Tax effective planning for future PPOR purchase

Discussion in 'Accounting & Tax' started by c_west, 29th Jan, 2017.

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  1. c_west

    c_west Well-Known Member

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    I am currently looking at strategies to achieve my goal of purchasing our 2nd PPOR in the next 5-6 years, here is the current process I am looking at:

    1. Currently living in PPOR in Adelaide, due to move for work at the end of the year. Will remove funds from offset account and turn original PPOR into 2nd IP. Should be Cashflow positive $80-100 per week owned in joint names with my wife.

    2. Funds from offset will go towards share purchases (boring LIC type shares) and continue to pour money into shares on a bi-monthly/quarterly period whilst renting in future desired area for purchase (allow kids to get into appropiate schools, get to know market well etc). Shares will be purchased in a discretionary trust, my wife and myself as beneficiaries. 1st PPOR will be sold when market is stronger for northern Adelaide (if ever)

    3. Wife (and I to a certain extent) would like PPOR in 5-6 years in desired location where we have moved to using both cash saved, 1st PPOR sale and growth/profits from the shares. Here comes my problem.

    I would personally not like to sell the shares due to the tax efficient income they produce, but obviously paying down PPOR mortgage would be ideal as it is dead non-deductible debt. What would be the best way to structure now with a future PPOR purchase in mind? Can I use shares as security for deposit? Or just take the CGT with selling the shares, pay down the mortgage then create a loan split to purchase the shares back?

    I would prefer not to just park my money in a bank account ‘earning’ interest as I believe that is a terrible investment choice.

    I will be seeking legal advice once it is confirmed I am moving but would like to have an idea before approaching a tax solicitor.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You can't use shares as security for a deposit. Even if you could you will not get any tax advantage

    Can you borrow against the existing property and lend to the trust to buy shares?

    Best not to use cash if you can to buy shares as you will pay more interest on the PPOR debt down the track.

    If not equity you might have to take a hit and plan to sell the shares and evt recycle into the PPOR loan.
     
  3. c_west

    c_west Well-Known Member

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    Thanks terry.

    Not too much equity left in the house for shares at this stage. Looks like I might just tell the mrs to cut back hours when we sell the shares or even I take some leave without pay when we sell!
     
  4. Kirsti327

    Kirsti327 Well-Known Member

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    A few other things that you may or may not have considered

    1. Have you ever paid extra off current PPOR and used redraw for personal expenses? Would need to determine how much of the loan still relates to the original purchases and any renovations as they are the only parts that will be deductible. If you have used redraw in the past for any other reason, may be worthwhile to split the current mortgage and pay off the portion that is not deductible. Since you mentioned you have an offset account already, you may have already known about this and avoided the issue.


    2. Even though it may seem pointless in the short term and will incur a few hundred $$ in bank fees, I would suggest paying the cash off the existing mortgage loan and then reborrowing against that property for the shares if you intend to hold the shares at least as long as the property. That way you have more chance of preserving your deductions later - if you can pay enough cash to have equity in the new property, you can refinance the shares loan onto it before selling the old property


    3. Consider also setting up a bucket company as beneficiary for share dividends (benefit will depend on your personal marginal tax rates) - for 2016/17 a small Pty Ltd company will pay 27.5% tax v individual rates up to 49% - but work out if the tax benefit is worth the accounting fees on the amount you expect to earn.


    4. When it comes time to purchase the next PPOR, make sure you pay attention to timeframes and take advantage of the exemption for capital gains tax up to 6 years after moving out of previous PPOR. Sell the previous one before the 6 years is up and before you buy the new one to get maximum tax benefit on both properties.



    if there's an equity gain in the next few years I would top up the Adelaide mortgage with a second split loan to 80% (or more if you are comfortable with/have already paid LMI) and use that for the shares while accumulating cash in your offset account toward the new property deposit. Pay as much cash as you can toward new property and refinance the share loan onto it before discharging the old property to maintain deductions.
     
  5. Perthguy

    Perthguy Well-Known Member

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    I always wondered with a bucket company how the profits might be distributed to a director or shareholder.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Isn't this only if the company qualifies as a small business?
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It would either be director fees of dividends.

    The key is that the company can retain income and pay it out in a future year with franking credits - if a dividend.
     
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