Clean slate - what would your optimal strategy(s) be?

Being a non resident changes things because of withholding tax

Tax Tip 37: Withhold tax on interest you pay to overseas entities

Tax Tip 37: Withhold tax on interest you pay to overseas entities


But this will depend on your tax residency status which is different to immigration status.


Answers to your questions below:

Yes, 95% mine. However as we are married a certain % (only a %) of the monies are commingled does this present an issue?


Yes. You cannot borrow your own money so if you have mixed funds in one account (your’s and hers) then you cannot borrow this money. If she has some of her own money and keeps it separate you could set something up though.


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Is the benefit here to reduce future CGT/taxable rental income as they would come under her name only on a lower tax rate? Because we could always buy as joint tenants.


I generally think it is preferable not to own property jointly with others, even spouses. See this thread for my reasons: Tax Tip 21: Tax Advantages of Buying property in 1 name only


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Or the main benefit is that the money is a loan and therefore can be future deductible when refinanced correctly?

That is possibly the main benefit here.


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How would such a loan work in practice, is it simply documented between us?
Would it be unsecured, or secured on the property?

Just think of lending a stranger money – you would want it properly documented and at commercial terms. Need to see a lawyer about this.

It could be secured by an unregistered mortgage or unsecured.


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Would she be able to set up a LoC if I have loaned her 100% of the purchase price under point 1? Or would the bank consider the property bought with cash as we are married/my loan is unsecured?


She would got to a bank and offer the property as security for a LOC. If she is not working then it will be difficult to get finance. You could jointly be a borrower as lenders lend to 2 spouses where 1 is on title.


If you have a mortgage over the property the bank won’t lend unless this is discharged.


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Will I be able to go on a LoC backed by a property when I am not on the title?


This could be done 2 ways

1. Loan in both names.

2. Loan in your name with guarantee from wife


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So I buy the IP? (as my wife will have bought in point1)


This will depend on the circumstances. It may be better for your wife to buy the next one, either using the LOC for the full price or for 20% deposit and going for 80% on another loan – perhaps with you.

Depends on the circumstances.

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What would be the benefit of buying on my own, if I am the main income earner? Would I not wear full CGT if we decided to sell it in future?


The owner would wear the full CGT if sold. So planning is needed. Where you own one property each you could sell the one that is owned by the person that is on the lower income so less CGT is paid. Where both own 2 properties this sort of tax planning couldn’t be done.


Another benefit is manipulating income of the property by moving cash into different offsets. E.g. moving a large sum to an offset of a property owned by your wife would result in tax savings if she is not working. The same cash could be moved to your offset if you stop work or end up with a lower taxable income.

This may be good in the year of sale of an IP with CGT.


I understand excess cash in the offset account here would lower my deductible interest payments. Do I not want to keep interest payments high to reduce taxable income?


You will be still losing money with paying interest so you would want to minimise it as much as possible. If you spend $10 in interest you will only save $5 if you are on the top marginal rate.


So my wife has a deductible loan against her property (previous PPoR). The cash goes back to me to pay my loan back. I use the cash to buy the new PPoR. If this is what you mean, it's genius.


Exactly


Wife pays $100,000 for a $100,000 property. You lend her the $100,000.

Later value jumps to $150,000.

She refinances the $100,000 loan from you to say ANZ. ANZ pays out your loan at settlement so you get back your $100,000 and the wife’s loan is still the same - $100,000. Purpose hasn’t changed and neither has deductibility (if set up right).

 

I have my job here in Perth, so am tax resident here (but not yet permanent resident). This should simplify this aspect

I will pm you separately on this, not for a public forum but interested in your thoughts.

I will see a lawyer about this, but from an accounting/tax perspective am I not generating income (if under commercial terms) from my wife, and therefore paying higher tax rate than her tax rate? Or did you mean commercial clauses but 0% interest rate?

So my loan to her is unsecured for this to work, got it.

So it may realistically be better from CGT taxation perspective for my wife (low/no income) to own the majority of properties as any in my name would be sold for a CGT hit almost certainly (med/high income). Is this correct?

This does give extra flexibility if circumstances change, good point. But from CGT perspective may be detrimental if we decide to sell a property in my name (see point above)?

Is a possible danger to this strategy that my wife may struggle to refinance my loan on her limited income, without the bank taking into account my job/income?

 

If i was in such a wonderful position as yourself (i am not) I'd be picking up the phone and giving TerryW some of your $$ inreturn for some superb advice. Could well be the best investment you ever make.

 

If Terry lived in Perth I'd be pounding on his door no doubt. I find if you are unlucky accountants can not think sufficiently outside the box, and you would never know until it was too late. Hence this exercise to see what property experts here would do.

 

If Terry is taking new clients you could do it over phone/email - probably even Skype if you want to 'see' him.

 

Terry, thanks for the very helpful insights. Trying to follow your logic and taking into account Jess's comments etc

I believe the main benefit is you have a fully deductible loan if you move out of the property and keep it as an IP. Plus the income from the IP would go to my wife (low income). Plus lower CGT payable taking advantage of wife tax rate when eventually sold and CGT 6 year rule not used.

The main drawbacks are while we live in it as PPoR, I increase my taxable income through loaning my wife money (thus a higher tax rate than she can deduct from her income). Plus to buy a new PPoR and have the wife's loan considered deductible, she would solely need to refinance on low income (lender may not approve). If lender does not approve refinance, the new loan taken out by me/us for the new PPoR will not be deductible.

This second option would mean if a loan is taken out to buy a new PPoR, the loan cannot be deductible, even though we keep the first house as IP. Better to go with Jess's suggestion and take out mortgage straight away instead of cash?

Do you agree with this assessment Terry or have I missed something in my interpretation?

 

loans can be at zero interest. But you will need specific tax and legal advice on this.
Depending on your wife's income she may be able to borrow for the purchase up to a certain amount with a related party loan funding the rest.
Whether you would charge her interest or not will depend in your situation and plans.

 

Hi
Still a bit confused when you said you made the choice to buy a PPOR for not paying rent and lifestyle, but then say you want to make it IP1 the following year? A PPOR is usually not the best IP, so better differentiate from start, or I guess you have your eyes set on FHB stamp duty reduction? This small saving will set you back. This is related to differentiating control vs ownership.

Ex
If you buy your PPOR outright at $600k and value goes up 10%, you created $60k of equity.

But if instead you buy 5 IP at $500k each using $100k for each and leaving $100k buffer, when values goes up 10%, then you created $250k. The difference can make you rent a palace for a while! I would go for the second option any day. I would buy one by one starting slowly and accelerate as you become more aware of the process and more comfortable. And I would seriously look at buying them in a family trust as this provides flexibility to distribute income, does not consume your right for FHB grants, but quarantines losses so no negative gearing ( but offset against future gains so not really loosing it). This is the strategy I am executing at the moment.

Yann

 

Hi Yann,

What you are referring to is leverage. Consider however the market going down when you have 5 IPs at 500K each. As I said I was a bear on Perth property. I'd be renting a cardboard box for a while!

I am interested in the family trust structure you mention, perhaps you could elaborate?

Thanks,

PP

 

a discretionary trust allows the trustee to distribute the income of the trust to the beneficiaries of the trust. The trust itself doesn't pay tax, but the recipients of the income do. This allows streaming of income to the lower tax payer beneficiaries.

 

Just like what Terry said.
With more details, I have a family trust with corporate trustee. My wife and I are the company directors. Trust beneficiaries are my wife and I plus many categories to keep it flexible with most family members or other organisations of our liking like charities etc. The trust makes loans and purchase properties every now and then when we can afford, and has a small share portfolio. We have this set up as wife is on and off work as family grows . In the future
we plan to live off trust distributions and be able to give those distributions to the one not working or with less taxes each year. Other advantages is that we can quarantine losses now while we work and offset later when needed, still have franking credits to the one with less taxes, still eligible for FHB grant, and no asset in our name so good protection if one of us creates a business or for estate planning.

These points work for us but would not likely be beneficial for all situations, so get legal and tax advice before setting it up. It gives flexibility for revenue distribution but is quite rigid once set up you can not easily transfer monnies or assets between you and the trust (stamp duty, tax...). Happy to chat further via PM or over the phone if you want to know more about our set up and why it works for us.