Tax Tip 232: Simple Tax Strategy to Increase Deductions

Discussion in 'Accounting & Tax' started by Terry_w, 16th Aug, 2019.

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  1. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    I have a friend who is on the top marginal tax rate, has several properties in NSW, and has about $2mil in cash offsetting the property loans resulting in him complaining about all the tax he is paying.

    A very simple solution is to buy another property. A the slightly more complex solution is to set up a company or a discretionary trust to hold this property.

    He could do this

    Property purchase price $1,500,000 in NSW

    Set up a discretionary trust and make an interest free loan of $1,650,000 to allow for stamp duty etc.

    The money lent will come from the offset accounts linked to the investment properties. When this money is removed the interest on the loans connected to these offset accounts will jump by the following

    $1,650,000 x 4% = $66,000 per year

    The individual will now have $66,000 more in tax deductions per year.

    This will save him about $30,000 in tax each year.


    The trust, on the other hand, will have a profit because it is not paying any interest on its loan to the individual. The trust profit could be distributed to other family members, but this individual is childless and single and will remain so. So he could set up a bucket company, making sure it is a beneficiary of the trust, and any income could be diverted to this company where it will be taxed at 30%. It can later be drawn out as dividends with credits for this tax paid.

    So a relatively simple strategy for him to save about $30,000 each year and to potentially get further ahead by having more capital compounding.

    The alternative for him is to use a company to buy a property, not acting as a trustee, and this way the company would get an extra land tax threshold, but that needs further thinking and advice.

    Related posts to this strategy are

    Strategy: Don’t Keep Large Sums in Offset Accounts Strategy: Don’t Keep Large Sums in Offset Accounts


    Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest


    Tax Tip 228: Break even points with Using Offset Accounts to Invest Tax Tip 228: Break even points with Using Offset Accounts to Invest


    Tax Tip 108: Using Bucket Companies to Save Tax Tax Tip 108: Using Bucket Companies to Save Tax


    Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Depending on his/their age a superannuation strategy could also be more tax effective and even address some elements of asset protection in some cases. A variety of mechanisms could achieve this.

    Care should always be taken since once a entity owns property it may be excluded from super forever. A strategy earlier on may address bypassing that.
     
  3. paulF

    paulF Well-Known Member

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    It can be the other way around if the property falls in value. At 1% fall for a 1.5 Mil property , that's a loss of 15k a year.
     
  4. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Only if he sells at a loss. I was talking about income.
     
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  5. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Tax savings can reduce the total cost of ownership allowing growth to evolve in time. We often find people who buy a "loss"making property for tax purposes. But after tax the cashflows are neutral or negligible. Perhaps even positive. They can afford to be patient and allow growth to evolve over 2, 5 or 15 years.

    Terrys point is a good one -"only if he has to sell" The present state of the property market reflects this view. If you can afford the cashflows on any property you dont have to sell. People who lose tend to be impacted by external issues eg lender says sell something, forced to sell by cashflow, loss of job, divorce etc.
     
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  6. NG.

    NG. Active Member

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    great, simple tax strategy. also outlined simple and to the point!
     
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