a couple of years (we don't need to borrow finance initially neither), then when sales are at a decent level convert to pty ltd for the liability protection (with both as shareholder's, wife as only director). Any obvious problems with this?