West Pennant Hills (Sydney)

ummmmm Martin. Hate to be picky but Serf said $260k (or do you think that was a typo?)

I wouldn’t have a clue about Rocky prices to spot whether there was a typo by Serf or not although $260k and renting for $390 doesn’t sound right either.

Irrelevant GP, forget all about the capital gains of the HDT and what happens to them – you have invested in INCOME units so the amount of capital gain and who it’s distributed to doesn’t matter. As to how little income is being received before it would otherwise attract the fiscal fiend’s attention?

1. no worries as long as the Deed is adhered to
2. can be zero in the year/s that the HDT makes a (taxable) loss.
3. you credit the ATO with far more analytical nouse than they deserve. They’re not stupid but nor do they have the resources to undertake the analysis that worries you so.
4. the tax return of the HDT says income of $x. The distribution schedule of the return allocates that income to whomever. So long as $x equals distrubted dollars then the HDT pays no tax, AND there is nothing that automatically causes the HDT to pop-up on a report that could either generate a question, and certainly not an audit.
5. heck, there’s nothing in the tax return that even discloses the fact that we’re talking about a HDT. In the eyes of the ATO it is simply a trust lodging a trust tax return.
6. don’t forget that we operate under the self-assessment regime.

At the end of the day, all you need to do is follow the Deed and you won’t have a problem

GP, break the ‘transaction’ down into layman’s terms. The company is making an INVESTMENT in income units in a HDT. End of story. Hey, think of it as my HDT (it’ll help you see the two legal parties involved here)

It is NOT using/applying it’s money for YOUR benefit and therefore (imnsho) Div7 & 109 do NOT apply. If they don’t apply then you don’t need to worry about their subclauses or the need to meet one of the exemptive fine print issues.

Unfortunately I’m the only real shareholder and am on the top tax rate, which is why I’m having all this hassle in the first place [].[/quote]

Then you may want to consider your domestic situation, or alternatively study the beneficiary classes of your HDT a little more closely <g>

Thanks a lot for your detailed response! Much appreciated.

You’re welcome. Let’s see if your paid advice concurs <g>

Hi Mark

I’ve never heard of Intertax so I can’t report any good/bad news of them.

At 40% I’d probably have my fingers crossed for a failure ! <g>

Just remember that a guarantee is only as good as the mob giving it.

That being the case I’d want to see their financial statements for the past 3 years together with their tax returns (so that I could make sure that the two agreed).

Is the investment being offered under an ASIC approved prospectus? (or are they keeping the participation offers limited so as to fly under the ASIC radar on publicly offered investments).

Development type finance (without pre-sales) from mainstream lenders, whilst not impossible is not a stroll in the park either – and for good reason. Every man and his dog can produce paperwork that shows fantastic profits from a development project. It’s your job to find out how believable/accurate these projections are.

Unless you either
1. have some experience with developments (and can therefore assess their projects properly), or
2. can afford to lose your investment (cos the guarantee turns out to be worthless).

then whilst I wouldn’t start running just yet, I’d certainly want to do my due diligence properly. And then for the first project at least I’d probably only invest under (2) above until I became more comfortable with them.

Then perhaps we should ask Julia to respond? I’m not familiar with her writings and the circumstances behind her comments. However, with that said, let me take your questions as they now stand and in isolation to what Julia may or may not have said. OK?

Yes I am.

GP, can I respectfully suggest that you need to separate and straighten out in your own mind just who is borrowing the money and who is doing the investing… they are two distinctly different entities (both legally and for tax purposes)

GP, I don’t see a problem here. YOU have invested in income units which (ordinarily, depending on the Deed) do not attract any sharing of capital gains. The purpose test (for deductibility of the interest) is applied against you, NOT the trust.

In your scenario above, the HDT has NOT borrowed. It has issued income units (to you).

Whether the HDT uses it for income generating purposes or not is (almost) irrelevant, although I wouldn’t like to see there being NO income generated back to the income unit holders. Why not? Because you’d could hardly argue your case for deductibility if there was NO LIKELIHOOD of you receiving a +’ve income stream from the HDT income units at some stage in the future. That is not to say that there MUST be an INCOME payout by the HDT EVERY year <g>

Firstly, the income/captial MIX of earnings by the HDT is irrelevant. If the Deed is properly drawn, then the income units and the capital units are completely separate beasts, each having distinct rights as to income, capital & capital profits. Indeed you can often find some units in a HDT that are a blend of the two primary types of units – ie a hybrid unit in a HDT – a sorter double whammy if you like. These ‘mixed units’ were very popular back in the 80’s with unlisted property trusts. But that’s another topic. However it is a reminder to be completely aufait with your Trust Deed and what it allows/doesn’t allow.

Now, back to your question…..

Let me be sure that I understand the circumstances – it is the COMPANY investing in the income units and not YOU using the company funds to invest in the income units in YOUR NAME?

If it is the latter circumstance (units in your name having used company funds) then yes you would have a Div7 problem and therefore should make a dividend distribution first.

If it is the former case (ie the company investing in its name) then, I don’t see a Div7 problem. Why? Because there has been no loan to you which might otherwise be contrued, or deemed (under DIV7) to be a dividend to you.

Just another thought…. on the basis that the (same) company was a discretionary beneficiary under the same HT, it might be worthwhile running the numbers to see whether you’d be better off:
1. distributing some (unadjusted – for the 50% exemption) capital gain.
2. paying 30% company tax rate (as opposed to the 24.5% personal tax rate)
3. then paying a fully franked dividend to a low income shareholder

…. just something to cogitate over your rice bubbles.

Well there you have it GP

Hi Nick,

The interest on all the loans you outlined would be tax deductible against the income generated by the property.

The taxman applies what he calls the ‘purpose test’. If the purpose of the borrowing is to generate taxable income then the interest associated with that borrowing IS tax deductible.

You’d need to be careful apportioning the interest on any mixed-purpose loan. eg the credit card funding – so that you were only claiming that portion of interest that related to the income generating purpose. File your calculations along with your other tax working papers for that year with your file copy of the return.

Hi Jo & GreatPig,

Jo, sorry to have confused you. As GreatPig correctly picked up my ball and ran with it … all I was saying is that ‘income tax rules’ as opposed to ‘CGT’ rules would apply in Gumshoe’s case.

Assuming there is a gain made, that gain will always be taxed unless it meets the (only) current EXEMPTION rule – that rule being the PPOR exemption.

As GreatPig suggested, intent is a nebulous thing to definitely pin down. It was correctly suggested that it would be difficult to claim (tho not entirely impossible) that you had invested for CG when you’re turning over 6 properties a year.

Would you believe that a self employed builder would have a devil’s job to convince the ATO that s/he had bought for CG and NOT with an income purpose?

One’s intent at the start of doing something IS VERY IMPORTANT in tax land. As is being able to demonstrate WHY/HOW that ‘intention’ changed along the way perhaps.

Monopoly, talk to any tax professional worth their salt, and they will tell you just what a turning point “intent” can be. If nothing else it’s often the cornerstone for arguing for/against the application of Part IVA of the Tax Act (as it is more commonly known as). Intent and dominant purpose (for doing something, or not doing something) can sink a case.

When the 50% exemption rules for CGT were released (in their draft form)many of the better tax commentators predicted mass tax evasion through people claiming that the 50% rules applied to them.

As time goes by, ATO audit activity in this area will increase. The ATO (in the 2004 tax year and beyond) is already focussed on property investors and the liklihood that investors will receive firstly the standard questionnaire followed by a closer audit is now dramatically increased.

If you happened to have disposed of a property (in the year that you are being audited on) AND have claimed the 50% CGT exemption, you can bet your bottom dollar that the investor’s INTENT will be examined very closely.

The larger your (property) portfolio the more likely it is that you will have to defend the position that you are NOT conducting a BUSINESS. Because if you are (in the business of) then as GreatPig rightly said – “all your gains become taxable”. Now whether you want to call those ‘gains’ “CGT with no 50% exemption” or income is a case of semantics (notwothstanding that the money you made would be reported in a different section of your tax return).

Contact the ATO and ask them for their little booklet – “Am I In Business”. Have a read of that then tell me – At What Point Will A Property Investor Be Running A Business?

Monopoly, I’d rather throw a triple, go to jail and wait out my 3 turns. You think Mayfair is the best property on the board? THAT’s where the taxman lurks – just before you look like getting a payout for passing go. He’ll either slug you with the rent if you step foot on his property or he slugs you with the $200 tax bill instead.
[baaa]

p.s. Hey, if you want a really great debate, let’s talk about the (effective) removal of allowing a deduction for negatively geared properties. Mr Keating (when he was our illustrious Treasurer) did it from approx 1983 thru 1985 tax years inclusive.

Over the past 3-4 years they’ve done the same thing to small businesses that make losses.They can no longer offset those losses against other income.

IMNSHO it isn’t a great leap to extend those tax rules to our property portfolios. Heck they could even do it on a property by property basis and not allow the aggregation of a property portfolio where some are +’ve and others are -‘ve.

Hi CRJ (& Gumshoe)

Thank you for the summary on the issue.

One issue that was not mentioned, and one that Gumshoe needs to be careful of, is that of the investor’s intent when the asset (in this case property) was purchased.

In Gumshoe’s case the stated intent is to settle on the land, build a dwelling and then sell it for gain.

This places it clearly in the ‘income’ bracket and NOT the ‘capital gains’ bracket. This being the case Gumshoe it wouldn’t matter if you held the property for 5 years after it’s completion (renting it out in the meantime), the original INTENT was one of profit.

You may want to review and perhaps document your intentions [biggrin]

Hi Julia,

I agree with your sentiments.

I’ve been a CPA long enuff to have experienced 2 or 3 attempts to merge the two bodies – each attempt being thwarted by the CA’s desire to protect the sanctity of their precious Royal Charter.

And yes, we are the larger of the two accounting bodies and that brings with it the advantages you mention.

Unfortunately the majority of our members are in commercial accounting roles as opposed to public practice (as you and I are).

My personal belief (although this is not the forum to debate this issue) is that you and I (and those like us that share the public accounting stage with our CA brethren) should have been hived off to the CA 20 years ago. We would then have had an accounting body that specialised in public practice and another that focussed on the needs of the commercial accountant – which I’m sure you’d agree the needs of which are quite different.

I don’t think the merger will ever happen and that the fragmentation will continue to divide the industry – to the detriment of our public clients.

I DO KNOW that any future overtures will NOT come from the CPA’s

Hi Cruiser,

Interestingly the most flexible funds ARE equal. You need to be very careful of being too cute with the Trust Deed.

The better funds are established with reasonably simple Deeds that aren’t going to need reviewing/rewriting every few years.

As to whether your price is reasonable would depend on what that included

1. a corporate trustee or not?
2. all the ATO registrations?
3. some training for you on your responsibilities as a Trustee and how to operate the beast (the SMSF)?
4. whether a SMSF was really warranted for what you wanted to do and therefore your $ were totally wasted? (I’ve seen these heavily supported by my brethren accountants when they are not necessary/appropriate for the circumstances)