Forum Replies Created
Thanks Terry for the privilege to learn from your input.
With the added flexibility in HDT, as mentioned in your reply, it’s definitely well worth the initial outlay of legal and finance setup fees.
I must admit I have difficulty coming to grips with HDT and is cautious venturing down this path. My fear of failure is so great it can stop me dead on my track. This forum is my saviour….
Terry, keep doing what you do. I, and dare I say – most of us forumites here, enjoy reading and learning from your posts.
Cheers
CTTerryW
Oops, I see that Jan’s book didn’t say if it was HDT, presumably a normal family trust.
With HDT, if structured correctly, the individual lend the borrowed sum to the trust (company trustee) by buying units in the trust. So he is entitled to negative gearing while the trust benefitted from rent revenue and claim full expenses (other than loan interest). At the end of a financial year, a net distribution of income is paid to the unit holder.
Once the loan is paid off by the unit holder, the trust can then borrow from the bank for further investment. This strategy works better when investor has a ‘buy and hold’ strategy as there may be CGT implication later in on sale.
It’s definitely a tax strategy, investors wear tax legislation risk if ATO decides it rich picking….
CT
Now and then, I return to the forum to share and learn. I’ve done more on the latter. Yet, I can only speak for myself.
There are those of us newbies trying to read and keep abreast of changes in the finance market for investment purposes. Asking a few questions to satisfy curiosity is hardly a crime. The ‘stupid’ thing to do is to act with arrogance.
Sharks are in very walks of life, you need to ask the questions and backup with own due diligence. I do feel for the dignified MBs and FPs (for that matter). The only way forward for us is to insult them? Hmm, here I thought we need to build a team for success? Just couldn’t let this one pass.
CT
Thanks for speedy reply, Qld007. No apology needed.
Been to see a FP last month, she highly recommended using one from her referral soources. At this stage we haven’t done a complete figure on what we need, but glad to know you’re able to help.
Now I really show my true ignorance here – can you offer pointers on how work out a list of contigencies of what is minimum required to cover and genearlly for what period? I understand this is not an advice per se, just a starting point.[blush2]
CT
Hi Qlds007 and Russ
My concern is whether it is valid to have the title in name of trust , while loan in name of highest tax bracket individual, for the benefit of claiming interest rebate from negative gearing through the company trust structure.
My question come about as I read through Jan Somer’s book over the weekend. It was made clear that the tax situation is depedent on the name on the title, not the name on loan.
I’m aware the book is dated and don’t mind to be corrected on this issue.
CT
You know what they say about Murphy’s Law. I’ve been lucky with other types of insurance, income protection policy should not be ignored as there can be too much at stake if injury strikes…
brc, do you have any good sources as to which brokers?
I suppose the industry super fund can help at good rate – we’ve life and TPD insurances through an industry super. Again I haven’t the experience, any first hand input is valuable and much appreciated.
CT
Kjs, we’re here to learn and are warned enough times in the forum to back up opinions with qualified professionals with expertise in properties.
I cannot underestimate MB opinions. Loan features are constantly changing as well as the rigid tax compliance issue to boot. Where do you turn Kjs? Reading this thread alone said a lot…
Afterall MBs are the expert in their field.
CT
Yes, Elka, it’s been a hot topic for a while in this forum.
It is a undeniable risk that the loan provider do not want to spell out in bold print….., I’d like buyers to heed the warning here and make suitable adjustments to justify the risks taken on. The promoter of these loan prey on those that can least afford this type of ‘cheap’ loans by way of ‘educating’ them about finance. Disgusting indeed!!
Don’t you wish those so called gurus just do the right thing?
CT
I read the article ‘In Your Best Interest’ in the October issue of API. It was almost cut and dry in attempting to answer the interest deductibility concerns we have as investors. I quote the following pointers:
1. No change on deductibility of interest, for that matter, interest on interest. (It was implied that normal business with overdraft facilities already have capitalised interest and do not run into problems with tax deductibility.)
2. Obviously, loans marketed for thier tax benefits are out but on the other hand, investors are not obliged to pay more tax than necessary.
3. There is no problem in taking into account the deductibility of interest in negotiating the terms of loan (eg. IO loan for investment and P&I loan for PPOR)
4. The problem arises when the loans are not stand alone and are linked.
5. The more simple and normal the arrangement of loans the less likely it is to be considered a scheme.
6. ATO cannot tell investors how to run their affairs. But a systematic approach to increasing the loan on IP may point towards a scheme.
7. Watch out for spare funds to make extra payment on PPOR. A good way is to use Mortgage Offset account rather than straight into Home loan Redraw facility.
8. Do not be tempted prop up IP loan strategically.
I hope I do the article justice.
CT
Hi Dom
Interesting read and good to toss this around for opinions.
I’ve just listened to Steve’s take in the mini-seminar for his Book #3 launch. Sounds like he’s got very conservative in the current change in property trend generally.
Property definitely has its place in one’s overall wealth creation asset selections, albeit the savvy may try to time the entry and/or exit, to make long term sustainable profit.
I thought if I choose wisely and watch it closely to monitor if it still fit in my overall plan; I might be OK.
Hell, I’m still holding T2 shares, what am I doing??
CT
Hi BreakEven
The following is a checklist I’d use for any Mortgage Broker:
1. only use MIAA Accredited Mortgage Consultant (see MIAA website for detail)
2. check the number of lenders on their books (wide choice of lenders available to you maybe a good thing)
3. how do they get paid (you are entitled to have their fee disclosure to minimise any vested interest in product pushing)
4. fees they charge for service, if any (some provide a portfolio review and ask for $250 fee for review, I personally would not use them)
5. their methodology and criteria use to qualify your loan (a low rate may be compromised on features and vise versa)
6. ask for a Loan Comparison Rate (use the benchmark AAPR and check out Cannex website, although AAPR has some limitations)
7. find out if they are brokers as well as a mortgage originators (the latter sells their own brand of product which can be competitive and features unavailable to conventional products)
8. ask for proof of professional qualifications / experience / references from clients (a good broker should have no problem with that)
9. ask if they have professional indemnity insurance (a must in their line of work)
10. check the privacy guidelines on handling your financial information.
Finally ask lots of questions and be prepared for uncertainties that may affect your loan position down the track. Get answers now before signing on the dotted line.
Cheers[wink2]
CTThank you all for contributing your expertise in this thread.
Now, I’m almost tempted to join your line of work. Great job satisfaction for helping people achieving their goals; your integrity will be rewarded beyond the commissions (and trails)….. See, I’m learning.[laughing]
Thanks Terry, I think you have answered my concerns on interest deductability on reborrowing using exisitng home loan. Time I check with my bank. Let’s hope there’s a relationship manager that knows their loan products inside out. [mellow]
Cheers
CTHi all,
Thanks John for taking care in replying to my late posts. I’m grateful for the generosity demonstrated by all.
John, I understand the business loan should ideally be independent from personal or investment purpose to follow strict tax compliance guideline.
My last question relates to the cost saving on the loan stamp duty (originally paid when it was taken out, eg 400K loan would mean a stamp duty of $4780).
Scenario
Own home outright (payout 400K loan in full)
Buy new IP at 300K at 80% LVR (drawdown to coincide PPOR payout)
Ask bank for release of title and substitute new IP title
Meet deposit and other upfront costs on the purchase out of savings (conservative)For simplicity, assuming an Offset feature can be set up easily on the original loan, and the loan amount can be negotiated to suit (reduced loan amount to say, 240K, and get rid of redraw).
If that PPOR loan was to be paid off to nil and coinciding with a draw down of the loan for IP; would that complicate the intent of negative gearing for tax (as it was originally taken out for PPOR)?
Something is telling me it’s not right… I need to refinance to structure it properly etc..
Please bear with my line of questions; stupid as they may sound.
Can anyone offer some pointer? – I hope I do myself justice by thinking aloud here. [wacko]CT
Hi Simon,
Following your line of discussion, “..to deny shares or property as a bad investment is to rob yourself of 50% of the boom action each cycle.”
I just want to add that some experts (with some vested interests) would say, “it’s time in the market rather than timing the market” that has a long term winning strategy.
I find myself questioning that wisedom. If one take on the life long approach to learn the share or property market; won’t one do better with active stategies to time the market for the entry and exit (especially when the downside has been projected and weighed against holding on to an asset)?
So, I thought one have to be careful what information to take on board.
My 2c worth, anyway.
CT
Geez, I don’t know what I don’t know… Thanks for clarifying that JohnSmith.
I really appreciate you pointing out the split loan trap on claiming interest later. It is definitely something the broker in contact was unaware of the issue here.
Yes, I do recall reading from posts in this forum the Offset is the way to go. But I’m not clear on what make the Offset different from a Redraw.
* Is it available on standard loan product or is it an extra feature in premium products?
* And is the method of interest calculation of the Offset similar to that of Repayment Redraw facility?On a separate issue to save stamp duty on loan already paid – Do we face a problem with claiming for negative gearing when we pay off PPOR loan and use it as an Investment loan?
That original Wealth Package Home Loan still has over $350K left (with a sizeable Special Redraw payment) to run the full term of 30 years (from the original date of settlement 3.5 years ago). It seems more tricky when the loan was taken out in joint names – my spouse has higher salary while I do not have a regular income except from variable trust distributions.
In times of increasingly more innovative but complex loan application, I’m going to be indebted for all input generated here before we can confidently venture out to ask the right questions of the lender(s). [happy3]
As with all replies, I understand the comments are to be followed by advice whenever necessary. [thumbsupanim]
CT
Now you’re talking, Simon!!!
Agree 100% on self education; having little knowledge can be so dangerous.
Pity it’s a property forum…, I’d, and assuming most of us here, like more of this open discussions.
CT
Thank you Terry and Simon for your replies; I guess I must heed your warnings and play it safe as you guys have seen the bad things happened to the uninitiated more so than we do.
Hmmm, it’s all talk for now as I’m waiting for settlement of my other property before doing anything. All the more reason to do my due diligence. [blush2]
CT
Hi elkam,
Thanks for your input; that’s more like what I thought it feasible. Otherwise it’s a blatant miuse of the ruling and spelled tax avoiding scheme no matter how one looks at it.
Anyway, there are people doing just that and have deep pockets to defend their stakes… The penalties may be slap on the wrists to them, but too much to bear for us new straight investors.
CT
Hi Terry,
Why do I need a lawyer for ? [blink]
I haven’t done anything remotely like those cunning devils the case studies; although I’m certainly jealous [jealous] for those in the know who dared to test the unchartered waters to create inconspicuous wealth.
I suppose the lawyers cost them enough to fight their cases in the end.., and I for one, am not able to stomach the worries to live a normal life waiting for the outcome of ATO decision, however favourable the scheme is.
CT
Hi Simon,
It’s all well for learning from the case studies. As a general sweeping statement – the compound or capitalisation of interest is allowed, if there is evidence in subtantiating the purpose test for property (or any other business) investing (using LOC) to generate income.
But is it allowed to generate loss as a result to claim negative gearing benefits(where the income is siphoned to payoff personal debt)? This makes the threshold compliance line blurred.
Can you help clarify that, Simon?
CT
