Spousal Loan Strategy?

Hi fellow propertychat gurus,

I finally purchased a PPOR mid last year and got into the property game.

After reading Terry_W's strategies, I just want to run this by everyone to see if this is a plausible play or you can tell me I'm dreaming. Of course, I will seek proper advice from an accountant to work out the details if this is a legitimate strategy.

I got the idea from one of terry's strategy about borrowing unsecured loan from spouse. I couldn't find the exact thread but basically this is what I want to do -

Some $ figures have question marks, they are assumptions.
1 - IP1 $600k?, I borrow 480k? for an investment property + put in 20% cash to avoid LMR
OR
Turn existing PPOR with $400k equity into IP then refinance for the 20% deposit. Call this IP2.

2. wife with zero income lends me $300k for an investment property at a market rate of 15% interest. This equates to an income of $45k or $38k income after tax, or approximately 12.5% return on investment.

3. I put the $300k towards offset account for said IP1. Thus brings my interest costs to $45k + $9k ($180k @ 5% interest) = $56k OR adding equity loan interest = $60k
Net yield 2.5%? - $15k?

4. Outstanding $400k loan outstanding on IP2 @ 5% = $20k - rental income net of costs + interest = $0?

My income is approx. $95k or $67k after tax and 5% salary sacrifice. This strategy effectively cuts my pre-tax income by 50% or a net tax deduction of $16k

So to sum it up.
Wife +$38k pa.
Me +$16k pa. (tax credit)
That's $54k return on $300k cash per annum (18% net yield) which currently sits against the PPOR offset account earning 3.82%.

The PPOR was purchased in my name (thanks again terry_w picked up that tip from your threads)
My wife and I have a formal loan agreement in place for the money to be offset against the PPOR charging an interest and records of monthly repayment for an agreement amount.

Thank you for taking the time to read this thread. Is this anywhere close to being a legitimate strategy?

 

Does your wife have $300k?

Is the PPOR paid off? Or no non-deductible debt?

 

Yes, she has $300k

The PPOR has $400k equity and $400k loan. Interest only with an offset account and $300k sitting in it aka the documented loan from my wife. Purchased in June 2016, I'm able to convert it to an IP after June 2017.

 

Why not just borrow against the property to invest and keep the cash in the offset?

 

To take negative gearing advantages and provide an income for my partner. Higher return on capital and higher negative gearing for myself.

Terry, am I going about this completely the wrong way? In your opinion, what are the disadvantages to what I'm trying to do here? Or the good old buy an IP is the way to go.

Thanks

 

You would have to run the numbers and see. But I suspect saving interest on a non deductible loan would be better return.

 

I can't advise you on the tax bit but from a loan strategy point of view you should use equity rather than cash for the deposit on an investment property as it increases your investment debt and tax deductions. Any cash keep it in offset. Also remember for investment, LMI is not such a bad guy either, as he too is tax deductible...

 

If I convert PPOR to IP, the loan then becomes tax deductible since it was IO from day 1 with offset?

 

If the loan relates to the purchase of the property then yes.

 

Based on a discussion I had with the ATO based on a determination I requested I think its a sham loan and likely could be construed as a scheme. Part IVA anti-avoidance may apply. It seems a non-recourse non-arms length loan with income that exceeds arms length income and a tax benefit appears a predominant purpose. The ATO could cancel the tax deduction and determine this as a form of evasion / avoidance and impose penalties also. There would be no time limit to doing this eg ten years time.

I'm not a advocate of a spouse loan unless a number of issues are addressed - personal legal / tax advice should be obtained. Im not saying spouse loans dont work. They do. But in some cases they a risk. The source of the $300K also needs to be determined. If it was inherited etc this may be a significant fact to alter this view (perhaps) compared to drawing down on the PPOR to onlend to you.

Commencing with the plan to utilise your wife's tax free threshold to also enhance your deductions may be a fatal element of the proposed scheme. (FYI , A scheme means a consecutive sequence of events and can be legal or otherwise). A private ruling request to the ATO may well confirm this concern at no cost.

 

id agree with paul. think ato will argue strongly part iva.

why is the wife lending to you at 15% ? if you could get a loan elsewhere cheaper then why have you entered into the transaction ? not saying it isnt deductible but would need to have good reasons. e.g. high risk development activity, loan is unsecured, canr get funds easily elsewhere might mean 15% is justified. some mezzanine lenders charge that but your facts would need to be similar to theirs.

remember part iva is sole or dominant purpose. sounds as though your dominant purpose is to shift income to a low earning spouse so you get a higher interest deduction.

 

And the greatest risk with Part IVA is they can revisit the issue without time limits. The compounding effect of penalties, interest and primary tax can really snowball.

1. The would likely deny the property owner interest deduction in full and
2. Leave wife's interest earnings as income

Refinancing the loan may also not be deductible if the original spouse financing was deficient. ATO would argue its was never a loan. It was a mere gift hence incapable of refinance.

Expensive arguments to fight. Objections may be refused leading to more and more costs.

 

But the spousal loan isn't even needed in this case.

 

Hey guys, thanks for the great inputs. This probably isn't going to fly. i.e. the bank probably won't lend me a $480k loan to begin with if I have an unsecured loan of $300k.

 

Thats a good point and one the ATO have raised with taxpayers who have done spousal and related party loans. How is it serviced ? They seek hard evidence of the loan account and its transactions. While that original proceeds may appear settled OK the ongoing loan must be maintained continually. So if spouse loan seem to be paid and then the apparent repayments are circulated back again it can look like a sham.

I have not encountered the ATO seeking to confirm the bank lender knows about the other loan. I dont see that as critical but it could be a reason for the ATO to take a closer look

 

If is possible that the ATO gets hold of the loan application and if there is no spousal loan declared it could be further evidence that it is sham.

I have never heard of them getting hold of loan applications - but I have seen a client who had the Child support agency get his loan application which had different income declared to that which he told them. They used it as leverage to get back owed child support payments from him.

 

excellent point terry. ATO can and do (seen this during voluntary disclosures and audit) ask for loan applications and other types of applications to see whether you have reported the loan. You complete a statement of assets and liabilities and dont include it. ATO going to ask was it really a loan ?