Join our investing community

Buy an investment property or home?

Discussion in 'Investing Strategies' started by Maverick, 6th Dec, 2005.

  1. Maverick

    Maverick Well-Known Member

    Joined:
    23rd Sep, 2005
    Posts:
    51
    Location:
    Melbourne
    I have recently received newsletter from mortgage broker who is also writing articles for Australian Property Investors magazine.

    The newsletter has featured an article about pros and cons of buying an investment property or buying a house (if someone has to choose from the two).

    Here is the link: http://www.prosolution.com.au/free_newsletter/dec05.pdf

    I think there is actually the third option that brings together “the best of the two worlds”.

    You could buy an investment property in Trust and rent it from the trust.

    Advantages:
    • You gain asset protection
    • You live in the house that you actually wanted to leave in
    • Your loan and other property related expenses and depreciation are tax deductible
    • The property is bought in the right structure to convert it later to investment property
    • Your ownership structure is much more flexible to cater for changing financial situation of the potential owners (i.e. husband and wife owing as tenants in common with specific percentages according to their income which might change in future – not very flexible)
    • You might utilize negative gearing via Hybrid Trust

    There are of course some disadvantages:
    • No 50% concession on Capital Gain Tax
    • Must rent out the property at market rent (very important)
    • If using Hybrid Trust, not all lenders understand and accept it

    Your comments are welcomed.
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Hi Maverick

    I like your line of thinking, but there are some problems with this approach if you use any form of unitised trust and perhaps even if you don't.

    Nick will have to have the final word on all things tax, but check out this tax ruling from the ATO. TR 2002/18
    http://law.ato.gov.au/atolaw/view.h...001&recStart=21&recnum=22&tot=23&pn=ALL:::ALL

    There's even a helpful diagram.

    Basically it puts the kibosh on renting your home from a trust where you borrow to buy the units. They say it's improperly trying to convert expenditures of a personal character to a deductible character and also say it breaches the general anti-avoidance provisions in part IVA.

    However, there's an old case Janmor Nominees where a doctor rented the home from a family discretionary trust. The trustee was the borrower and thus had the interest deduction but it was able to offset that against significant income provided from it acting as service provider for his practice (a service trust arrangement) so he was okay. Rather ominously however the ATO point out that the Janmor case was heard prior to the general anti-avoidance provision in part IVA being enacted.

    So...please get accounting and legal advice before entering into any such transaction.

    Cheers
    N.
     
  3. Maverick

    Maverick Well-Known Member

    Joined:
    23rd Sep, 2005
    Posts:
    51
    Location:
    Melbourne
    Nigel,

    I guess it will all very much depend on the “...sole or dominant purpose of a person or persons entering into or carrying out the scheme...”. If the arrangement is to “...enable the taxpayer to obtain a tax benefit...”, then I agree that it is not good. But if the purpose is asset protection, then it’s a different story.

    Also in the ruling, there was a situation where “…there is a significant disproportion between the amount of the distribution from the trustee and the amount of the interest incurred by the taxpayer on the borrowings used to acquire the units in the unit trust…”. I guess if all the transactions are kept at “arms length” and the distribution is exactly according to the number of income units and their proportion to the interest in the property, then it shouldn’t be a problem.

    I agree that the accounting and legal advise are necessary.

    I’m looking forward for more opinions and for the Nick’s verdict :)

    Thank you.
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Maverick

    I think you make a good point about asset protection. Mochkin's case (a stockbroker) in the last few years certainly helped the asset protection argument.

    BUT I still think (sadly) it's an uphill battle with a unitised trust. With a discretionary trust where the trustee is a borrower, i.e. the Janmor scenario perhaps it's a better case...but again no certainty.

    Part IVA is a real obstacle.
     
  5. Glebe

    Glebe Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    932
    Location:
    Sydney, NSW
    I believe NickM doesn't want anything to do with his clients renting from their trust. Hopefully he reads this thread and speaks for himself.
     
  6. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    sorry for the delayed response but net has been offline for 4 days :mad:

    i actually discussed this at great length with a client this evening.

    Glebe has predicted my thoughts on this one and Nigel has supported why he thinks it doesnt work

    Janmoor Nominees is relevant but as Nigel pointed out PtIVA was not an issue back then. Bear in mind if the trust incurs a loss then "you" do not receive a personal tax benefit.

    Dr Redmans case formed the basis of TR 2002/18. He received a personal tax benefit. the arrangement was found to be private and domestic in nature.

    If you borrow to purchase units in a HDt then as far as i am concerned it looks and smells like a unit trust therefore 2002/18 catches you.

    If you borrow in the name of the trustee and the losses are retained in the trust then your case is a lot stronger. Market rent + an asset protection argument. If you are straight PAYG then you will be battling.

    As is the case with many issues in tax, this is a greyish area. Whilst i look at alternative strategies and ways to minimise tax and fast track wealth, i do not support this strategy. There is more against it than for it.

    NickM
     
  7. Maverick

    Maverick Well-Known Member

    Joined:
    23rd Sep, 2005
    Posts:
    51
    Location:
    Melbourne
    Nigel, Glebe, Nick,

    I appreciate your feedback.
     
  8. Steve Navra

    Steve Navra Well-Known Member

    Joined:
    7th Aug, 2005
    Posts:
    195
    Hi All,

    I am in strong agreement with Nic (As supported by Nigel and others) that this is just NOT the way to go!!

    However . . . back to the original question:
    Buy a home or rent???

    Aaaaaah I feel a lengthy discussion is warranted on this one:

    There are many factors to take in to account . . . especially lifestyle and stage of life (married; children etc)

    Who would like to kick of the discussion in this or a new thread ??

    Regards,
    Steve
     
  9. Maverick

    Maverick Well-Known Member

    Joined:
    23rd Sep, 2005
    Posts:
    51
    Location:
    Melbourne
    The above statement seems to me as an appropriate subject by itself to be addressed on this Forum.

    Sim, Nigel, Nick, Steve, do you think it deserves an Article? (or perhaps a series of articles?)

    Thank you.