Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement

Discussion in 'Accounting & Tax' started by Terry_w, 12th Oct, 2015.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    Same appliex. The deposit for a trust property should not be paid by the individual because it could damage the asset protection strength. The individual should lend the trust the money. The trustee may direct the individual to pay the deposit on its behalf.
     
    fritzsticker likes this.
  2. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    Same appliex. The deposit for a trust property should not be paid by the individual because it could damage the asset protection strength. The individual should lend the trust the money. The trustee may direct the individual to pay the deposit on its behalf.
     
  3. M-THIS

    M-THIS Well-Known Member

    Joined:
    6th Jul, 2015
    Posts:
    46
    Location:
    Sydney

    Thanks Terry - so Individual should lend money to the Trust's bank account. Then the Trust pay the 10%/20% deposit to purchase the property.

    In this case there would be no need for the LOC or New Loan from Bank to fund the deposit right?
     
  4. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    I would argue that if you pay a deposit using cash and later try to "fix"it you may well demonstrate a Part IVA concern.

    With respect to trusts I can NEVER understand why clever people consider use of a trust then they shortcut the settlement of funds by personally paying the deposit etc rather than going to the trouble of ensuring the trust has a bank account and the trustee pays it. This failure to settle a loaned amount or deposit can be critical. All for the sake of the cost of a bank account.

    Its common to a structure that some advisers advocate. A unit trust and a disc trust that owns all the units. Units are funded by the disc trust borrowing money from Mr X who borrows against other equity. But to save $ the units are not paid or settled through bank accounts. The individual bypasses formalities and credits the funds to the unit trust. Perhaps even no loan agreement ? May be hard to argue that there is any settled interest for the unit trust property and the Disc Trust has no interest. Sure you argue the intention to settle etc but there is no transaction. Especially when its revealed that Mr X borrowed $400K and credited this straight to the unit trust.
    Instead Mr X should lend (loan agreement !) the $400K to the trust and credit the DT bank account. The DT should then subscribe to units and settle those units by paying $400K to the unit trust. Documents and cashflows are identical.
     
    fritzsticker, Perthguy and Terry_w like this.
  5. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    The trust should use its own money as deposit. this may be cash in its bank account or further borrowings.

    With someone else paying the deposit there is the risk of resulting trust accusations later.

    The trust could borrow from person A who is borrowing from say CBA or the trust could set up its own loan with CBA using A's property perhaps. If borrowing a written loan agreement is advisable.
     
  6. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    Yes Part IVA needs to be considered.

    Many people spend thousands on setting up complex structures and then virtually ignore them when the actual transaction happens. they think merely 'having' a trust brings some sort of asset protection - when it doesn't.
     
  7. fattyman

    fattyman Member

    Joined:
    18th Oct, 2016
    Posts:
    18
    Location:
    Melbourne
    @Terry_w how does maximising your deductions benefit you if you're paying more than your deductions?

    For example, if say your deposit is $100k and interest rate is 5%. Your additional interest expense is $5k but save in tax $1,850 (assuming marginal tax rate of 37%).

    Therefore the net expense is an additional cost of $3,150.

    Is there something fundamental missing in my calculations?
     
  8. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    Yes - Debt recycling. You would be leaving money in an offset account, against your non-deductible home loan.
     
  9. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,561
    Location:
    Adelaide, SA
    Not sure if this was correct - hopefully @Terry_w or @Paul@PFI could confirm.
    I've previously paid deposit from my own cash, then for settlement used full borrowed funds and instructed the conveyancer to provide cheque for excess funds.
    Had my conveyancer say no problem and sort it out for me, but when tried to do it with a different conveyancer for a client they said couldn't be done.
    My thought it that no problem can be done from conveyancers side - just other CBF
    And tax wise I can't see a problem as settlement hasn't happened, borrowed funds were 100% used for settlement/purchase
    But happy to be told it's not right by the pro's
     
  10. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    Its fine from a legal point of view, but whether the interest would be deductible or not is a different matter. The interest would be deducitble unless the ATO applied Part IVA to deny it.
     
    Brady likes this.
  11. giraffez

    giraffez Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    595
    Location:
    NSW
    Terry, at the time your deposit is due, your loan hasn't been approved yet. Even if everything was organised up front, you really have 5 days to come up with the money from the day the offer is accepted, this is not enough time to get a loan.
     
  12. Perthguy

    Perthguy Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    11,767
    Location:
    Perth
    You could have a line of credit set up against an IP (or PPoR) if there is enough equity.
     
  13. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    So its not borrowed funds then....The issue of pre planning and organising a prior loan would be the key to maximising deductions and or refinancing the deposit.
     
    Terry_w likes this.
  14. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    Most people would plan ahead a bit. Many don't and buy property unexpectedly and they need to consider the effects of getting it wrong in the rush.
     
  15. giraffez

    giraffez Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    595
    Location:
    NSW
    when you say line of credit, what do you mean? Another loan against an existing property you own?

    And if you don't own anything, then what? Tax tips indicate parents but not every parent will be able to help out
     
  16. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    If you can't borrow you may need to use cash for the deposit and there are no problems with this.
     
  17. Perthguy

    Perthguy Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    11,767
    Location:
    Perth
    Line of credit is a particular type of loan.
     
  18. Obsidian

    Obsidian Well-Known Member

    Joined:
    19th Aug, 2016
    Posts:
    162
    Location:
    Sydney
    Look, I know your some tax adviser, but not all investment is about minimising tax. God forbid we should commit a cardinal sin, and pay for investment deposit with cash.:eek:
    Sorry if you think that somewhat "conservative investing" is a lack of common sense. But I suppose that this is a property forum (borrow 105%) :).

    We paid our last 20% deposit with cash (cash built up in 1yr from rents with having a previous 0% LVR portfolio, so all massively positively geared). But that's silly as well I suppose. Having a positive geared portfolio and having to may MORE tax.

    More tax deductions means you have paid more interest ($5000), of which you only get $1400 back in tax refund. Still costs you $3600.
     
    Last edited: 24th Mar, 2017
    el caballo likes this.
  19. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    I didn't mean to imply that tax is the only consideration but best to maximise deductions where possible.

    Where you have non-deductible debt or not yet bought a house using cash is good, but borrowing could be better.
     
    Perthguy likes this.
  20. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Best tax position vs normal is a best case comaprison for best tax effectiveness Terry doesnt suggest that the only tax outcome is complete deductibility. Its an illustration. Each taxpayer chooses personal indebtedness as breakeven or max.
     
    fritzsticker likes this.