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Hi Henry, be very careful of that sort of strategy. The ATO certainly does not like this sort of thing and have even published a "taxpayer alert" on one such scheme.
http://law.ato.gov.au/atolaw/view.htm?docid=TPA/TA20011/NAT/ATO/00001
The other factor to consider is that if using a trust to purchase a ppor then the CGT main residence exemption is not available. This would generally be worth way more than the tax deductions.
Cheers Scott.
By charge I meant that gst would apply to sale. Should choose my words more carefully!
Hi Paul,
If you are selling under 5 years you can claim some GST. The amount may/will need to apportion this if the properties have been rented.
You will also need to charge GST and will need to work out if you can and should use the margin scheme.
This is complex stuff – talk to your accountant!
If you try and navigate your way through this on your own you are bound to encounter problems.
GST on property in a nutshell……..
GST on the purchase and/or build can only be claimed where the property is to be used in the making of a "taxable supply". This is the sale of the property subject to GST within 5 years.
After a property has been rented for 5 years it ceases to be "new residential premises" and the sale becomes an "input taxed supply"
Renting out a property is making an input taxed supply.
When making only input taxed supplies, it is not permissable to claim a refund of any GST paid.
Where there is a mixture of input taxed supplies and taxable supplies – a calculation is required to determine how much GST can be claimed. Broadly this is a calculation of the percentage of each class of supply over the total revenue from all classes.
Also, if a property is purchased under the margin scheme – the GST in the purchase price can not be claimed as a refund.
Is the home loan more of a risk?
You can’t ignore the fact that you are paying rent and building someone elses asset in the process.
It is also problematic to do a simple cash flow analysis/comparison when the home investment is substantially more than the IP.
You need to run the numbers and take the full position into account incl cap growth, taxes (incl cgt), rent, etc.
If your are willing to start smaller with your home your risk will shrink.
Whatever you do, don’t buy a property in a company as suggested. The CGT consequences would be a disaster.
You really do need to do the numbers and factor in the tax impact. The tax benefits of a negatively geared IP can be good but if still paying rent then you have to look at your total income and asset position.
I would be surprised if this is better renting and buying an IP.
As for buying a home – do be careful not to over capitalise. If you start with something more modest you can still save towards an IP.
You can then trade up once you have built up wealth and/or income and any profit is tax free under the main residence exemption.
My view is that rather than paying rent, you would be better off paying off a home loan. You can then borrow against the equity in your home to assist in purchasing investment properties.
This of course does depend on how the numbers stack up and you should look at this. How does your rent compare to likely home loan payments? What would your cash flow postion be for an IP and does that change the balance?
Also, ask yourself what’s important to you – is there a non financial motivation to owning your own home?
Lastly, you should research the performance of property in the area where you are looking and get an idea of where the market is heading. If prices are likely to come off further then it may be better to try and time your entry into the market to position yourself for maximum capital growth.
My 2 cents – I think it’s dangerous to place too much emphasis on sound bites that try to sum up the current market in a single sentence.
Different types of properties in different locations will perform differently. Ie affordable inner city low rise seems to be performing ok whereas outer suburban houses seem to be performing less well.
The challenge is to do the research to work out where to invest to achieve good returns. This includes consideration of investments outside of property.
Hi,
Negatively geared IPs work best when held by a high income earner. Using a trust presents a problem for this.
As noted above, a trust will not assist in a divorce. Also, if you are tipping money into the trust to cover the purchase deposit, etc and ongoing expenses, a loan will build up and this will be an asset of yours. As such, asset protection is effectively reduced.
If the IP starts to produce taxable income in future you will use up the losses then what? Do you have beneficiaries who can be taxed on the income at an effective rate?
Lastly, you should really get it set up professionally if asset protection is your motivation. 1 small cock up and it can all come undone. They can also explain trusts in more detail. You should never set up a structure you don't understand!
Hi Paul,
Stamp duty could be a real issue if you want to transfer the property wholly into your name. I suggest you investigate further.
Are you making the right financial decision to take over the property? Should you be seeking payment from her to cover her share of the excess of the loan over the property value and for the costs you have been paying?
In Victoria release of deposits is covered by Section 27 of the Sale of Land Act. I suggest that you have a read of this (or the equivalent in the state you are purchasing) and then talk to your Lawyer about the clause.
http://www.austlii.edu.au/au/legis/vic/consol_act/sola1962100/s27.html
Hi,
The test for deductibility of interest is the use to which the borrowed funds are put. If put towards the acquisition of an IP that will generate taxable rent then the interest will be deductible.
Watch for a change in intention as noted above. Eg. if there is a change of intention to sell on completion rather than rent the status of the interest may/will change and there are a whole range of other tax and GST issues to deal with.
Note – if you can't deduct the interest it will form part of the cost and will be taken into consideration when calculating the profit on sale.
Hi,
Shouldn't be too different. A couple of tips – firstly, if you are signing a contract think about signing and/or nominee. This will give you the option to use the trust or not.
Also, for your record keeping you should have a resolution from the corporate trustee that the purchase is made in it's capacity of trustee for the trust.
Hi Dellas,
We can all proffer our opinions but at the end of the day we are not the one's stumping up our hard earned.
I never recommend investing on a tips. In making successful investments there is really no substitute for doing your homework.
I suggest you seek professional advice or get busy reviewing available data such as: http://services.land.vic.gov.au/landchannel/content/guide and numerous other sources.
Are ITRs a comodotised product?
Perhaps they are perceived as such by some. However, as a professional I know that a lot of operators produce them very cheaply and make alot of mistakes in the process.
Although people don't like doing their tax and having to pay for the priveledge the pain that arises out of an ATO audit where you have problems can be severe. Alternatively, extra tax paid because the accountant didn't get it right hurts too.
In my view the more savy recognise that "you get what you pay for".
Our starting price for a simple ITR starts at $250 and increases based on the volume and complexity. We scope this out and advise clients upfront so they know what to expect.
Hi,
There are technical issues at play here that need resolving.
You really need an answer to the question of when you "acquire an ownership interest in a dwelling". We have suggested that this is at the time construction is completed but you really can not take that as gospel – it needs to be confirmed.
My advice – see your accountant. If you havn't got one, get one. They will be able to resolve the technical issues and guide you through the calculation. They can also advise on tips to reduce your tax bill like the good tip provided by crj.
They will also be able to provide tax planning advice that takes into account your full financial position.
Hi,
I understand that $1,100m2 to $1,400m2 could give you a good approximation of costs. However, this is pretty rough and ready and would not include landscaping and other costs.
There is really no substitute for a quote from a builder.
Modular housing seems to be gaining wider acceptance and could be worth investigating as a means of improving profitability.
Hi,
If the property is used in a business it may qualify for the small business Capital Gains Tax exemptions.
It's a good idea to put the property in a seperate trust, however, I recommend due diligence to confirm that can qualify for the exemption (if applicable).
Further consideration of the meaning of "acquire an ownership interest in a dwelling" may be required regarding the application of the overlap provisions.
It sounds like the construction of the dwelling on the 2nd property has recently been completed and this may satisfy the defenition.
This has got me interested………
I found the following in the Victorian Sale of Land Act.
http://www.austlii.edu.au/au/legis/vic/consol_act/sola1962100/s32.html
It seems to just state that the Section 32 statement must be provided before the purchaser signs the contract. This being the case, to provide the Section 32 on auction day does not appear to be a problem.
