Would Labor's proposed reduction in the CGT discount change your investing behaviour?

Refinancing to the same amount is all you could do. Any more that the same amount and the ATO will want to know where you used the money and any deductability of interest for the excess will be based on what it was spent on not what it was raised against.

 

Hmmm. Ok, so you're saying that if IP1 was valued at $500k ($400 loan at 80%LVR) and the value increased (post tax changes) to $600k, if you refinanced to 80% and drew out the $80k equity for IP2 then $400k of the loan would be considered negative geared and the new $80k would not. That does make sense in terms of how the tax deductibility of debt is viewed. Also sounds rather messy.

Even still, if you have 4x IPs pre-tax changes with the above scenario it does seem worthwhile holding onto that $1.6M of debt to be negatively geared, even if it only ever stays at $1.6M?

If you took the above IP1 scenario and payed down the debt via P&I loan to say $200k debt, then refinanced, could you claim up to the original $400kor only up to the $200k?

 

For the 40% who voted they will invest more heavily in shares, do you understand the CGT discount will be reduced for them as well? If so, why the change in priority to shares?

 

Labours proposal to impose a minimum 30% tax on trust distributions may impact you?

Assuming the properties are positive cashflow, distributing the net rental income may attract more tax than it would now.

An investor holding properties in trusts generating $40k net rental after expenses and distributing that income could be up for $12k tax rather than approx $4k now.

Investors may reconsider using trusts to hold investment properties if the proposal gets up and those who already have properties in trusts will be severly impacted if planning to retire on rents.

 

If one has a trust which generates a taxable income, I believe the solution is simple.

Buy one or more NG properties and reduce the trust’s taxable income to zero (or near zero).

In other words, instead of giving the $12k (in example above) to BS and an ALP Government, give it to a bank in the form of loan Interest.

I would rather use the $12k to help one buy more high-growth IPs than give it to the Government and watch them waste it .

I find it ironic that one of the unintended consequences of this policy is that BS/ALP could be encouraging some investors to buy more IPs .

I use property for growth. I feel people will still use trusts to buy IPs, especially B+H investors as one can delay the effect of the CGT discount reduction for up to 80 years.

I use a trust for retirement income, a SMSF, and it only invest in shares (and managed funds).

 

the other solution is to contract with the trust for something so payment won't be a distribution

 

Curious to know more about this.

 

Can you please expand/explain?

 

I believe the proposed tax is to be levied on trust distributions. The way around it might be to get money out of the trust by other than a distribution.

 

That's a massive assumption. I would not bank on it.

Why? The 50% CGT concession is being grandfathered on those properties. If people sell:
a) they lose the 50% concession
b) pay tax on the capital gain
c) lose money in fees and commissions
d) lose more in stamp duty and fees buying back in
e) may be required to pay back loans
f) at the end find their borrowing capacity has dropped and they can't borrow what they had

What's attractive about any of that?

 

My bad, I was under wrong impression that CGT concessions may not be GFd and only NG would be GFd,

 

Can anyone clarify for me whether CGT discount on shares/equities bought before 01.01.20 will be grandfathered? I have read that resi property investments will be, but not specifically that all asset classes will be.

 

Incidentally, I was just emailed this overview of the tax change issues from BMT Tax Depreciation:

What should you know about negative gearing before the 2019 Federal Election?

 

Well, it is possible that nothing will happen or something different to what was promised.

I am only going on the current press release that the changes to CGT will be grandfathered

 

Nothing can be clarified until the legislation passes the senate. The current proposal is to grandfather but that is subject to change

 

Terry,
Can you give me an example of what you mean by this?
How do you get money out of a trust other than through a distribution?

 

I see a major increase in corporate trust distributions (both flawed and correctly done) which will see major avoidance of this tax issue. Many will fall foul of unpaid present entitlement rules and Div 7A etc.

 

Payment for services. Wages are some examples.

 

Thanks Terry, makes sense.

 

Agree but with wages you have other considerations like PAYE, payroll tax, workers comp, etc