Forum Replies Created
- chrisaus wrote:I think I have made a huge mistake putting all that cash down for my investment property. The way I see it, I should've gone with a loan that has an interest offset account, put down the minimum to avoid lenders mortgage insurance and then put the rest of my cash in the interest offset account.
It's easy for things to become 'mistakes' in hindsight, when at the time it wasn't such a bad idea.
Re: restructuring the loans.. there's no good news. Tax deductibility of interest is based on the 'purpose' of the loan, you can't borrow more money for the purpose of buying an investment property you already own. You can try and juggle things around with another entity, but there's usually very little benefit. In brief, some other entity needs to buy that investment property from you, (ie: spouse, trust, company) that will allow the other entity to borrow 80% of the transfer cost, and have a 100% tax deductible loan. On the downside the transfer will attract stamp duty (in some states you can transfer to your spouse for free.. I think? maybe?) and it will be a CGT event. also, the CGT would be calculated based on a market value, rather than your transfer value.
Considering the downsides, the advantages look pretty dubious. If the house is worth $310, then 80% is $248. You said your loan amount is $190. So we're talking about borrowings of $58k. The interest on that will be around $3800, so say your in a %30 tax bracket, your looking at a tax advantage of $1140. So if you cop the stamp duty & cgt now, it'll take you a while to catch up to your tax advantage.
Well not quite, you only claim the costs once, and you claim all the rental costs against your rental income.
Where the costs are greater than the income, the result will be a loss.
Regardless of whether the rental turns a profit or a loss, the outcome is applied to your other income.
In the example of:
Taxable Income = 90 + (70 – 33) = 127The rental is turning a profit of $37k after the expenses of $33k have been deducted from the income. So in that example, it will increase your income by $37k to arrive at $127k.
It might help to try to think of the rental as a seperate entity or business (even though it's not). The rental has income and it has expenses, from which it will turn a profit or a loss. Then, if the rental turns a profit, then that profit will increase your taxable income, and vice versa.
Clear as mud?
It's something like:
Taxable Income = Other Income + (Rent – Costs)So for you its:
Taxable Income = 90 + (70 – 33) = 127for a negative geared property it might be:
Taxable Income = 90 + (15 – 25) = 80Once you work out your taxable income, then apply marginal rates.
The primary benefit of a company is limited liability (if anything goes wrong, litigators can not pursue you personally). And the primary benefit of the trust is the ability to disperse income to a range of beneficiaries (ie: children). The two can operate in tandem, with a company as trustee for a trust.
The company itself pays a flat rate of tax @ 30%, but any income you 'draw out' (via dividends, or salary) will be taxed at marginal rates.
eg: the company makes $50k (profit before salaries) for 2 years, each year you draw a salary as director of $30k, and in the second year take a $40k dividend. In the first year, the companies profit is $20k, so it pays $6k in tax. Your personal income (if you have none from other sources) is $30k, so at marginal rates thats $2550. In the following year, on the company's $20k profit it will pay another 6k in tax, and then distribute you a dividend of $40k, of course, there's actually only $28k to distribute, so you'll get a franked dividend of $28k + franking credits of $12k = $40k. so your salary + dividend = taxable income of $70k. The tax payable on that at marginal rates is $15,600 but you've got $12k in credits, so the bill would only be $3600.
So in the second year, between yourself and the company you pay exactly the same amount of tax, as you would if the $70k was just personal income. The only advantage tax-wise is that you can use the company as a 'buffer' that is, only distribute the income to yourself in years when your in a 30% tax bracket.
There are considerable disadvantages to these structures which you need to be wary of. A company does not have access to the 50% discount for CGT. (A trust does) And neither entity can distribute a loss – that is, you wont be able to claim any losses against your other personal income.
basically your right.. I'd say "your profit will be taxed at marginal rates subject to a 50%", rather than "half is taxed and the other half is untaxed"… but you know, you say tomato
personally.. in the example you give I'd only give up my PPORE when they pried it from my cold dead hands.. but thats just me.
consider this:
"I'll buy a property, renovate, and sell at a profit. But while I'm renovating I may as well live there for the sake of convenience."
which is very different to
"I'll buy a residence for myself, but probably renovate to make it more livable. Thereafter if its had good capital growth I might sell"
for practical purposes the situation is the same, but for the tax office the two scenarios are very different.Your best bet might be to look for an accountant (rather than financial adviser) in your area, just call a few & they should be able to give you a set price for a one off consult.
certainly is acceptable for ATO.. no problems there
2morroW wrote:A second question I have is about where to buy. I'm not really fussed and don't want to make an emotional purchase. I've been thinking that Geelong is good option but wonder if any other areas around Melbourne have growth potential over the next 10 years or so? I am looking to spend no more than 350,000 max but would prefer around 300,000 or less. Any suggestions?Well.. your the only one who can really decide, there's a plethora of books and other resources to help you chose what sorts of area will enjoy good capital growth.
That said, your already on the right track, it's wise to realise that you should try to be fairly calculating and unemotional about it. Just keep in mind that in your case, the property really does need to be somewhere near melbourne, because whilst no one will ever knock on the door just to confirm your actually living there, it really does need to be conceivable that you do live there.
You wouldn't be the first person who's tried to represent to the ATO that their PPOR is in sydney, but their tax return shows they have a full time job in melbourne.
Raydenhead wrote:Ring the ATO, they may be able to answer your question without charging you a fee.That's probably true, but they usually give the worst answers, and they wont give you the context of other options.
The ATO will simply tell you that your using your home to generate taxable income, therefore you must declare the income, claim the relevant portion of your expenses, and if/when you sell, pay the appropriate portion of capital gains tax.
As Jamie pointed out, there are other options. And, usually the capital gains tax implications hurt a -lot- more than foregoing the small income tax advantage you might get in the short term.
If your careful.. it could be a very effective approach, tax wise.
However, you'd have to "move in" (think furniture, utilities, mail, etc) for the first 6 months. This would give you 2 advantages:
1- you'd be eligible for the $7000 FHOG – which will go a long way towards the rent that your not getting, and
2- thereafter you can extend the principle place of residence exemption for capital gains tax for 6 years,Then, whilst the property is rented it will be negative geared, so the taxman and your tenant will help you pay off the house.
Hi Hawkeye,
In short, you have to actually move in.
You can extend the PPORE on a property after you move out (regardless of whether your renting or living in a home you own), but you can’t just nominate one of your investment properties because your currently living in a rental.
They’re both deductible capital items, and can be depreciated.
In the case of the antenna, its likely less than $1000, and could therefore be allocated to a low value pool.
Im not a broker… but they get commission for any finance they organise for you. Usually a finance broker is only too happy to give you some advice in anticipation of being able to organise finance for you in the future. If you call a broker you can always ask them what their fee structure is.
Hi Intrigue,
Terryw’s advice is right on the money. Talk to an accountant, and have them recommend a local finance broker.
Talking to your local branch is tricky, they’re representing the interests of the branch, not yours. Also, unfortunately they often have no training nor experience whatsoever, aside from a 2 week crash course in filling out the loan application form on your behalf. You said yourself your “seeking advice to make sure she gets it set up correct”. You simply shouldn’t be put in that position, the branch will receive a (considerable) commission for organising finance for you. And what exactly are they doing to earn it? filling out the form for you? In talking to a broker your assured of a certain quality of service.
Re the tax side of things, your on the right track. Build funds in the offset, pay the interest from the LOC.
NewbieInvest wrote:Not the best time of year for this to happen as I guess not much happens over the christmas period.My question is how long should I leave it before I start to hassel the agent to get someone in the property. I don’t want to be a pain but at the same time I expect good service from my property manager.Its a sad fact of life that those who are the most annoying tend to get the best service. Its not necessarily the quietest time of the year. In my own case I have a couple of weeks off over christmas and intend to spend it moving (sad but true). When you have to move you have to move, christmas or no.
If I were you I’d “rattle their cage” in advance… ask when it will be advertised, what is your agency’s opening hours over christmas, is your agent taking any time off.
The ATO’s definition of a repair or improvement has evolved over time. It used to be “like for like” was a repair, these days they’re a little more hard-line about it:
ATO wrote:If you have to replace something identifiable as a separate item of capital equipment (such as a complete fence or building, a stove, kitchen cupboards or a refrigerator) you have not carried out a repair. This means you cannot claim the entire replacement cost you incurred in the year you incurred it. However, you may be able to claim the cost as a capital works deduction or a deduction for decline in value.ie: if you replace an item in its entirety, then it cannot be claimed in full, in the year of expense, as a repair.
have a read:
Repairs:
http://www.ato.gov.au/individuals/content.asp?doc=/content/00183233.htm
Capital:
http://www.ato.gov.au/individuals/content.asp?doc=/content/00183243.htmAlso.. even if you could argue that it was a repair, then in your case you would not be able to claim it, as you wouldn’t be performing repairs which were required as a result of the property being rented.
The SMSF can certainly improve the property with its own funds. If you contribute your own funds to improvements, they will need to be considered to be personal superannuation contributions.
The fact that the blinds are a “capital expense” isn’t really bad news. It just means that the cost needs to be claimed over time (probably 8 years) rather than all in one go. The SMSF will still get the full deduction, but just over time, rather than in 1 lump sum.
Hi lisa,
the thought of paying 4mil in tax makes my stomach turn, I’m sure it does yours also. As terry said, you will need a good accountant to come up with a good plan. If its difficult to get a recommendation for one, then pick 3 from the phone book.. even if 2 of them waste your time and 1 of them saves you 1% CGT thats a win right?
I hate to be a naysayer, but there’s no way to reduce your CGT liability in any meaningful way.
If you were selling a couple of houses, then yes, selling them in different years would help, in this case it would save you something in the region of $50k.. In a few months the lump sum your getting would accrue that in bank interest. The effect is greater if you were to say, subdivide the property into blocks and sell them off over a greater period of time. Over 20 years would save you about 25% in CGT. (assuming no major changes to tax law) But… its not worth it. Your better off having 4.75mil right now than 6 mil (+CPI +appreciation) over the next 20 years.
Transfering to a trust wouldnt work, its a “non arms length” transaction, and as such the tax office would assign “fair market value” to the transaction.
Interestingly.. whilst you might not find a way out of paying your CGT, you could make it work for you as best you can. The financial year ends on the 30th of June, and your taxes are due 9 months later, on the 31st of March. If you sign the contract of sale on the 1st of July (first day of the year) then the tax on that sale wouldn’t be payable for 21 months (less three months for settlement to occur). So that’s a full 18 months in a term deposit or something.
Hi pullmyfinger..
Based on your info, my best guess is an annual net loss of around $31k to $33k. Considering 70% of that loss will be applied to your husband’s taxable income, and 30% will be applied to your own, your tax savings will be between $9k and $10k.
There’s a great online calculator for that here:
http://www.wheatcroft.com.au/tools/negative_gearing_calculator.phpTo claim the PPORE on a property between the time you sign the purchase contract and the time you move in, you have to move in as soon as is practically possible.
http://www.ato.gov.au/individuals/content.asp?doc=/content/57404.htm&page=5&H5
says:Quote:If you could not move in because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest. You are, therefore, not eligible for the main residence exemption for that period – that is, from the date of settlement until you move in.I think you might be getting confused with the “extending the PPORE” rules”.. you cannot extend the exemption in reverse, you can only extend it into the period AFTER you lived there. per:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htmAlso… by renting the property before you live in it.. you will loose access to the “home first used to produce income rule” – which can sometimes save you a bunch in CGT, but probably not really that relevant in this case.
not quite…
You still need to lodge a tax return showing your rental income and expenses, which will result in a negative taxable income.
Re: working, it’s certainly a can of worms. There’s a number of implications to earning both Australian income and “Foreign Source Income”, too many to mention here. Long story short, its unlikely that your FSI will effect the outcome (amount payable / refundable) of your Australian Tax Return.
