Should I set up a trust for my first IP

Sorry Terry, I am a bit confused.  So it's not the above table for interest only loans I should be looking at?  For example, if I intend to get an IO loan up to 5 years, do I basically stick with the 1 year rate of 6.74% and then that just gets readjusted by the banks like with the variable rates?  And does the 7.79% rate refer to if I wanted to pay 5 years of interest upfront/all in one go?

bb8

Thanks Terry,

Sorry I misinterpreted the tables.  Thank you for the clarification. 

In regards to interest only loans, I was reading your advice in other threads about extending beyond the general 5 year maximum.   The banks would re-evaluate your financial circumstances (presumably like re-financing?).  I got the impression from NAB last time that 5 years is the absolute maximum for that loan.

Is it a common thing for investors to apply for extension of IO loans beyond the 5 years?  I suppose if the banks says no then one can approach another bank?   It would not be ideal to be reverting to P+I on an investment property after 5 years b/c I wouldn't intend to sell the property after 5 years if I can avoid it.

I thought more about your comment regarding increasing a loan on a property (say if my existing IP property is now valued more that what I paid for), that the additional interest incurred is only tax deductible if used for investment purposes :

1.  if that money is not used directly for the same property, but being used to offset another IO loan on an investment property which is held in a family trust, is that interest not considered tax deductible? 

2. if one was to maximise the loan on the existing property (we'd borrowed 600,000 at the time but now b/c the property is worth more, 80% of it's current value is 720,000 so we are considering to borrow an extra 120,000)  – do we apply for a new loan of 720,000 or get a line of credit? 

thanks,
bb8

Hi Terry,

Just wanted to thank you again for your advice and also to followup my meeting with the accountant yesterday.   As a sole personal service provider even if I set up a company the tax office will still see the company as a personal service company, and b/c I'm the only employee (not counting a "bookkeeper") all the profit will still have to be distributed to me – therefore no tax benefit. 

However he did talk about setting myself up as a provider of medical services through a "service trust" (managed by a company), which means my earnings can be distributed by the service trust directly to the family trust with the investment property, which in the earlier stages will be in negative balance.  This means effectively I can negative gear indirectly. 

He also mentioned onlending my personal loan to the family trust property could be an issue if I am sued, b/c they will go after the property as the family trust owes me money.

bb8

Thanks Terry

Have been doing lots of reading into service trusts.  A few accounting firms have released newsletters in relation to setting up service trusts and their general advice is that as a sole practitioner with minimal overhead (general admin only, no office leasing or major equipment required), much like an anaesthetitst, that service trusts are not recommended due to the tax ruling in 2006.  I went to the ATO website to read more about this and I am trying to work out if my situation can justify that a service trust is "commercially viable" if the main activities are handling job searches, booking travel, magazine/internet subscriptions, and limited medical equipment.  Even with a reasonable markup for these services provided, the ATO may not view basic admin work as "commercially viable".   As a locum or if I work at a practice I will be a subcontractor with agreed %'s paid (e.g 60-40, with the 40% deducted from the practice to cover for nurses, rooms, etc).  My job is very portable and so won't need nurses.
As a young doctor my income is still limited so have to factor in the expense of setting up and runninng a service trust – which is fine but not sure if I fit the criteria that ATO has set.

I am not sure if I should be speaking with a tax lawyer or another accountant for a second opinion, and there seems to be quite a number that advertise themselves to specialise in the health field.  I'm sorry if I'm tracking off the topic but it looks like I will have to keep the family property trust losses for now until I save up enough for the offset account

Do you know of any recommended accountants/tax lawyers in Melbourne that I can seek a second opinion with?

Thanks
bb8

thanks.. I will have a look through the website.  McMaster's and Bongiorno are based in Melbourne but also have offices in NSW +/- QLD so I will explore them as well.