Depends on exactly what you mean by this.

If you mean buying the properties in the trust(s) and using the company as the trustee(s), then I gather that’s a common scenario.

However, buying appreciating assets in a company is generally not a good idea as you lose the 50% CGT discount.

GP

Yack,

Until you get around to buying Dale’s book…

The idea is you borrow in your own name and buy income units from your hybrid trust. Since you’re borrowing for income-producing purposes (you get the net income from the rent), the interest is deductible, even if its more than the rental income.

That I don’t really know. I recall from Dale’s book that some lenders may not be too comfortable with the concept, due to lack of familiarity, but you’d really need to ask a good mortgage broker.

I gather the trustee allows the property to be used as security, so I suppose if the lender would accept it as security when bought in your own name, then they would probably do likewise when bought in a trust.

However, a mortgage broker would be much better placed to answer this. I’m only going by what I’ve read.

GP

Misty,

My understanding is that it’s what the money is borrowed for that’s important, not where it came from.

So as long as it’s used for income-producing purposes, then I believe it should be deductible.

But as always, check with a good accountant.

GP

Thanks Steven. I’ll take a look at it.

GP

That’s good to hear [].

Do you know if it matters whether the loan is from an Australian lender or a NZ lender?

And I read something about the ATO taking witholding tax from interest payments to NZ lenders. Have you heard of that?

GP

Remember though that it’s not the marginal tax rate that counts but the average tax rate. A person can earn around $70K a year before their tax payable is higher than a company’s.

If all the beneficiaries are earning much more than this though, then I think distributing to a company might be okay provided it’s only income or capital gain on assets held for less than 12 months. For capital gain on assets held for more than 12 months the top tax rate is only 24.25%, which is less than the company rate.

One problem with building up cash in a company is that to get it out you have to declare dividends, and dividends have to go to shareholders. If the shareholders are still on high incomes, then they’ll have to pay the extra 18.5% tax anyway. And while it’s possible to have a low income earner as a shareholder of a different class of share, where dividends don’t have to be distributed evenly between classes, there are anti-avoidance provisions to do with dividend streaming to be wary of. Basically companies aren’t very flexible when it comes to distibuting retained profits.

Note though that I’m not an accountant and this is just my understanding and personal experience.

GP

Waz11,

This was discussed here somewhere not so long ago.

From memory, the main points were that the house owned by the trust would not be capital gains tax exempt and you cannot negatively gear the house you’re living in (ie. by using a unit or hybrid trust). Otherwise I don’t think there’s much problem with it.

But check with an accountant or lawyer.

GP

YC,

I’d say that in many cases the return is necessary to compensate for a lack of capital gain potential and the added risk of long periods of vacancy.

I had an email yesterday from an REA in NZ offering a place for $55K currently rented at $148pw. That’s about a 14% gross yield.

However, according to the 2001 census stats, the population was about 1600, down about 2.5% from the previous census, the majority of income earners were under $20K pa (half of those under $10K), and the unemployment rate was around 18%.

I’m not sure that that gives a particularly good tenant pool – at least not of tenants who would be likely to always pay their rent on time.

GP

And mine.

To rub salt into the wound, after the last time my place got broken into (before I had an alarm system and window bars), the police came and dusted everywhere for fingerprints – which means I had an awful mess of black powder to clean up all around the place! It’s not always easy cleaning that stuff off.

GP

Scullyman,

I’m not a legal or financial person either, but I would imagine that would be worse. The promissory note might be considered as income to the vendor (assuming they declared it), so they’d miss out on the 50% CGT discount they might otherwise be entitled to.

Also, the fact that you’re trying to help the vendor save on CGT indicates that the transaction is not arms-length. You may end up with the ATO valuing the house at market value for CGT purposes AND hitting the vendor for income tax on the promissory note.

But as I say, I’m not an accountant so this is all just conjecture.

GP