I have a tricky situation that I'd like people's opinions on. Here's my very long explanation and question. I've tried to explain as much as possible so my situation is clear: I live remotely and when the kids reached school age, I decided to move from our property so I could live in town and just travel home on the weekends. (two and a half hours away) As such, about 4 years ago we bought a house in town in our HDT that I rent from our HDT. Unfortunately I did a dumb thing and without going into the details of why and how on earth(!), the house was paid for without a loan as we had money in savings which we bought units in the trust with and the trust bought the house. We have borrowed against the house to invest but effectively the house itself is actually positvely geared - it has been one of those cringe things for me ever since. - how messy! At the time of my mistake, I asked my accountant if it was possible to just have the house there and not claim any costs and therefore not pay any rent. The advice was that I couldn't do that unless I was renovating or had another valid reason for not making the house available for rent. So I have just lived with it, keeping my rent to the minimum possible as I am an excellent tenant! Next year I want to move back home and come in about one night a week. My options as I see it are: 1. Rent out part of the house for the rent I was paying so the rent is still covered (which is still good value) and basically share with someone. When I initially got agents to evaluate the rent I should pay, I didn't include a paddock I have which could be used for horses and I have since also done a lot to the house and garden. The town I live in has also boomed due to resources. I only minimally increased my rent as I had valid quotes at the time of beginning my rent and have been a long term tenant. However, the point I am making is that if I were to start again, the rent would be a lot more - hence, charging someone the rent I have been paying, for a furnished house with a horse paddock, that they have to share on a minimal basis is actually a good deal. My problem with this option is that I would not cope well if they didn't treat my house properly... 2. Maintain the status quo and cop the rent myself, which will be hard as I will not have the income earning capacity I have now 3. My preferred option - find a way not to have to rent it at all without huge transfer costs etc and just use it for my once a week visits. 4. Second preference - I'd consider finding a reliable, neat person who would be happy to help caretake in return for very cheap rent and putting up with the kids and myself once a week but can't see how this could be justified to the ATO as the rent would be lower than it is now. I can't understand why it isn't feasible to not claim any costs and not pay any rent for this house and would appreciate drawing on everyone's knowledge about the best way to handle this mess. thank you, jen
I find your accountant's reasoning a little hard to fathom. Sure I understand that it would need to be available at market rent to claim deductions*, but if it's positively geared, there's no point, your paying tax for literally no reason. Your best bet might simply be to ask your accountant why you have to rent it out. * I suspect if you had in fact borrowed money for the units, deductions would be disallowed by the ATO for reasons set out in TR 2002/18. I'm surprised in the circumstances this arrangement was even recommended to you in the first place.
Why a unitised or HDT which gives no asset protection if there was no negative gearing intention ? In which case there is no need to deal at arm's length (market rent). In the absence of more info, sounds like unecessary tax by declaring rental income for the trust AND possible future CGT issues if you want to hold the property in a discretionary form later. Cheers, Rob
Our original intention was to gear it negatively and place it in the trust so we could use it as an investment property at a later date. I thought I'd be using it for a few years and then make a clean break - not needing it any more. In all fairness to my accountant at the time, they didn't recommend this current situation - as a positively geared investment - that happened by accident. At the time of buying the property a lot of issues were happening in our lives and at the last minute everything went a#se -about and the final decision of where the money was to come from was made in haste, leading to bad decisions made quickly - all history about why it happened. What I'd really like to know is if I can just stop making it available for rent and stop claiming any deductions. I have actually been transferred from my original accountant, within the same firm, so I will ask my "new" accountant about the situation and see if I can get any further. thanks for your comments, I appreciate it.
