Forum Replies Created
Baloo,
It is generally a landlord that either doesn’t have pets or thinks that they will destroy a property. Of all the properties we have owned we have always allowed pets but obviously most tenants haven’t had them. Of the 5 or so tenants who have had pets we have never had problems. We also requested that the carpets be steam cleaned and that all surfaces were clean and no residual smells were left behind but that is what you expect of any tenant. I could tell you of one tenant we had who had a small child and they were prone to wetting the bed. It had got into the carpet and had left a urine stain that we couldn’t remove and we had to replace that small piece of carpet. Did it bother me. Of course not. Humans have to live and breathe and sometimes these things happen. Anyway don’t get me harping on about pets and renting. In New York City almost everyone who rents an apartment owns a pet. And every weekend they are out in Central park with them. Same in London. Same in Paris. But then us aussies are usually a few years behind the rest of the world.
Baloo,
No i don’t feel bad at all. In fact it is a landlords responsibility to know the body corporate laws and ask the relevant questions. We were never asked if we had pets. I think they assumed a couple with no children renting a $1,000 per week apartment would not have any “extras”. Well thats there problem. In fact we are excellent tenants. We have paid our rent 6 months in advance, the dog is groomed weekly and is well trained so it won’t do any more damage to the apartment than we will and in fact the other tenants (the building is mainly owner occupiers) all have small pets.
We have allowed our tenants to have pets as I think that as long as you have good tenants then they will ensure that the pets do not do any damage to your property. My wife and I have never been able to have children because of her infertility and our dog has therefore provided extreme enjoyment for the two of us. I find it fascinating that a landlord would say no pets but what about no children. I mean a small child can do more damage to a property than a pet.
So will the landlord regret their decision. I don’t think so. We will provide good income for their property, it will be extremely well maintained and we will not be making any demands of the landlord. So I think they will just have to deal with it and realise that in a society that is choosing to marry later, have less children etc. pets are a wonderful part of life. It amazes me that some people think that if a tenant has a pet that they will allow it to shed hair everywhere, never clean up after it, let it crap all over the place and make the place stink. I mean some people need to get a grip.
Monopoly,
Spot on. There was also a clause for that but unfortunately my wife and I have good vision. Well being a man I usually miss the toilet seat so I was instructed to sit down many years ago but I don’t think that would wash with the body corporate. But you are right a landlord would be in huge trouble with the anti discrimination tribunal if you tried to prevent a tenant bringing in a guide dog.
Im currently renting an apartment in Sydney (having sold all my properties) and my wife and I wanted to bring our lovely Bishon Frise with us. Anyway the landlord was furious they found out we had a pet. But being the diligent people we are we read the body corporate laws and there was a clause allowing animals for people with hearing impairments. Its an awful thing that my wife has tinnitus (which cannot be proven or disproven – and hers is very mild) but an audiologist gave us a letter saying she has a hearing impairment and our pride and joy “Bitch” (don’t ask why we called her that) is now living with us.
GreatPig,
You are correct. Broadly speaking, any strategy directed at avoiding wastage of imputation benefits by directing the flow of franked distributions to members who can most benefit from them to the exclusion of other members, may amount to dividend streaming. When it applies, such benefits are treated as unfranked unrebatable dividends paid out of the profits of the company.
Lizzy,
Your examples are correct but I think Mortgage Advisor was talking about keeping your tax levels BELOW the 30% rate. In both of your examples this is achieved.
Note however that the $ 7,350 remaining in the company is the vehicle you will need to use for investing. For some people this is not suitable as they want access to the funds.
So how do you get the money out. Well as I said if you don’t have a Division 7A Loan Agreement in place PRIOR to the loan then it is considered to be a unfranked deemed dividend which is not deductible to the company and fully assessable to the taxpayer.
If you do have a Divison 7A Loan Agreement then you will need to charge at least the Benchmark Interest Rate to prevent any Fringe Benefits Tax issues and the loan will need to be repaid eventually (including the interest you have charged). This will usually be at least before 7 years otherwise under State Law the loan will go stale and it will be considered as forgiveness of debt with the associated fringe benefits tax issues. This can be avoided with a Statement of Recognition.
Finally since you have paid $3,150 in tax then you will be able to distribute a dividend of $7,350. However under the Dividend Imputation system the $7,350 is grossed up in the hands of the taxpayer i.e. to $10,500 and then the taxpaper receives a franking credit of $3,150. This means that once the dividend is paid the result will be the same.
Leaving it and investing through the company may therefore make sense but if you do so then you will not get the 50% CGT discount on any capital gains.
Every situation needs to be carefully considered before making a final decision as they all have taxation implications. You need to work out which one is most suitable for you in the current circumstances and to prevent significant tax obligations in future.
MortgageAdvisor is correct. This strategy will only work if you generate income through a company. Personal Services Income (such as most PAYG) would not be open to this strategy as the income is treated as assessable in the hands of the taxpayer earning the income. Basically to disinguish between PSI income and non PSI income you need to meet the results test.
Even if you do meet the results test and are paying yourself a maximum wage of $71K the profits will be retained in the company and will be taxed at a rate of 30%. This is where the maximum rate of 30% comes in.
However what happens when you want to get the money out of the company. Well if there are sufficient funds in the company then the company can invest although this has problems (e.g. companies don’t get the 50% CGT discount so this might be the wrong strategy if you plan on selling one of your assets in the future), also any losses (from negative gearing) are kept in the company and carried forward (providing it meets the carrying forward of losses tests) and are not able to be offset against other income. It can be offset against company income but the loss then only has a benefit of 30% not 47% (if you are on the highest income tax scales). So again need to work out what is best.
Also if you plan on lending money from the company to yourself as an employee or as a director make sure you have a Division 7A Loan Agreement in place otherwise it will be treated as an unfranked dividend which is non deductible for the company but fully assessable in the hands of the taxpayer. Nasty. And Div 7A Loan Agreements cannot be made respectively, it is against the law.
You can pay a dividend to yourself from the company but the net effect is the same. ALthough this can change if you plan on earning less income in future years or if you plan on paying a dividend to a shareholder that is on a lower tax scale. However there must be sufficient franking credits in the company’s franking account otherwise the company will be liable for franking deficit tax.
So just be aware of how you want to use the future funds and the taxation implications both now and in the future. Some good planning with your accountant and/or taw laryer should assist you with these decisions.
Yes increased demand will lead to demand pull inflation. However this assumes that future demand would exceed current demand. I would argue that the current level of demand would remain constant however the funding for that demand would be through savings rather than through debt. Increased equity in property prices has already fuelled demand for consumer goods and this has had little effect on inflation due to small increases in the interest rate to stabilise the demand and therefore the inflation rate. We could have a good economics discussion on this one. Remember however that in a global economy there is also competition and so prices ( particularly for goods) are constrained by the perception of what something is worth. Just because we have higher inflation doesn’t automatically assume that prices will increase. It is the demand for something that will increase prices. I am arguing that the demand is already present and is currently being funded by increased debt.
Regarding a loss from selling. Just talk to many of the Docklands investors. They have put $20K deposits down to purchase properties for $900K that will now only generate $700K in the current market. If they go ahead with these contracts (and many have had to) then yes they are in a capital loss situation.
And as regards to experimenting sexually. Well I have been happily married for 30 years so it hasn’t cost me anything except having a very happy wife. I am not talking about sleeping around. But then again most couples haven’t heard of anything except the missionary position. No wonder they have more interest in their children’s activities than their partners.
SetMeFree,
I empathise with you and your wife’s situation. Unfortunately there are many people in a similar situation to yourself and there are many players who are responsible.
Firstly I agree that it is a tragedy that our government taxes those who earn a high wage soo much (as I have said before I am not against streaming income from the rich to the poor) but not at the ridiculous levels we do here in Australia. If we had a government who were willing to reduce taxes don’t they realise it would also stimulate our economy and also indirectly increase other taxes (GST). With more money in our pockets we would be able to increase our consumer spending (rather than just doing it through credit) and therefore boost our local economy. It would also provide people with the opportunity to invest more and take the burden from the government in the future.
We also can’t forgot those individuals who have promised to make people multimillionaires in a few years. It has taken me 40 years (im 55 now and started work at 15) to make a multimillion dollar portfolio and it is a tragedy that people have offerred many people false dreams. A lot of people have fed off the fears of people and advised them to invest in areas that they were not knowledgeable about. Property is like any other investment, it is important to understand a person’s risk profile, insurance protection, ability to service debts, spending patterns, etc. before advising which financial instrument is the most appropriate for that individual. Unfortunately the Australian public has been sold the false hope that by investing in property we will all become millionaires with a passive income of $500K per annum in just 5 years. Well yes this is possible but not after 5 years. Like I said it took me 40 years to build such a portfolio but our societies desire to have everything now feeds this “need” to have it all now. I truly hope that some of the pain that we will experience in the next couple of years as a society helps us to get back to basics. To learn the basic fundamentals of investment, to stop following the herd and to know when to cut one’s losses.
I think you are in that position. With regards to the super fund there are a lot of issues in your strategy which I do not have the time nor ability to answer in this forum. My only suggestion is to consultant a good accountant and/or tax lawyer.
You really need to sit down with your accountant and work out a few things:-
1. What is the current market value of this property ? Basically what will you get if you sold now and how much of a loss will you make by selling.
2. Can you afford to service the debt (taking into account revenue from renting the property) without your wife’s income. The IT sector has been hit very hard here in Australia. The same has happened in the UK and is only recently coming back from a couple of years of difficult times. Even then the days of earning 1,000 pounds per day are over. Those rates went down to 300 pounds per day and are now back to 500 pounds per day depending on your skill set. I am not sure what your wife does but I would be budgeting for the fact that she will probably not find work for about 3-6 months. Outsourcing to India has become fierce and will continue in the future.
3. You need to do a comprehensive cost/benefit analysis and do an NPV (Net Present Value) analysis over a 5 year period. This will assist in determining what decision to make. You will need a competent accountant. If they stare blankly when you say NPV go elsewhere.
4. Learn from the experience. Learn that having a multimillion dollar portfolio isn’t everything. I don’t know where you live but the best things in life are always cheap. A coffee ($3) with friends discussing politics, music, sport, sufferings, joys. This is what life is about. A walk with your wife in a local park. Visting a local art gallery. Experimenting sexually. All things that don’t cost much but make life wonderful. Don’t worry if this experience costs you but it is what you take away from it. Remember that other people have lost millions but have also gained it back. Focus on the important things in life and the other things will follow.
redwing,
that is exactly what I have done. I have sold all my Australian property including my PPOR. I did this about 8 months ago now with the view that the Australian property market had peaked and I would take my gain (pay capital gains tax – except on my PPOR) and then wait for prices to fall and reinvest.
At the moment I am living in a very expensive area of Sydney in a $3 million dollar apartment for $1,000 per week. Taking into account interest on such a loan, strata fees, water rates, land tax, repairs and maintenance (although this would be low given it is a new apartment) then I am definitely ahead. I will definitely reenter the market once it has cooled but I will then be able to purchase a now $3 million property for around $2 million (and yes I do believe these drops will occur – I think we have another Hong Kong market on our hands). Im planning on renting for another 2 years and then look at reentering the market. I did the same thing in the late 80s after negative gearing was removed and people thought I was a fool. Well those people are the ones who have just paid of their PPOR and have one investment property and a standard motor vehicle. Never listen to the herd, they will just loose you money.
If a taxpayer acquires a dwelling that is to become the taxpayer’s main residence and the taxpayer still owns an existing main residence, both dwellings are treated as the taxpayer’s main residence for up to six months (ITAA97 sec 118-140 ). However, this rule only applies if the taxpayer’s existing main residence was the taxpayer’s main residence for a continuous period of at least three months in the 12 months before it was disposed of and it was not used for income-producing purposes in any part of that 12-month period when it was not the taxpayer’s main residence.
This concession applies even if the taxpayer has made a choice under ITAA97 sec 118-145 or 118-150 that only one of the dwellings is to be treated as a main residence (Taxation Determination TD 1999/43 ).Where a taxpayer subdivides land on which a main residence is built and constructs a new main residence on the vacant part of the land, the main residence exemption is not available for both dwellings for the full period of ownership. However, both dwellings may be exempt for up to six months (Taxation Determinations TD 2000/13, TD 2000/14 ).
If a dwelling that was a taxpayer’s main residence stops being his/her main residence, the taxpayer may choose to continue to treat it as a main residence (sec 118-145 ). The maximum period that the dwelling can be treated as a main residence is six years if the dwelling is used for income-producing purposes while the taxpayer is absent. If the dwelling is re-established as the taxpayer’s main residence, another maximum period of six years starts to run if the dwelling again stops being the taxpayer’s main residence. If the dwelling is not used for income-producing purposes during the taxpayer’s absence, it can be treated as the taxpayer’s main residence indefinitely. Only a part exemption applies if the dwelling was partly used for income-producing purposes at the time it stopped being the taxpayer’s actual main residence
I use Littlejohn Frazer for my UK property dealings. They are based in Canary Wharf, London. Contact number is 0011-44-20-7369 4524 and ask for Ted Brew. Hope this helps.
One of the risk areas in adding a corporate beneficiary is triggering a resettlement. If the coroporate beneficiary is already named as a beneficary under the trust deed, then clearly there is no resettlement issue to consider. However, it is not so obvious where the company must be nominated or the trust deed altered.
Generally the ATO will accept that a nomination of an additional beneficiary does not result in a resettlement where BOTH of the following conditions are satisfied:-
1. The nomination is pursuant to an already existing power to nominate new beneficiaries which is only exercisable under the terms of the trust in favour of a clearly defined group which it could be reasonable inferred that the trust was intended to benefit; AND
2. It can be shown from the deed and surrounding circumstances that the actual objective, purpose or theme of the trust was to benefit that wider group which includes the nominated beneficiary or beneficiaries.
A greater risk arises where the terms of the trust deed are required to be amended.
If the addition of the beneficiary is as a mere income beneficary then there will be no resettlement issues. However if the addition of the company as a capital or default beneficiary then there are possible resettlement issues.
If a company is to be added as a beneficiary. where possible, it should be nominated as an income beneficiary only.
If the trust deed must be amended then the amendment should only allow the trustee to nominate the company as as income beneficiary, and not as a capital or default beneficiary.
All of the shareholders of the company should be primary beneficiaries or members of their family. Thus the distribution of income to the company will only benefit the family which the settlor intended to benefit.
Note that if the trust deed does need to be amended then stamp duty implications could arise. Refer to Nichols Cabramatta Wholesale Stationary Supplies Pty Ltd v Commissioner of Stamp Duties (NSW). In that case adding a corporate beneficiary resulted in a stamp duty of $34,000
The trust deed amendment could also constitute a resettlement for CGT purposes.
Also if the trust owns pre CGT assets then Division 149 could be triggered. Also refer to paragraph 8 of IT 2340. If the majority of the company’s shareholders are not trust beneficiaries, the Commissioner may try to apply Division 149.
Also if the corporate beneficiary is incorporated part way during the year then the company can only receive distributions made by the trust on or after the incorporation date.
The tax office may also evalauate the purpose of adding a corporate beneficiary. If the sole and dominant purpose is merely to gain a tax advantage then the Commissioner may elect for Part IVA to apply.
All in all see your accountant and/or lawyer. Lots of people have established trusts without a full understanding of trust and taxation law without understanding the full implications.
If you purchase the property in your name then you will be on title deeds and any trasfer will result in stamp duty being payable.
It will also trigger a CGT event but given that you would probably transfer the asset for the same price then this would not be an issue.
However stamp duty will be payable on the transfer. Make sure you get the structure right in the beginning otherwise there can be enormous tax issues later on.
Either way those who have overstated their income on those low doc home loans could be hit both ways. The Tax Office could firstly issue an amended assessment based on the income you stated in your low doc loan application (and it is up to the taxpayer to dispute that assessment).
Then if the taxpayer does prove that the income was overstated they have committed a criminal offense and committed fraud.
I don’t think people will be charged over these offenses (although guess we have to wait and see). But I think it is another way to rein in the high borrowing levels of the average consumer in Australia.
The fundamental difference is between purchasing an investment and purchasing a good or service. If I borrow for investment purposes and the investment decreases significantly in value (and the costs of servicing the investment do not exceed the income) then it is a poor investment.
What difference does it make as long as people keep repaying the loan ? Well it makes a huge difference because you are just injecting funds into a poor investment. Using that same logic it wouldn’t matter if your interest rate was 50% as long as you can pay it back.
And if people are not concerned about negative equity then they will never be wealthy. $1,000,000 worth of property with $1,500,000 of debt means net worth of ($500,000). So you sell all your properties and they have to find another $500,000 to pay back the bank. No wonder only 2% of the population retire wealthy.
The best vehicle for a negatively geared property depends on your taxation status. But generally it is best held by the higher income earner and therefore the higher income tax payer. Some people will try to make things highly complex with trusts, companies, etc. but if the property is negatively geared and you are not in a high liability risk industry (i.e. potential to be sued) then holding the investment in your own name is usually the best, cheapest and easiest option. Not sure why some people want to complicate things.
Also meant to mention that negative gearing is generally not recommended as a strategy for discretionary trusts as the losses are trapped at the trust level and imputation credits (from any dividends from shares – if you are using the same trust) could be lost. Discretionary trusts for property investment are mainly desgined for positively geared properties not negatively geared ones.
Not quite sure where you got 15% CGT through a trust but a discretionary trust can access the 50% CGT discount and, in addition, is able to distribute the tax-free amount to beneficiaries. As TerryW claims this could mean that your CGT liability is nil depending on the beneficiaries that it is distributed to. Capital gains in a superannuation fund are taxed at 15% (not trusts) but as you mentioned you cannot easily access these funds.
I cant speak for other people but I think most of us are looking for self-funded retirement and the ability to be able to maximise the funds we receive from our labour and ensure that it is invested to provide us with a passive income stream for the future. For one person this may be a passive income stream of $10K while for another it may be a passive income stream of $500K. It all depends on what you want to do and how much that will cost. If I want to travel First Class around the world 365 days a year staying in 5 star hotels then the later will probably be required.
Will it make us happy. Well in and of itself of course not. Happiness is found in believing in oneself, living your dreams (and these dreams don’t have to cost money – it can be as simple as watching a sunset over Bondi Beach – free), caring for your friends and family and trying to help others as we share this world for a short period.
Investment is just about maximising our funds and knowledge to provide something for the future.
