Turning Fully Paid PPOR Into IP For Negative Gearing

Discussion in 'Accounting & Tax' started by boo_ha_why, 3rd Apr, 2018.

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  1. boo_ha_why

    boo_ha_why New Member

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    Apologies I have tried to search on the forum for similar questions but none fully fits my situation.

    I have a fully paid PPOR in Maroubra Sydney and I would like to buy and move to a new property closer to the CBD.

    I would like to turn the current Maroubra PPOR into IP and take advantage of negative gearing. Selling it would incur sale cost which i dont think it's worth it.

    Is there anyway I could do this legally or whether there is anyway i could tax-deduct the future rental income from this Maroubra property?

    Thanks.
     
  2. Mike A

    Mike A Well-Known Member

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    Not with the current structure.

    You could sell the property to a trust or company that borrows to acquire the property but if done in the name of the trust or company the losses will be trapped there until it has profits to absorb the losses.

    Could sell to a partner doing the same thing but they will get the interest deduction not you.

    Finally could sell to a unit trust with you borrowing to acquire units in the unit trust. That will lead to deductibility but has a stamp duty cost.

    The benefit would be it is a form of debt recyling so the funds which were used to pay you to buy your PPOR would now be deductible. Would need to weigh up the future tax benefits vs the stamp duty costs. It might be worth it. No capital gains tax on the transfer if maroubra was your PPOR for the entire time of ownership.
     
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  3. Terry_w

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

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  4. Paul@PAS

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

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    There will need to be sound and supported reasons outside of interest deductions to sell a property to a spouse or a trust. Part IVA anti-avoidance provision in tax law would likely apply to a scheme that sells the property where there is a predominant purpose involving a tax benefit. ie a new deduction for the property for interest. That seems the relevant issue being asked.

    Part IVA may be less likely to be an issue if you had a spouse, defacto, same sex defacto / spouse etc and use the NSW stamp duty concession and sell 50% of (!) the property to them. Their borrowings would be paid to you and you may use that to buy a new home. Their borrowing is deductible v's their 50% and your 50% would remain positive geared.

    Another way involves keeping the former home and renting it in a positive geared manner and at same time buying a further IP that is negatively geared. One offsets the other. However there may be asset risks in doing this. For example if property values feel 10% you have double the leverage. Land tax and many other factors should all be considered. Also this doesnt address your main need - A new property to live in.

    In the simplest form you can use the equity in Maroubra to buy your own home and that can be done two ways
    1. Sale
    2. Retain and access equity loan - Non-deductible while you reside there as the borrowing would be used to acquire non-income producing property. If you later move out of the CBD property it could become deductible.

    The original question is a good example of the use of a offset. It would have preserved the original amount borrowed on the property.
     
    Last edited: 3rd Apr, 2018
  5. Mike A

    Mike A Well-Known Member

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    ATO has said in its rulings Part IVA generally doesnt apply on the sale to a spouse.

    And that makes sense if you read Part IVA and how it works

    The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'.

    This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative arrangement also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D of the ITAA 1936.

    If the OP purchased sold her main residence to an external party it would be free of CGT. she then takes the cash and uses it buy a new property she lives in at the CBD. using equity in her new property she borrows 100% to acquire a new IP. The interest on that loan would be fully deductible.

    So in the alternative postulate their is no additional tax benefit. How could Part IVA apply ? There are 8 factors to consider not just 2
     
    Last edited: 3rd Apr, 2018
  6. Paul@PAS

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

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    The fundamental principle was the issue being addressed. Personal tax advice is warranted. A BPR even especially where the ATO view is it doesnt generally apply.

    But I specifically refer to the issue of trusts where Part IVA may be a concern rather than a blanket assumption that its a legit change of owner.

    The NSW duty concession is also reason to consider spouse sale.....The same can no longer be said of Victoria which trimmed its concession.

    Little things can fail - eg like a spouse who owns 20% and they seek to refinance that so a acquisition of the other 30% so its now 50/50. Its possible that it wont be 100% deductible to that spouse since person A is a co-borrower to buy their own interest. Can occur with "refinancing principle" debt recycling sometimes as well as some spouse sales. The ATO Hybrid Trust rulings contained that view too.
     
  7. Mike A

    Mike A Well-Known Member

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    im uncertain why a sale to a unit trust where the individual holds the units would be subject to Part IVA under the alternate hypothesis. the alternate hypothesis position would seem to indicate the individual would be in the same position with other strategies. There are already a number of private binding rulings confirming the same. It isn't a blanket assumption but a general observation. For many cases Part IVA wont apply.
     
  8. Terry_w

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

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    I have a PBR for a client for selling the main residence to a Fixed Unit trust, them borrowing to do so, claiming the interest, and using the funds released from the sale for the purchase of a new main residence - PBR said interest would be deductible to the inidividuals purchasing to buy the units of the trust and Part IVA wouldn't apply.

    My argument was that if they didn't do this they would have sold the property and bought a new one under the same structure.
     
  9. Mike A

    Mike A Well-Known Member

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    I agree @Terry_w i cant see where Part IVA comes into play using an alternate hypothesis analysis.

    Paul knows that stamp duty can also be mitigated in NSW particularly on moving assets to a unit trust using strategies implemented by Chris Batten which we all know arent necessarily loved by the NSW OSR but have been indicated are fine and comply with the law. So that is also another option is to use the services of Chris Batten to move the asset to a unit trust.
     
  10. Paul@PAS

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

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    Its a strategy that requires advice and isnt always a certainty. I dont believe all unit trusts work for example. Some unit trusts are very badly written and for example have a structure akin to a hybrid trust and meet with clauses of concern found in the HDT ruling and are doubtful . One is sold by a major deed provider....There must be others.

    I'm picky. I dont like posting to say a thing is a sure bet sometimes and to say Part IVA cant apply would exclude a hell of a lot of schemes that have failed in the past. My time working with Chris on advanced trust issues also dealt with loads of people who thought they had a sure bet who ignored little details. One of funniest was a pre-1999 unit trust. It was - It was ordered from deed provider on 10th August 1999 but was executed on 11th August 1999. It was NOT a pre-1999 unit trust. Only a deed and a contract dated prior to 11th fulfill the rules. 1 day......

    I know of Terrys trust and agree that approach was correct and advice + a PBR is the correct approach to avoid objection, appeal and uncertainty later like many had with hybrids. Part IVA was said to not apply there too but the ATO argued - it benefits others. The decision on whether it works is that of the ATO if we want 100% client confidence. I think thats the correct approach to avoid Part IVA.
     
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  11. Mike A

    Mike A Well-Known Member

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    Good comment paul. I agree the benefits of a PBR far outweigh the costs involved in preparing one. Ive advised many clients i cant sign off on a piece of advice until i obtain a PBR on their behalf. Some walk but its not worth the professional risk and i dont believe it offers clients certainty. Last thing you want is to be arguing with the ATO in court.
     
  12. neK

    neK Well-Known Member

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    Interesting topic. Apologies if it sounds like I'm repeating, I've read the above multiple times and trying to get it to sink into my head.

    Is my understanding correct here?

    John and Jane have a PPR (Property A). This PPR has a loan of $500,000 combined. However its current value is $1,500,000. The property is jointly owned (not tenants in common)

    John and Jane have purchased a NEW PPR (yet to be settled) (Property B)

    John sells Jane his half of Property A - they are still living in it for market value of $750,000.

    John now has $750,000 cash. Property A is now solely owned by Jane with a loan of $1m ($500,000/2 + $750,000).

    No CGT is payable because Property A is still a PPR (Property B is yet to be settled yet).
    However depending on the State the property is located in, Stamp Duty may be payable. In the case of NSW, no exemptions are given, so Stamp Duty would be payable on the $750,000.

    When Property A ceases to become a PPR, and becomes an IP, the entire interest of $1m is tax deductible to Jane.

    John is free to do what he wants with his $750,000 - which he will most likely put in the offset account of the new PPR (Property B).

    Now because all this is a spousal transfer, Part IVA is not triggered.

    Have I got this right?
     
  13. Terry_w

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

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    Yes, except for the Part IVA bit - you forgot 'probably'
     
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  14. Mike A

    Mike A Well-Known Member

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    Some significant figures and potentially a lot of interest deductibility moving forward. Make it safe and get a PBR asking for the comissioners opinion on Part IVA. Then you are safe.
     
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  15. neK

    neK Well-Known Member

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    Just reading up on the OSR site
    Exemptions and concessions | Revenue NSW

    But i thought that stamp duty would be payable in NSW. I'm a little confused by this.
     
  16. Terry_w

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

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    neK and Mike A like this.