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  • Profile photo of gomez109gomez109
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    June 29, 2011 - 3:52 am

    So, if you wanted to make a bit of money from this, couldn't you buy a large block of land now (under the old stamp duty rates) and then commence building 3 townhouses for investment purposes on the land after 1st August, you could claim this 3 times, couldn't you?

    (Of course, it does need to make sense in its own right, but given I was thinking about doing this construction anyway, seems like a good way to get the government to give me $30,000)….

    Profile photo of gomez109gomez109
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    June 6, 2011 - 1:01 am

    Hi Terry,

    Thanks very much for your thoughts. It’s always very helpful to bounce ideas off other people, particularly when they seem to be as well informed as you are!

    Cheers,

    TIm

    Profile photo of gomez109gomez109
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    June 4, 2011 - 12:37 pm

    Hi Terry,

    I appreciate that the asset will grow in value and when it is sold there will be a profit — but that profit will need to be distributed as a capital gain to the beneficiaries so cannot be used to pay off the “loan”. So the only real way for the trust to acquire capital seems to be through non-cash deductibles like depreciation.

    Sorry I was unclear about the question on the offset account. Your answer was very nearly what I had in mind, except I was envisaging an investment loan, not a loan on the PPOR.

    So, if I have an investment loan of $100,000 which is deductible, with $20,000 in the offset account and I lend the $20,000 to the trust from the offset account, my personal deductible expenses go up by $20,000 so I pay $1,400 more interest at 7%

    But the trust now has $20,000 more so doesn’t need to borrow this money, so it saves $1,400 in interest and makes $1,400 more profit for the year. Which it then distributes to my wife as the lower income earner, reducing our net tax bill.

    I’m assuming the ATO would disallow this scenario and force the trust to pay interest to me at market rates, negating this strategy?

    Thanks,

    Tim

    P.S. — I don’t suppose you’re a tax accountant who services the Sydney area are you? I could really do to have a good conversation with you, your answers on the forums are incredibly helpful!!

    Profile photo of gomez109gomez109
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    June 4, 2011 - 12:18 pm

    Thanks for all the great input, much appreciated. And I certainly agree and would never buy a place just for a depreciation allowance. However, when trying to quantitatively determine whether a brand new property is a better investment than a similar configuration but older property with smaller price tag, depreciation does come into it.

    (As do many other factors such as number of repairs needed, etc)

    A rough guide is all I’m after, so I like the sort of rules that Mr5o1 has given, just as an estimate.

    Thanks,

    Tim

    Profile photo of gomez109gomez109
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    June 3, 2011 - 12:41 am

    Hi Terry,

    That’s very helpful, thank you.

    I guess what I’m getting confused about in the first scenario is: If the trust has to distribute all it’s profit to beneficiaries then it will never have any money to repay the “loan”. The only way it seems to be able to get money is to have it gifted.

    So if it makes $1,000 and has to distribute it, there’s no money left to repay the loan. The only way I can see it repaying the loan then is by making money through non-cash deductions such as depreciation and amortising borrowing costs.

    So the property might have:
    – Rent $33,000
    – Interest $28,000
    – Depreciation & other non-cash deductions: $4,000

    So the profit would be $33,000 – $28,000 -$4,000 = $1,000, but the trust would still have $4,000 in cash once it’s distributed it’s profit. And it could use this $4,000 to repay the loan, correct?

    On your comment about the interest not being tax deductible, does that apply if the money comes out of an offset account?

    For example, I have a loan of $200, 000 and an offset account with $50,000 in it. I lend the trust $40,000 from the offset account. Is the interest now tax deductible?

    And finally, do I need to charge market interest rate for the interest the trust pays me to be tax deductible? For example, if the trust pays me 1% interest and I’m paying 7%, is that 6% difference tax deductible? (In which case the trust makes more profit, distributes this profit to my wife as a lower income earner and I get a tax deduction.)

    Thanks very much,

    Tim

    Profile photo of gomez109gomez109
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    February 15, 2009 - 11:56 am

    Thanks Richard, that clears it up. So really you're talking about splitting a loan secured by a single security into multiple separate accounts all under the same loan. Something like St George's portfolio loan.

    Now I've just got to find a lender that offers this split facility with an offset account…

    Out of curiosity, do you know if I can withdraw money off one investment loan and put in on another investment loan without tax issues? For example, if I have
    – a loan with a limit of $300k and a balance of $200k
    – a loan with a limit of $250k and a balance of $150k

    (Again, there is a difference between the limit and the balance because I've put extra payments into the loans, both of which are IO on Std Var rate)

    Can I then move the money around, so I could say end up with
    – a loan with a limit of $300k and a balance of $300k
    – a loan with a limit of $250k and a balance of $50k

    I know my bank will let me do it, and I can't see any negative tax implications, but I'd be interested in other people's thoughts on this.

    Then I could put the offset account against the first account to reduce the interest, and put the second account in a split account like you're talking about to fund future investment.

    Thanks!

    Profile photo of gomez109gomez109
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    February 15, 2009 - 3:09 am

    Eddiec, thanks very much, that's what I thought.

    IP Freely, sorry if I was unclear. There would be 3 accounts, 2 loans and 2 properties. My wife owns one property, one loan and an offset account, all in her name. I own one property, one loan and an offset account, all in my name. The third account is not an offset account, but it's just a normal account in both names, which allows me to move money from an account in my name to an account in her name, effectively "bouncing" the money off it.

    Profile photo of gomez109gomez109
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    February 12, 2009 - 12:23 pm

    Hi Richard,

    Thanks very much for getting back to me.

    My loans are both I/O and not P&I, but they both have redraw facilities on them, so I've put some extra money into them in order to reduce the interest. That's what I meant by "ahead of the repayments"; badly worded I know.

    After your comment, I read the "10 disadvantages of cross collateralizing" paper on your web site. Very interesting indeed. I see why you say it's bad, although I've read other view points too.

    Would you mind elucidating a bit on your "split facility" comment? How would using a split facility be any different to me keeping the 2 separate loans and linking an offset account to one of the loans? Doing the latter I could redraw the additional money off the loan with the (new) offset account and place these funds on the other investment loan, giving me one big loan with an offset account, and another, smaller loan with the capability of withdrawing a large amount of money for my next IP.

    Yes, all the debt is deductable. However, I'm assuming that withdrawals from the offset account don't need to be, they can be for everyday living expenses for example?

    Thanks very much!

    PS: Just as an aside, I might recommend you put contact details and your comany's name in your cross collateralisation document. I printed it out and read it in my, er, reading room, got to the point that said "please contact us if you want further information" and realised I couldn't remember where I printed it from, and hence whom to contact!

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