Here is a previous excellent post from Julia on the subject.

Cheers, Paul

“If the Vendor Finance arrangement has the following features the income stream received, once the wrap arrangement has begun, is considered to be principle and interest by the ATO. The income stream received before the wrap arrangement is entered into is considered rent. Reference ID2003/968.
Typical Features of a Wrap (Vendor Finance Arrangement)
1) The purchaser pays a deposit at the time of entering into the arrangement.
2) The settlement (change of the title deed to the purchaser) does not take place for several years after the arrangement is entered into.
3) The purchaser has the right to occupy the property prior to settlement
4) The purchaser pays a weekly amount (regardless of the name it is given in the arrangement) for the right to occupy the property
5) As part of the arrangement the purchaser pays the rates, taxes and insurances on the property.
6) The balance of the purchase price to be paid on settlement of the arrangement is reduced by the weekly instalments.
7) If the purchaser fails to complete the arrangement the deposit and weekly instalments are forfeited.

Now what about the profit on the sale of the property? Is that normal income or capital gain and when is it taxable? Assuming an agreement similar to that described above the answer to this question revolves around whether the vendor is in the business of selling houses or an investor just realising an investment. The key issues in differentiating here, according to ID2004/25, 26 & 27 are:
1) The Vendor did not use the property for any other purpose than to enter into the wrap. A straight rental of a property before entering into a wrap arrangement would avoid this point.
2) The property was sold at a profit
3) The wrap arrangement was entered into within 6 months of the vendor purchasing the property.
4) The Vendor is in the business of purchasing properties to resell. It would be difficult for the ATO to argue this case if the Vendor only bought and sold one property.

If you are caught by all of the above then CGT cannot apply to the sale of the property as the profit on the sale is revenue in nature. If a transaction is caught as income, CGT does not apply or in other words CGT is the last option if income tax doesn’t catch it. But even if you weren’t caught by the above and CGT applied there would be no discount if the property was held for under 12 months. If you did hold the property for less than 12 months before entering into the wrap it is better to argue that you are in business and caught by the above because the profit on sale would be revenue in nature and as a result not assessable until settlement which could be 25 years away (ID2004/27). If you hold the property for less than 12 months but it is subject to CGT you don’t qualify for the discount but would be assessable on the profit when entering into the wrap.
Section 104-15(1) of ITAA 1997 states that a CGT event happens when the owner of a property enters into an arrangement with another party to allow them to live in the property and title may transfer at the end of the arrangement. Section 104-10(3) states that the time the CGT event happens is the time of entering into a contract for the disposal of the asset, not when settlement (title passes) takes place.
For example this means that the vendor who enters into a wrap on a property that has been previously used as a rental and held for more than 6 months will be subject to CGT on the property in the financial year the wrap agreement is entered into. Accordingly, if at this stage the property has not been held for 12 months no CGT discount will be available even if they eventually end up holding the property for 25 years under the arrangement.

More information on rental properties is available on my web site in the rental property booklet. All free http://www.bantacs.com.au

[email protected]“

Hi Traezi

Vendor finance may be one option for you but even that is problematical.

Vendor finance can be broken roughly into 2 techniques; instalment sales contracts and lease options. The lease option would probably be best for you as you would most likely lose your rental assistance with an instalment sales contract.

However, to be realistic, nearly all lenders, including vendor financiers (wrappers) would not like to see you spending more than one third of your gross income on your house payments. That comes to about $216 per week on my claculator.

Next it comes down to your personal situation. Do you live in an area or can you move to an area where the houses are cheap enough to allow a payment of $216 per week to be viable. And is $216 per week too much out of an already tight budget.

For your planning purposes, a payment of $216 per week would give you a borrowing capacity of approx $140,000 at 7% over 30 years.

If you would like to continue with your enquiries, leave your details on the Vendor Finance (Wraps) Association’s website and I’m sure somebody will get in contact. Their website can be found at:
http://www.financewraps.asn.au

I hope this helps.

Cheers, Paul

Hi Waz

I know you say you don’t want to spend the money on a wrap pack but I’d suggest you have a re-think about short changing your education on this business.

We use Tony Cordato as the lawyer for our business but ultimately we would have had to spend a lot more than 2k to 3k to get the same amount of information from Tony as we got from the wrap pack (as with all lawyers, Tony’s time is expensive).

There are also many many areas covered in the wrap pack (either Steve’s or Rick’s) that a lawyer just wouldn’t know about, i.e. the day to day running of the business and the pitfalls for newbies to be aware of.

And anyway, you’ll get more than the cost of the pack back in your first deal.

I hope this helps.

Cheers, Paul

Hi Fish

I’d suggest you sit down and discuss these very important questions with a “switched on” accountant.

In the meantime, if you’d like to educate yourself on these subjects, I’d recommend Steve’s “Wealth Guardian” kit which is available on this site. It’s an easy read and is a fantastic educational resource.

I hope this helps.

Cheers, Paul

Hi Redwing

Have a look at:
https://www.propertyinvesting.com/strategies/lease-options.html

Cheers, Paul

Hi Julia

I just wanted to second what Felicity said. Great post! Thanks for your help.

Cheers, Paul

Hi KFJ

If you join the Vendor Finance (Wraps) Association you will find a mortgage broker there who has a loan product which he promotes as having both “Funders” and “Lenders Mortgage Insurance providers” approval to use for on-selling using vendor finance, i.e. wraps. The Association’s website is at
http://www.financewraps.asn.au
You will find reference to this product on the members forum.

As an aside, I think you might have it wrong with your comment about the wraps pack(s) being “a lot of money to outlay just to find out about the finance side”. It’s what you don’t know in this pursuit (as with many others) that will hurt you. And anyway you will recoup the cost of the wrap pack(s) on your first wrap. My suggestion. don’t scrimp on your education.

I hope this helps.

Cheers, Paul

Hi Rakky

As far as I can see, you’ve got it right up to and including,
“Who’s name is the property in for the duration of the wrapp?” – Usually your name stays on the title.

“Does your own lender require any involvement in the process?” – I now know of 2 mortgage organisations who are advertising that their underlying funders and mortgage insurers are fully “in the loop” as far as knowing and approving that the house may be on sold using a wrap strategy.

Also, if you haven’t already, go back to the home page of this site and click on the “wraps” link. You’ll find a lot of good information there.

I hope this helps.

Cheers, Paul

Hi Craig

Try the Vendor Finance /Wraps forum on this site. Have seen quite a few Canadian wrappers posting on the John Burley forum boards – http://www.johnburley.com

Hope this helps.

Cheers, Paul

Hi

I’d like to ask the moderator to move this thread to the “Opinionated” forum. My feeeling is that’s where it belongs.

Cheers, Paul