Hi,

Following on from my initial post, I have decided to come back and write a more comprehensive answer.

Property Trusts

The first point to note here is the accounting structure mentioned, i.e. a trust.

A trust is a legal structure that exists where ownership is separate from entitlement. For example, in a trust the assets are administered by the trustee for the benefit (i.e. earning of income) that flows through to those entitled to receive those profits (i.e. the beneficiaries).

The type of trust mentioned here is a unit trust, which means that beneficaries’ entitlements is based on the number of units held (i.e. the more units, the more profits flow through to them).

The value of these units is reflected in two ways:

1. The underlying value of the asset base – meaning that as assets appreciate in value then so too does the value of the units; and

2. Speculation – usually in respect to future values or earnings.

Transacting of Units

Property trusts can be public or private in nature. Units in Public Property Trusts are traded on the Australian Stock Exchange, and as such you’ll need a broker (or an e-trade account) to instigate a buy or sell order.

On the other hand, purchase and sale of units in Private Property Trusts are transacted out of the public’s eye.

You could say there are two types of private trusts:

* Private public property trusts – whose units are available for the general public to purchase, and where the amount of funds or number of investors are large enough to warrant that a prospectus (meeting ASIC guidelines) be issued, however these units are not traded on the stock exchange; and

* Truly private property trusts that don’t meet the ASIC requirements requiring a prospectus, and instead are privately administered.

Authority

The authority (i.e. the document outlining the rules) for any property trust are contained in the trust deed. This would include the purchase and sale of the units, trustee powers etc.

Where the trust is listed on the ASX then it must also meet further requirements under the ASX listing rules.

Purpose

The general purpose of having a property trust is for various investors to pool their resources (and thus spread the risk) to acquire property, usually of a significant dollar value (such as a shopping centre, inner city building etc.).

Well, that’s about it for now… hope this has provided a little more information.

Cheers,

Steve McKnight

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Hi Waz11,

Thanks for your post.

I’m a little confused as to what you want more information on…

Is it:

1. A general property trust that is run commercially (i.e. accepts investments from the general public); or

2. A property trust that specifically invests in commercial property.

Operating through a turst is nothing unusual by itself. If you are looking for a type 1 version then it may be you just need to look for property trusts that are listed on the ASX (e.g. see: S&P/ASX 200 Property Trusts).

These entities pool public money to acquire property according to their prospectus – often shopping centres and the like.

They are listed on the ASX, meaning that units are bought and sold via a broker.

Here’s a quick link to help you understand more.

If it is item 2 then any trust can potentially invest in commercial property (subject to the terms of the trust deed). It may be either public or private.

Hope this helps.

Bye,

Steve McKnight

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Hi,

Sorry – didn’t know that Jo was also posting so apologies for the repeating…

If that is your strategy then keep going, and learning, as experience is the best teacher.

Just two points to note:

1. Be sure to add more in perceived value than actual cost. Sometimes the line can be blury, but if you lose perspective then it’s easy to lose money.

For example, on one early reno project I did I added a lot of fluff under the pretext of making the house more homely (such as coat hooks). In hindsight I think I lost sight of what added value and what was an unnecessary extra. I think finding the line comes from experience.

2. It’s more likely that a large portion your works will not be immediately deductibe, but rather need to be capitalised into the cost of your property. Just be careful of this as if you are relying on a big tax refund to fund ongoing works then you may be caught short.

Warm regards,

Steve McKnight

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Hi Sarah,

Thanks for your post and welcome to the website!

You have an interesting problem, but don’t forget that you can apply for exemption to the rules (not sure what chance you would have…)

Otherwise, I suggest checking out the weekend property section to the West Australian as when I last thumbed it through it was chockers with ads from developers.

Regards,

Steve McKnight

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Hi,

In recent times there seems to be a point of distinction between positively geared and positive cashflow (especially after Margaret Lomas’ books)

Positively Geared

A positive cashflow outcome after the tax effect of non-cash depreciation tax deductions has been factored in.

That is, a pre-tax negative cashflow situation that is turned into an after-tax positive cashflow outcome because the tax benefit of the depreciation tips it over the line.

Positive Cashflow

Simply more cash received than cash paid – ignoring the tax impact of depreciation and not distinguishing cah inflow and traditional revenue, or cash payments and accounting expenses.

For example, in my case, I treat my entire P&I loan repayment as a cash outflow (under positive cashflow), where as for acocunting purposes I’d only include the interest component.

Having said that, I’m not sure how positive gearers treat the principal part of a loan repayment since most of the models I have since promote interest-only loans.

Sorry, it seems to have turned out to be a complex (and perhaps academic) way to explain the difference, but it’s kind of needed in the interests of accuracy.

Regards,

Steve McKnight

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Hi,

Just wanted to add to remember that the CGT discount is not available to companies, and works slightly differently for Super Funds.

Also, did some quick surfing for you and found the ATO guide to Capital Gains. Click here for the link.

Regards,

Steve McKnight

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Hi,

Terry has provided a good reply, so this may be somewhat overkill…

If you have not claimed those costs in the past then you may be able to add them to the cost base of the asset (you’ll need specific advice).

In repsect the amount of tax you’ll pay… first thing… I assume that your partner’s name is not on the title? If it is then there may be some legal complications.

Assuming it is not, and that you have it in a trust, here’s what happens:

1. The capital gain needs to be show in the trust tax return (i.e. after you have worked out the appropriate amount).

2. The gain is then distributed to the relevant beneficiaries, who are then taxed at their appropriate marginal tax rates. Provided the entity is an individual or super fund, then they should be able to access some form of the CGT discount. Distributions to a company do not qualify for the CGT discount.

May I suggest that you get some advice re: tax planning prior to selling, as a few hundred dollars spent now may save you several thousand in tax, and once you have sold then you lose some of your flexibility.

Best wishes,

Steve McKnight

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Hi,

I’ll try to answer this from two perspectives:

1. Investing Theory

You only undertake a reno when you add more in perceived value than actual cost.

2. Tax implications

While you need to get specific advice for the circumstance, my general tax knowledge (i.e. what I haven’t yet erased!) is that there needs to be a nexus between earning income and the repair.

As such, repairs done soon after buying are usually deemed part of the cost of the property, yet repairs done ‘in-between’ tenants should be deductible – either outright or else via depreciation.

So, to answer your question… provided the cost relates to earning assessable income, then depending on the timing it will either need to be:

A. Capitalised (i.e. added into the price of the asset) and then, depending on the item, potentially depreciated; or else

B. Claimed as a deduction.

Hope this helps. If you want to read further info, then the ATO website that talks about this issue is a good source. Click here for the link (and scroll towards the bottom of the page for the heading ‘repairs’).

Bye,

Steve McKnight

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Hi,

Thanks for making this good and interesting post.

Generally speaking, I am not a fan of serviced apartments as they are more of a solution than they are a problem.

Practically, this means that it is the management agency that stands first in the profit queue by charing a (usually) above-market rate to run the investment.

As for positive cashflow returns, just be on the lookout for hidden costs and unrealistic growth and other projections used to smooth over the figures.

You may actually find that it is cheaper to pick up a second hand serviced apartment than to buy a new one – so i’d be investigating that angle.

Finally, I urge you to consider the uniqueness of the investment you may be acquiring. It is scarcity that drives growth, so there needs to be something identifiable (beyond the usual marketing blurb) to flag your investment to achieve above market returns.

Thanks again for your post and welcome to the forum!

Regards,

Steve McKnight

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Hi Darls,

Thanks for making your thought provoking post.

I hadn’t realised that the majority of the products (i.e. everything except the books) had an audio component. It is this way in an attempt to provide extra value to the purchaser.

I’ll make it a point to back now and think about (and certainly cost) how much it would be to have a transcript made for those who have hearing difficulties.

Thanks for your input.

Regards,

Steve McKnight

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