Forum Replies Created
I know many who do a kind of “cordial mix” – having some positive geared properties offsetting other slightly negative geared properties. If losses can be absorbed “across the portfolio”, then that’s not so bad. Some though might depend on having it offset their other Income – THAT is where such a change may lead to a change in the rental market
This is precisely the reason I believe treating property investment “not as a business” is a very bad idea.
Speak of which, they are trying to introduce something similar in NZ too. They call it “ring fencing” over there.
using a loss from property investing to reduce your other income.
I would say this sounds like it would have a more negative impact against individual speculators rather than investors.
Unless they propose negative gearing cannot be used to offset the investor’s own investment portfolio, in which case that will probably kill off the invest altogether and cause some very serious consequences to the economy…
sounds like you are the borrower to me.
Sounds like a host of legal issues too.
And why is that?
I am not doing any buying, renovating and selling. None of those items are performed under my name. Instead the corp trustee acting on behalf of the Trust is doing all of that.
The properties are purchased under the trustee, renovated by the trustee and eventually sold by the trustee.
Yes, I am the settlor of the trust and yes, I am also the director / shareholder of the corp trustee… if me being the settlor and director / shareholder in the trust structure is something that immediately causes a problem, then I need to know. Because while I have talked to accountants when setting up such structure, but nobody raised any red flags for me. In fact, the people I spoke to explicitly said that the whole idea of using a business to do property investing is to separate the business from me as an individual, and I need to include people (such as secondary beneficiaries of some sort) or else legally that Trust isn’t really a separate entity to me as an individual.
As for me. I am only there to eliminate the hassle that my parents (or whoever that is providing the lending) don’t want to deal with.
Strange as it sounds to you, my parents frequently gets my help when it comes to using technology, such as:
logging a call with Optus to fix their phone line
not understanding a utility bill and gets my help to call the utility company to sort that out.
In the past, they wanted to do internet banking but couldn’t figure their way out the interface so they call me to drive to their home or they come to my home so they can log into the internet banking account and I do the internet banking in front of them.I have told them to learn to use technology as the use of technology to do those stuff will only become more and more prevalent in life but so far they struggle.
I have even had a case where my father things it is too complicated to follow a set of instructions to connect to a scanner/printer and do some scanning / printing. I even drew up the step by step instruction for him and he gave up saying “it is not something I do every day, I do it like once every 3-4 months and by then I just don’t remember, so you do it for me”
With regards to providing cash to the Trust, at this stage they indicated that they find it too bothersome to drive to my home or having me to drive to their home just so they can open their bank account for in front of me and for me to show them how to make a transfer (or call bank and it all on the phone on their own). Hence they think it is easier to jut transfer the money to my account first and then transfer to the Trust Account.
To me, I personally don’t mind how they do it, because either way, as far as I am concerned, it will be the Trust that gets the money and all the trading / business activities will be done by the Trust rather than myself. I have no involvement as an individual as far as the activities performed by the Trust goes.
I guess if the act of sending money to me first really is going to cause a legal / taxing problem, then that’s OK. I will just my parents that they need to come to my home or me going to their home so the money is transferred directly from their accounts to the trust so me as the “middle node” scenario doesn’t exist.
I think you are overcomplicating the issue. I would not worry about being caught under the NCCP as what your dad does is more like a JV where he is an unsecured lendor and he does not run a money lending business, he simply invests cash for a profit. There are a number of qualifiers to be classified to be in the business of money lending and he does not fit them, the same goes for GP.
Hi Ben
Yes, that’s what I always thought in the past… until I read the post stating “any transfer is considered to be illegal if not having a credit license”…
Who is the borrower?
You or a company?
If it is the company, why is the money going into your account?The corp trustee is the borrower.
Reason for considering to transfer to me first and than having me to transfer to the corp trustee is more from an ease of management point of view.
My parents are old folks and it is a hassle for them to transfer money to overseas. For example, ANZ now days no longer does overseas transfer across the counter any more, and you must call them on their support line to do an international transfer. While ANZ has good business reasons to do it this way, it just means more hassle for old moms and dads, so its much easier for them to transfer it to me and then let me handle all of those hassle.
Or it could be that money is not transferred directly from a personal bank account to the corp trustee, but instead is done via one of those money transfer entities such as XEMoney (who offers money transfers to overseas with more attractive rates compare to normal banks). In this case then everything is done online and again, it is a huge hassle for old moms and dads due to them being computer illiterate to do that, so it is much easier for me to handle those situations. (unless they are willing to share their banking passwords with me, but I would never ask for such as this is their private password and they are not supposed to share with me!)
I think you didn’t understand my previous post as I answered these.
You are right. I didn’t quite understand it.
When you said “If he is lending to you as agent or trustee of the trust you are an individual.” I read it as “If he is lending to you and he is working as an agent or trustee of the trust you are an individual.”
Now that I think of it, it appears you actually tried to say “If he is lending to you and you are working as agent or trustee of the trust you are an individual.”
English isn’t my first language and sometimes culture difference does make me interprate the sentence in a different way…
It does matter who the borrower is. If he is lending to you as agent or trustee of the trust you are an individual.
There are also various other legal and tax consequences to doing this.
Nah, not like that. He is not part of my trust or member of my trustee.
Trust is like this:
Me as the settlor
Me as director and shareholder of the trustee
Me and my son are beneficiaryMy parents are not covered in any scope as far as my trust is concerned.
My question is more in this regard:
1. If he sends money from his account directly to Trustee account, then according to what you described, he is not sending money to a “natural person”.
2. What about if he sends money to my account and then I transfer the money from my account into the Trustee account? In this case, is he still considered to send money to something “other than an natural individual” or is it considered as a transaction to “a natural individual” just because I happen to be the middle person?
If the lender is based overseas not covered by NCCP.
This is why we and other lenders have a separate lending entity in Shanghai doing Lodoc Non Resident Loans in Australia.
Cheers
Yours in Finance
My dad is in Australia… I am in Australia, but my corp trustee is overseas.
Your dad should seek legal advice.
But if he is lending to a corporate trustee the National Credit Code does not apply as the borrower is not a natural person.My Trust / Corporate Trustees is overseas.
In this case, does he need to send money directly to my Trustee (in which case the National Credit Code will not apply)? In other words: Dad’s account –> send international money to my trustee
Or can he send to my Trustee via my account? Dad’s account –> my account –> send international money to my trustee
Does it make a difference from a lending / credit / license / law’s point of view which method is used as long as it is documented clearly that my corp trustee is the ultimate receiver of the money?
Once you start lending to ordinary folks you then deemed to be in the business of money lending and thus need to be licensed.
Hi Ben
I think this is where things are getting very unfamiliar to me.
Can you let me know what license / gotcha’s that need to be careful with the below scenario:
———————–
What if say, the scenario is you are a property investor, and you specialize in “buy – renovate – sell” scenario.Let’s say you repeat this strategy 3 times a year and you operate your property investing using a Trust.
You dad is retired already but he has some cash savings… or you have a GP who knows you well and he doens’t like the idea of his cash sitting in banks earning little interest.
Instead of going to banks, your dad / GP is happy to lend you his personal cash savings to cover your renovation cost, and the condition is after you complete your renovation and sell your house, you return the money to your dad / GP with some added interest.
Your dad /GP then declares that as part of his personal income when doing tax return each year.
In this case, your dad / GP is not running a money making or financial business, they are just lending their personal money to you at time of your need and they legally declare all those extra little interest earned when doing their Tax Return.
But at the other hand, there is money going back and forth between your Trust and your dad / GP’s personal accounts, as much as 3 times per year. In the case of your dad, you can say “parents are parents and my dad is just helping me out”, but in the case of your GP, what’s the go there?
In this circumstance, is your Dad / GP considered to be “in the business of lending money”?
What is the definition of “in the business of lending money”? I see a quote somewhere that says “….Basic principle of business lending which involves lending money to many various (not family) parties for profit with which you make a living off”
In the scenario above, your Dad is already retired and just decides to help you out with renovation when you are investing… your GP has a professional job of his own (being a doctor with high pay) and he just wants some extra income, but he is also not “running a business” to lend money, he is just happy to help you with renovation cost provided if he can get some extra interest. So are they considered to be “in business of lending money”? Or is this a bit of a grey area and can be argued with?
Where do we draw the line as far as “in the business of lending money” is concerned?
The reason why I want to get that clarified is, investibly, in the future, I am sure that I will run into situations where I do not have enough cash myself to do a renovation and I need to borrow money. Of course I do not want to restrict my choices to have to go to banks every time. If there are angel investors other than banks who are willing to lend money with more flexible / negotiable conditions, then why not?
Likewise, I may for a period of time not be able to find the right deal but if somebody else has a deal but needs money, then lending a small portion of mine to earn some extra return is something I might consider too. eg: I trade properties via my Trust, but market is correcting itself for a period of a few months so my Trust activities are quiet during those a few months. During that time, somebody else has a good deal but they need to borrow some money to cover part of the cost… then I might consider provide that money for that somebody if that somebody can provide me x% of interest. In this case, is my Trust considered to be “in business of lending money”?
But of course, I want to make sure what I do is legal and ethical.
Yes it is illegal to provide credit to anyone (To an individual for personal purposes) without holding an Australian Credit License or being a Credit Representive of an ACL Holder)
Cheers
Yours in Finance
Well… that kind of sucks, and I have difficulty understanding the logic behind such laws. It is almost like saying “individual people are not allowed to help each other when it involves money”, and the law appears to setup in such a way that makes it purposely difficult for people to lend each other a hand.
A typical scenario could be, I need some money to do some work, and my parents are willing to lend me a hand.
Parents being parents, they will of course either charge me no interest, or if they have to, charge me very low interest compare to the kind of interest banks would charge. So naturally I’d be more inclined to receive help from my parents rather than banks.
So in this case, then, how can my parents help me in this regard going by the legal path?
Breach of NCCP if the loan is for personal purposes.
Heavy fines for doing so without an ACL.
Cheers
Yours in Finance
Are you able to elaborate a bit more? A bit confused here. It sounded almost like it is illegal for someone to lend money to a friend and expect the money to be returned in the future?
Only if you offer Coded loans over 62 days.
What if you just want to Angel invest someone?
Eg: you have 50K sitting in bank doing nothing. You have a friend who wants to do a flip and need some renovation money. You and you friend agree (both get lawyers to write up loan documents) to lend you 50K for 3 – 4 months and you friend will return 50K + 10% interest and the end of 3 – 4 months.
“Oh, no worries… just refinance with another lender and get a fresh 5 years of IO” – that may not be so easy in this current climate! Ouch !!!
I have just read that this is about to change again. Seems APRA thinks the control has at a high level achieved its purpose so IO lending is going to loosen up a bit again rather than tighten.
We will see how accurate this information is.
I don’t like negative gearing.
To me flipping should be done as a way to raise capital rather than “hold it and sell when I retire”. I would consider flip in the following scenarios:
1. I want to do buy and hold but I don’t have enough deposit to buy another one for buy and hold after this purchase, so I will flip for this purchase and as many flips as necessary to raise deposit. (in the ideal situation, if I implement my strategy correctly, at 80% LVR, I shouldn’t need to flip to raise capital)
2. I sell for strategic reasons.
The idea is to look for properties that look like total crappy hole that turns off and scares away most buyers, but in reality they only need a cosmetic renovation to get back on the “normal value”.
So buy that property at a value that will make your strategy work and do the following after buying
Renovate, which can take between 8-20 weeks depending on how much to renovate.
Re-evaluate, aim for spend X number of dollars on renovation and get at least twice as much value in return.
Get a tenant in with a strong rent.
Refinance, so you get deposit for the next purchase straight away after renovation, a term lots of investors refer to as “instant equity”, rather than having to spend 5 years waiting for a natural market growth.You get positive cash flow out of it too because you are buying what most people consider as a “useless crappy property” at a “crappy value”…
For example:
Normal market value = 250K, and normal rental = 300 per week. Negatively geared. Not only do you need to wait for 3-5 years for the value of this purchase to increase, it hurts your serviceability too.
Then you find a crappy property selling at 150K (because everybody thinks its crap and nobody wants to buy it), you spend 30K on renovation to bring its value back up to 250K, and rental it for 300 per week. This means you are getting 300 per week against 180K purchase price. This becomes positive cash flow, which means it becomes easier for you to refinance the 70k (250K-180K=70K) which can be used as deposit for the next investment.
When I say “positive cash flow”, I don’t just mean “rental – interest = positive”.
Instead what I mean is “rental – interest – property management – insurance – council rates – maintenance fees = still positive”Of course, this is only a very brief and high level view of the strategy I am thinking. There are lots of factors to consider when buying (demand, population, etc, etc, etc…)
No it will improve
I think this is where it can potentially get a bit confusing.
While the serviceability “will improves”, but if the repayment (P&I) is high enough and to the point where your monthly repayment + other expenses are high and your combined income doesn’t cover, then banks will still not lend to you.
It is not like banks will say “OK, out of $3000 repayment, only $1000 is interest, so let’s approve the loan based on $1000 interest + other expenses”. They will still say “let’s approve the loan based on $3000 + other expenses”.
This is why we need to look for bargains rather than the typical “let’s spend 5 years pay it off before start moving again” approach.
I say you should know your borrowing capacity first, so it helps you to realize what kind of deal you can do. eg: if your borrowing capacity is only 400K, then for most part (there are exceptions), there is no point of looking for deals that would require you to get an 800K loan.
Once this is sorted out,then always find a good deal first (not just find a deal, but a GOOD ENOUGH deal).
Then find money. Apart from getting a loan, there are other paths…..JV, angel investors, borrowing from family or friends, etc, etc, etc… once you found a good idea, and the deal is good enough to attract people who are able to potentially give you the lending, then everything becomes negotiable.
OK, Can I just download a generic loan document template (there are plenty online), and get both sides to sign it upon both sides happy with the content?
Ahhhh.. I see
I think that clears up my questions.
Regarding to loan document, who can give me advise on that? Accountant or Lawyer? If Lawyer, what sort of Lawyer I should go to?
I am not sure when it comes to the time for the trust to return those cash to my personal account, is ATO going to see this as “oh, that’s a huge amount of income this year, so pay income tax please”.
Regarding to gift vs loan… essentially I am “lending” (if this is even the right term to use) money to my family (in the form of a family trust), so it makes every little sense for me to charge my family interest.
Just like when my parents lend me money to pay for a school fee and later on I return that money to my parents… my parents being my parents, they therefore off course will not charge me interest, and I fail to see why government will be so upset about my parents not charging me interest.
If government insists that “a lending must incur an interest no matter if it is a lending from one family member to another such as you lending money to your own family trust”, then is there a minimum amount of interest rate the government insists we must use?
The trustee is again, a corporate trustee with me and my wife being the direction / shareholder.
Stupid question from me here, but can you explain limitation act?
