Strategy for Share investors involving Property

Is there a written loan agreement?

 

I think there will be at the end of this FY when he does the trust tax return. If not I will ask him. Thanks again for your help @Terry_w

 

There should be one in place before they money is lent. What evidence is there of the terms to the loan?

This sort of thing is common but so many issues involved.

 

To be honest I don't know in details about this will check with my accountant to make sure we follow the process correctly.

Thank you @Terry_w

 

I find this strange. You are the lender and you don't know if you have lent money or not! You might also control the trustee and don't know if the trustee has borrowed money or not. What about your fiduciary duties?

 

Just a question on interest deductibility,

Let's say I have a margin account and draw down to buy share in another brokerage account. Subsequently down the track I sell the shares but do not use the process to repay the margin loan. Is the interest still deductable?

Does it also matter if I own the shares for a day or a year?

 

No and No

 

Very interesting Terry. Wouldn't the trust need some equity though, or LMI?

 

No.

We cross collateralised the trust property with the new home.

Crossing is normally to be avoided, but we did it for tax reasons. It will be removed as soon as possible.

 

BTw they actually borrowed the money for the stamp duty too, so it may have been a 104% LVR.

 

I was not clear in my previous reply @Terry_w . I know how much used to buy shares in the trust, i just don't know the formality of setting the loan agreement up which I will check with my accountant.

Cheers,

Anne

 

But why don't you know? This is a serious trust law issue.

 

Hi Terry, let's take your example but Joe does not work and has no taxable income other than the income generated by the shares. His working partner Josephine is at the highest tax bracket.

Am I correct to say the mortgage interest deductibility is wasted on Joe, as he pays low/no tax anyway? Would you advise Josephine to do the strategy instead (although CGT is payable upon share disposal)?

Or split across both partners?

Thank you.

 

If Joe has no income he might not get any benefit, but don't forget his dividends are income and they may be larger than the interest on the loan.

Who is Josephine? If a non-spouse I would advise Joe not to 'buy in' her name without legal advice on the possibilty of never getting his money back.

If a spouse then there would be lots of things to consider - estate planning at death for one. Tax is just one of many things to think about.

 

Understood. If dividend income was lower, could losses be carried forward and used against future income/CGT upon share disposal? Trying to think of other benefits.

Josephine as a spouse. Thinking about the scenario where Joe's tax payable on any dividends is already limited (due to low/no income), however Josephine could use the mortgage interest deductability (only if divi's are lower than interest). I see a downside here though, as if either (i) the PPOR becomes a IP in future or (ii) Josephine disposes of shares, then higher tax would be payable due to rent and capital gains.

Am I think along the right lines?

 

Spouses should be incorporated in the overall plan. But advice is needed on the risks, asset protection, estate planning and tax aspects (etc - there is more).

Imagine Joe allowed Jo to buy them in her name. what could happen if she
sold them without his knowledge
died
hadn't finalised her divorce with Jim
Went bankrupt
etc