Tax: Do you pay/claim your spouse as a bookeeper or property manager?

If your wife owns the properites with you it may be hard to her to pay herself!

Even if the wife doesn't own any properties with you it may not be possible to pay her.
see a recent case, Brown and Commissioner of Taxation [2010] AATA 829, http://www.austlii.edu.au/au/cases/cth/AATA/2010/829.html

1. Allan Brown (“the taxpayer”) was the owner of a rental property. He says he employed his wife to assist with the paperwork and other issues associated with the property during the 2006-2007 year of income. He claimed a deduction in respect of the wages he paid her and in respect of a large contribution to her superannuation. The Commissioner disallowed the deductions in the objection decision. The matter has now come before the Tribunal.
2. I am not satisfied Mr Brown and his wife have discharged their obligation under s 14ZZK of the Taxation Administration Act 1953 (“the TAA”) to demonstrate that the Commissioner’s objection decision was excessive. The decision is therefore affirmed

It is a short judgment and worth a read. Maybe your accountant should read it too!

Yeah, that guy really did go over board didn't he!

It depends on the type of income. Businesses which come under the Personal Services Income rules are not allowed to pa  aspouse or child for administration work.

Renting residential property is not normally considered a business, and wouldn't fall under the PSI rules.

It's a grey area, because the ATO could easily argue you are just trying to split income. If you do it by the book, and don't pay too much, you should be ok.

Is your wife a joint owner of the property?

What you say sounds reasonable to me. Keep it t arms length and commercial rates. make sure you run it by your accountant first though.

If only you had used a discretionary trust!

Hi EV

If you were to borrow and lend the money to the trust then you couldn't claim the interest. You would be onlending to the trust and the trust would claim the interest with the interest received by your self being income which would be offset by the interest paid by yourself = you nil, trust claims interest.

If you want to work it out just assume the trust is a person with no other income.

True you would not get any negative gearing benefit, personally anyway, by using a discretionary trust. But if your property is postive geared after tax back then it is very close to being fully cashflow positive as rents rise. Then you will start having the tax problems.
If you don't sell that means you are building up greater gains which means greater tax.
trusts work well for the self employed. PAYE pays get sued to, and often for unfortunate events or accidents.
Not sure about being an idiot. Insurance won't help in litigation very often.
Don't think trusts cost that much extra to run. (you forget to include land tax which can be another high cost of using a trust)

hi EW

Using a trust would definitely be slower and cost you more in the initial stages. Unless the trust had other income and it could therefore negative gear. If no other income then it would just have losses which would be carried forward, but would not result in any immediate tax savings. $500 pw is a large short fall.

Using a trust in NSW means the trust would pay land tax on land values greater than $1, unless the trust is a fixed trust. You generally wouldn't want a fixed trust as there is no asset protection and no flexibility.  ie there is no threshold like an individual. This means more land tax initially, but an individual will reach the threshold soon and then start paying the same land tax amount on anything over that. Multiple trusts won't really help. Multiple states might, but most states hit trusts harder on land tax now.

Setting up a trust later is too late. Transferring property means CGT and Stamp duty and there will be little to no asset protection. You could buy subsequent properties in the trust, but the first ones will still lack flexibility and asset protection.

re getting sued. I am a lawyer and see it all the time. You can get sued for something very innocent. eg one man bought a car, which was a dud, so he sued the seller. He fought hard and lost. He now has to pay the judgment, his costs and the other party's costs and is looking at $500,000.

You probably won't get sued in relation to your properties, but things happen. eg there is a post here somewhere about a investor who had his handyman replace some glass next to the front door. The tenant put his hand through it and was badly cut. It turned out that the glass was not up to the safety standard and the tenant was awarded about $800,000 (agent was also liable as he arranged the handyman from memory.) If this was held in a trust the trust would be liable for the money so properties in this trust could be at risk, but assets in other trusts could be safe).

Anyway, using a trust would cost you more and slow you down initially. But you are creating a time bomb. What will happen in 20 years, You will be on a fortune and will be paying a heap of tax while your wife has little income and there will be little you can do to split the income. You will also be a very attractive target if someone considers suing you (one of the first things people should do when considering to sue is to see if any properties are owned, if none then it is not worth pursing usually as there will be nothing to pay a judgment with).

Hi EV

Yes you can significantly benefit from a trust. But getting the assets that you already own into the trust will be a problem. To get existing properties in a trust you would have to sell them to the trust which would mean stamp duty and CGT payable at market rates.

This is the same whether going into a unit trust or a discretionary.

If the trust is a unit trust and it is converting to a discretionary the trustee of hte unit trust will have to buy back or redeem the units. The units will need be sold at market value. So if your unit trust had one property worth $500,000 and had issued 100 units and 5 years later it had increased in value to $1,000,000 the units would now be worth $1,000,000. So you the unit holder would need to sell them for $1mil and you would have a capital gain of $500,000 and would need to pay tax. But you could minimise this by transferring the units over several years.

Yes

But any equity would still be yours as the trust would owe you the money if you loaned it to the trust. If you let the trust mortgage your property it would still be essentially the same, but it may look like you have less or no equity on on first glance.

it is still a good idea though.

Gifting is good, but there are problems you need to consider such as the claw back provisions of the Bankruptcy Act – if you go down the money can be clawed back indefinitely if you gifted with the intention to avoid creditors, up to 10 years otherwise. Also unless you have paid off your home loan you will face the dilemma of whether to pay off the home loan first and saving you interest, or just gifting your cash. (you could also gift to the trust and then borrow it back interest free to pay down the home loan – depending on your deed).

Unit trust is good but I am not sure you would be able to claim all the interest on the loan to buy the units if you only had income units. Its not a matter of you just paying the interest, you actually have to borrow to buy the units.

Did you see the thread about hybrid trusts by Chris Batten on somersoft? very interesting