Hi all, So I'm considering purchasing an IP in a trust (for asset protection purposes). So when I borrow the initial amount from the bank to invest in the unit trust, the funds are to invest in an income producing asset, so I can claim a deduction. Say 1 year down the track I wish to live in this property for 12 months. I don't want to claim a deduction for the 12 months I'm there (surely if it's not legal, it's certainly not ethical). However I want to make sure that once I move out and a tenant moves back in, that I can continue to claim the deduction. So during the time I move in, if I pay a nominal rental amount to the trust to cover expenses (so the trust has no net income for the period and thus pays no distribution) would that be acceptable?
Rewind a second - what asset protection are you achieving from buying the property in a unit trust? What are you trying to protect against? Regards, Jason
If you are borrowing to buy units in the unit trust then there is little to nil asset protection because the units are property which could fall into the hands of a trustee in bankruptcy. If you wish to live in the trust then the trustee has to consider the trust deed as to whether you pay rent and if so should it be market rent? The trust deed may permit this. You then need to consider the tax consequences. See TR 2002/18
Well my plan was to have a company as the trustee, not myself personally. However my main concern was how can I maintain the deductibility of the loan after I've moved out. If I was to purchase the house in my own name, with a standard IO loan, then during the initial tenants occupation, I can claim a tax deduction. However once I move in, I can no longer do that (which I am fine with). Once I then move out and start renting again, surely I can't start claiming the interest payments as a deduction right? If I can, then problem solved. My assumption is that I couldn't, so the idea was, if a third-party entity (company, trust, whatever is legal and suitable) owns the property AND that third party pays the income (dividend, distributions, etc) AND I borrow money to invest in that, then my interest payments are deductible. So if the third-party idea is legal and valid, then my question was how to do that? I figured a unit trust would be good, because then I'm simply borrowing to buy units, which from a tax point of view I believe is fine. If there were issues with me being the trustee, or rather the director of the company that is a trustee, then one of my parents could do that (which they would be ok with). Any thoughts?
Why assume that the interest won't be deductible after you move out? You've got to consider that TR 2002/18 if using a unit trust. TR 2002/18 - Income tax: home loan unit trust arrangement (As at 24 July 2002)
Once you move out and start renting it again then you would be able to claim the interest on the loan as a tax deduction again (assuming you haven't contaminated it in some other way - so it's purpose was still for the purchase of this property). Buy it in your own name, with a IO loan with an offset account (assuming you have no other non tax deductable debt that should be paid down first) and put your spare cash or extra repayments in the offset. Regards, Jason
I have always assumed that moving into it would be "contaminating" it, in the sense that during the period I'm living there, no one is paying rent. So that afterwards the ATO could say, well this loan has been used for a PPOR. So as long as I keep it IO and don't claim the deduction during living there, I'm fine to do so afterwards? I'll forget the whole trust issue in that case.
Yes (you don't actually need to keep it as IO - it could be P&I, however having it as IO maximizes your deductions after you rent it back out again).
I agree, for asset protection, having a corporate trustee is not really going to help you. You are still the owner of the units which are a different asset to the property, but any creditor could take the units which will effectively have the same result.
