Tax Tip 31: Should I buy in my name because I earn more money and can claim more?

Discussion in 'Accounting & Tax' started by Terry_w, 28th Aug, 2015.

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  1. Terry_w

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

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    Should I buy in my name because I earn more money and can claim more?

    These sorts of questions are very common. But a lawyer would be negligent to give a one word answer as the questioner is only asking about income tax issues and is only thinking the short term.

    Income tax - first thing to do is to work out the cash flow on the proposed purchase and to do this including non cash expenses such as depreciation, LMI etc. Work out how much tax savings would be expected and then compare this to buying in the other name. Consider the results for the first year and then for the next 20+ years. Rents tend to rise so any savings now may be negated in a few years when the property becomes cashflow positive and produces positive taxable income - maybe around the 10 year mark.

    Next consider what this extra cashflow could mean to you. Saving an extra $4000 in the first year or so could help pay off the home loan sooner, allow quicker debt recycling, allow more investments quicker etc. But it will result in more tax payable later so longer term it could be worse.

    CGT needs to be considered too. Many times I have seen a couple buy a property in the name of the higher income earner with the non working spouse owning nothing. Years later the property is sold and the owner is on the top rate of tax while the non owner spouse still has no income.

    And don’t forget about the other tax strategies
    • spousal loans
    • estate planning tax strategies
    • reducing land tax
    • spousal transfer strategies
    • offset account strategies

    And the non tax aspects
    • control
    • asset protection
    • death
    • estate planning
    • leverage ability
    • ability of getting finance
    • etc
     
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  2. blackenator

    blackenator Well-Known Member

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    what an awesome post thanks so much for all your information Terry with all these tax tips they have been such a great help
     
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  3. Patamea

    Patamea Well-Known Member

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    Thanks again Terry for another great post
     
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  4. PCHouse

    PCHouse Well-Known Member

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    Does the strategy change if the investment (property or shares) is leveraged or not leveraged?

    Take an example, Spouse A - high income, Spouse B - low income, and Spouse B will stop work before Spouse A.

    While the investment is leveraged i dare say having it under Spouse A makes sense from a tax deductibility and minimisation strategy notwithstanding CGT implications if the investment was to ever be sold?

    Alternatively, if the investment is non-leveraged, then Spouse B makes sense as income generated will attract less tax?

    What happens when Spouse A also eventually stops working and has a much larger investment portfolio? Should leveraged investments perhaps be a 70/30 split to cater for this?
     
  5. Terry_w

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

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    This is just one strategy out of many. You would need to consider that what is negative will hopefully become positive over time. Tax land. Estate planning etc too
     
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  6. Blueskies

    Blueskies Well-Known Member

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    I think this strategy can work well when figuring out who holds which asset types, for example it may make more sense for the higher yielding assets to be allocated to the lower income person's name, and the higher capital gain assets allocated to the high income earner.

    But I agree with Terry, what may be the case today can change over the investment timeframe.
     
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  7. Terry_w

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

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    If buying multiple properties I would genet prefer no joint ownership. Especially in nsw and vic because of the land tax laws
     
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  8. PCHouse

    PCHouse Well-Known Member

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    Thanks both for your input. Does your view change if the investment is leveraged high yielding shares rather than property? ie hopefully CF+ from the start, with non-leveraged purchases in say 5+ years.
     
  9. Terry_w

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

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    Shares are easily restructured if you get it wrong

    consider tax deductions while negative and income while positive plus capital gains
     
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  10. PCHouse

    PCHouse Well-Known Member

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    If the share strategy is long term passive income with no intention to sell, then CGT shouldn't come into play. I'm thinking a 70/30 split from the start in favour of higher earner Spouse A would maximise tax benefits whilst still working, and partially offset tax bills once both are no longer working?

    A transfer of shares after between Spouse A and B after they both stop working would still incur CGT if i understand correctly? Or have i misunderstood the 'restructure' comment?
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The lower income earner could also borrow far less than their spouse and while income may be shared the net tax outcome can be easily altered to rebalance etc
     
  12. Terry_w

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

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    You could buy 70 in one name and 30 in the other

    this allow for similar outcome for 70/30 tenants in common ownership but allows one to selll without the other one needing to sell
     
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  13. PCHouse

    PCHouse Well-Known Member

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    Not quite sure I follow, can you elaborate?
     
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Fred and Mary are buying a investment property costing $800K .They both feel some joint ownership is their thing despite other tax and legal advice about that. Mary has a low paid job and expects to soon raise kids and likely wont work. Fred has a very high income. They have $600K from an inheritance and savings.

    Fred may be better borrowing ALL his 70% incl legals and duty etc. His % will be neg geared provided he is the sole borrower on that loan. Fred will borrow against equity on another investment property he owned before marriage. Mary will use the cash to buy her 30%. This means each year Fred will neg gear and mary will pay tax on her share of net rent. Since Fred is also claiming interest as his own deduction he will still neg gear. Mary wont pay tax on her 30% share of $20,000 a year of income aftre some ownership costs. Fred will also receive a 70% share of $20,000 but then claim $29K of interest.

    Later they may use some of their new savings to invest ONLY in Mary's name to up her income. They can rebalance incomes this way and also use offsets to play with net debt to increase / reduce deductions. If Mary goes back to study and later earns a higher income they can rebalance loans using offsets without changing the borrowing or debt itself.
     
    Last edited: 10th Oct, 2022
  15. Terry_w

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

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  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I had written it with 50/50 but wanted to draw in the example you used as a way to rebalance too ;)
     
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  17. PCHouse

    PCHouse Well-Known Member

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    Thanks @Paul@PAS the example paints the picture, and also easily applicable to shares. As per my post above, i think the 70/30 split in favour of higher income earner invested in shares seems to be an appropriate balance from a tax perspective from the start, and also kickstarts a rebalance of income down the track when higher income earner stops working, cheers.
     
  18. Trainee

    Trainee Well-Known Member

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    With shares you can split by putting different amounts in individual names, right, so it's a lot easier to rebalance if you are dollar cost averaging, or even just adjusting the DRPs.
     
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  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    It may be now but in 10, 20 years you will complain that 70% CGT is borne by one taxpayer
     
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  20. PCHouse

    PCHouse Well-Known Member

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    Are you then suggesting 50/50 from the start is more appropriate for a long-term share passive income investment?

    As per Trainee's post above, once spouse A & B are no longer working, then rebalancing by only adding further investments under Spouse B will smooth this out. If a retirement passive income is the goal, then there's no need to sell and incur CGT.