How do you structure for something like this - thanks a ton in advance

Discussion in 'Accounting & Tax' started by can do it, 5th Feb, 2017.

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  1. can do it

    can do it Member

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    How do you structure something like this

    Hi Guys

    First of all, sorry for the long rant but I need to get answers for a start and I don’t have much time to waste

    I have been reading most of the threads from quite a while but it never materialized for me to jump into the IP property but the consequences are now pushing me into, as I need to move to overseas in over 2 yrs period of time to take care of my aging parents, need to prepare myself to be in a financial position so that it gives me a good base to settle down overseas while I start a career there which could take quite a bit of time therefore looking for as much passive income that I can generate from here

    Briefly here is the scenario

    Here is my current financial situation

    Principal place of residence is paid off

    No current loans

    Annual gross pay: 120567

    Wifey is not working and won’t be for a while

    My ppor would be around 500 conservatively

    Aim : To generate a passive income of 6k aud per month or as practically as much as possible

    Ways I can think of to start with:

    My current Ppor would be generating 1400 a month ( net ) but I still need 4600

    Investment property :

    Thinking of IP with a positive cash flow from day with atleast a gross yield of 7-8% as the intention is to generate passive income that would add onto 1600

    What type of : As I need something to reduce my tax as well while in Australia , started reading tons of info about NRAS as it talks about positive cashflow with negative gearing but heard that there wont be any new NRAS licenses from june or so 2016 that limited my chances of negative gearing with positive cash flow

    Other reasons to be keen on NRAS : As I wont be here

    Better management of property via NRAS structure

    CPI indexation of the NRAS credits

    I guess every 3-4 yrs rents would be compared against the market and adjusted (as I understand that NRAS rent 80% would be less than the market rent )

    I read about, tons of NRAS material that is available here and online and seriously started looking for NRAS property but the picture looks gloomy with the NRAS changes and the available properties are re-sale but not new stock and also the last of NRAS stock that is available is out of my range

    Budget : As the aim to generate positive cash flow and as am contracting atm wanted to stick around a budget of 350K max ( as more the budget less the gross and net yield ) and also just in case If I loose my job thereby by want to keep the payments low ( if I have to fork out of my pocket each month)

    From NRAS…

    I have started looking at standard properties as the picture with NRAS looks gloomy ( not much stock and the figures don’t add up for a positive cash flow )

    Even with the standard properties , avoided Major metro’s and started looking at regionals such as Bendigo , ballarat , geelong as they fit into my budget and gross and net yield is more than metro’s

    Kind of properties : I have narrowed my search into Apartments ( not more than 10 in one building) with less body corporate fee, units or townhouses without body corporate and preferably all of these type of properties – close to all amenities and transport and even though if they cost me a bit more as well

    I have started reading threads on Bendigo, ballarat, geelong and will post separate threads on my specific questions on them in Where to buy

    Aim :

    Option 1: To start with a go for two positively geared properties by borrowing against them and borrowing the rest on my ppor ( only the funds needed to settle from ppor ) and keep the loans as IO only and then by the time for me to leave – to pay off the lowest of the two or atleast pay 50% of one of the ip for e.g if its around 300 K to start with – Pay of 150K thereby generating more passive income, making the other IP both Interest and principal thereby one pays the other ,though there wont be any net cash coming out of them but they will be a path to be paid out quicker but the same time I can do tax deductions on them on the annual tax returns

    Other thoughts : As the intention is to generate passive income from the time I leave but not be bogged down with loan payments , thought of seriously saving and picking up a second job and buy one IP ( within a price range of 200 or 250K ) with cash

    Pros and cons of ‘other thoughts’ :

    Pros : I would get the rental income on the top of 1400 from my ppor from the one IP

    Cons : its virtually impossible to save that much in two year even though I work round the clock and pick up a second job

    2.I would loose the tax deductables ( such as interest on the loan as there wont be any loan ) so the things that I can only deduct is management fee + expenses ( including rates + water etc)

    Tax implications : This is the most important thing that I am trying to get my head around as it plays a very important part when I leave the country .. and seriously my head hurts and spins when I start thinking about this but cannot avoid this as everything revolves around the tax implications

    I am Aus citizen with OCI card holder for India and wont be returning back soon ( though eventually I will be but it wont be less than 183 days..let’s say atleast for 2 yrs for my first return ) as I will be lodging my aus tax return – the question of whether I would be treated as non-resident or resident for taxation pouposes is very confusing , the info on ATO is that not black and white

    So I have done some figures with the assumption of being a non-resident and also as resident when I lodge the tax return

    Resident : Considering my gross return on my PPOR per calendar year would be around 20250 ( with the current market rents ) , my deductions would be expenses + management fee , lets say around 4k per year , that would be 16K per year as it would be below the tax bracket , I would not be paying anything to the tax man

    Lets say that I have taken my first IP and lodge my tax return then – that return would include rent generated rom the IP and deductions would be interest paid on IP loan + depreciation + management fee and expenses

    For rough calculations , lets say that the rent is around 12K per year gross and expenses around 6k

    So total income from ppor and IP 1 = 20250 + 12 = 32252 and expenses of 10K resulting in a balance of 22252 – so the tax as per current rates of around 324 ( according to ato tax calculator )to be payable

    Non-resident : If I am being treated as non-resident based based exactly on the same scenario , I would need to pay a tax of 7231.00 per year

    So if my net come per month lets say 2200 ( 1400 from ppor ) and 800 from IP as the intention is to pay atleast half of the loan

    2200 – 602 ( 7231/12 = 602 aud ) = 1598 aud

    Question :

    So if my assumption is correct my net cash income is decreasing my 600 aud which is a significant amount , How would I ensure that I can increase my deductions so that my tax comes down at tax return

    This lead me a question that if I have done a terrible mistake by paying out PPOR and closing down loan (thus lost the Interest that I can claim when it becomes IP from the time it becomes IP)

    But

    If I am not considered as non-resident for taxation pourpoes then I am fine with the tax to be paid

    Considering all of these I was thinking more in the lines of NRAS which can be negative gearin g ( thereby helping to reduce the current tax ) and giving me a positive cashflow and giving me tax credits of around 11k ( atm) that are tax free but as said above current NRAS picture looks bleak atleast in my scenario

    Other avenues : Other than IP’s or if IP’s don’t add up with my figures , thinking of following , borrowing against ppor and on lending into a Company or a person under a legal contract and getting interest paid ( ofcourse more than bank fixed deposit rates ) then declaring that interest along with the gross income of ppor at the time of tax return

    Question : If I borrow against the ppor and invest in the Company , can I claim the interest that I pay for the loan as tax deduction

    What kind of agreement should be drafted between me and company for the onlending so that both the parties are protected and I can claim loan interest as tax deduction

    I can’t think of any other options such as shares, bonds as I don’t have clue about investing in them

    Can anyone suggest anything else in trying to achieve my goal

    Million dollor question :Am I in the right path in trying to generate passive income that can really help me when I leave by thinking of the above structure or have I got it completely wrong and looking at the wrong options

    If I am wrong with the whole of the above – what else would you suggest ?


    Thanks heaps
    can do it
     
    Perthguy likes this.
  2. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    This must be the longest bloody post on propertychat that I have ever read.

    You might be able to claim the interest if you have a written loan agreement on commercial terms.
     
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I scrolled and scrolled and didnt read a word
     
  4. Marg4000

    Marg4000 Well-Known Member

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    A big ask for a first post!

    I am sure there are people here qualified to advise you, but unfair to expect them to give long detailed answers for free. And there are legal implications for giving financial advice except in the most general terms.

    You need professional advice, tax and financial.

    Marg
     
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  5. can do it

    can do it Member

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    Hi terry

    Thanks and I have been reading your tax tips and they are very useful
     
  6. can do it

    can do it Member

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    Hi marg

    Thanks got your point at this stage I am not sure whether i am on the right path therefore getting some inputs before I take that next step
     
  7. Phase2

    Phase2 Well-Known Member

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    Agree! Though I didn't read it all. I only got as far as NRAS and thought @can do it needs to pick up the phone and talk to PCs resident NRAS specialist. @euro73 :)
     
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