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Putting PPOR into HDT good idea or not?

Discussion in 'Accounting, Tax & Legal' started by Triu, 11th Sep, 2006.

  1. Triu

    Triu Well-Known Member

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    Hi can anyone please advise if this is the best way! I want to buy a new PPOR but place my old one in a HDT and then redraw the equity to purchase a new PPOR. Should i also put the new PPOR in the HDT and then rent from my Trust? or is it a problem for future capital gains and land tax issues?

    Or should i pay down my existing ppor and then sell it the HDT and the borrow 100% to purchase my new PPOR and not place it in the trust but have a small mortage which i can then pay off quickly.

    Just confused at the moment about how to structure everything properly!

    thanks again

    Triu
     
  2. johnnyb

    johnnyb Well-Known Member

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    Hi Triu,

    I'm not really qualified to answer your questions, but I can tell you what we did a couple of years ago.

    We owned our PPOR outright but were moving interstate. We wanted to keep it as an IP, but also wanted to use the equity to buy a new PPOR.

    After looking at a few options we decided to transfer it to a HDT. The property was valued at $300K. I took out a loan of $240K (80%) and bought units in the HDT. We also made a "private loan" to the HDT for $60K. The trustee of the HDT (me) then bought the property from us. We did have to pay stamp duty, which was the only significant cost in the exercise.

    The net effect of all this was:
    1. We had $240K to put towards purchasing a new house,
    2. We had effectively converted $240K from non-deductible to deductible debt.
    3. We added another property to our portfolio.

    So overall a good outcome for our circumstances. I think one thing to ask yourself is whether your PPOR will be a good IP?

    Afraid I can't help with the question of buying your new PPOR in a HDT. We also considered that option, but decided there wasn't really much benefit to it - in particular I would probably not keep our current PPOR as an IP if we move again, so assuming we would sell it then we didn't want to loose any capital gains in tax.

    If you go ahead then make sure you're accountant knows his game, and also use a good mortgage broker.

    Hope this helps.

    John.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Hi Triu

    You should get tax and legal advice, but the key principle to keep in mind is that you want to:

    a) maximise your deductible debt (i.e. debt on your IP); and
    b) minimise your non-deductible debt (i.e. debt on your house).

    So what does that mean? As JohnnyB has posted, by selling your home (CGT free) to a trust you end up with deductible debt which was used to buy the IP and a big pile of cash (less stamp duty) to buy your PPOR with. The more cash you have to buy the PPOR the smaller the loan you'll need.

    (In an ideal world you'd buy hour PPOR for cash and then redraw all that juicy equity to buy investments ;) )

    With respect to your second query about renting one of the IPs owned by your trust, detailed tax advice is required. However, some observations:

    1) you would lose the CGT exemption which applies to PPOR if you ever sell
    2) you would need good evidence that you were being charged a market rent (and I suppose that the rent was reviewed regularly (altho I know many landlords don't put the rent up regularly))
    3) sound commercial reasons why you were doing things this way
    4) a realistic and not contrived need for asset protection.
    5) there have been some tax alerts (which I think may have progressed to more formal rulings) on renting your home from a unit trust...so you'd need to look carefully at those.

    From memory there was a tax case, Janmor, were the taxpayer was succesful in renting his family home from a trust but that was a pure discretionary trust rather than a unitised trust AND the borrowing was in the trust's name (from memory) and not in the taxpayer's personal name and he was a doctor - hence a good asset protection requirement. Also that case was some time ago, i.e. before the current Part IVA anti-avoidance provisions in the tax legislation. The trust in question had strong cashflow itself.

    SO to summarise, I think in limited circumstances it could be done, but for most people I don't believe it is a viable strategy.

    Cheers
    N.
     
  4. Apprentice

    Apprentice New Member

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    Johnnyb

    In your example would it have been possible to somehow draw down the whole $300K to buy the new PPOR and make it all tax deductible debt?

    Cheers

    Apprentice
     
  5. johnnyb

    johnnyb Well-Known Member

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    Hi Apprentice,

    Welcome to the forum!

    Sorry, but I'm not sure if we could have got the full $300K, as I never asked that question. I don't think there would be anything stopping you from doing this in principle (assuming you qualify for the loan, pay the LMI etc). We only wanted an 80% loan in order to keep some equity in the property.

    Maybe the accountants/mortgage brokers on the forum can confirm whether this can be done.

    John.
     
  6. NickM

    NickM Co-founder Staff Member

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    JohnnyB, the only way you could have got the full $300K immediately (+ st duty) would have been to cross collaterise the property with another. Then the bank would have lent you the full amount.

    Check the books of your HDT as the balance of $60K should still be reflected as owing to you. This could possibly be financed later on with a loan of $60K that should be tax deductible.

    This can then be used to further reduce your non ded debts.

    NickM
     
  7. johnnyb

    johnnyb Well-Known Member

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    Funny you should mention that. Just this morning I was going over the HDT's tax return for last year (no, I don't do that sort of thing normally, it's to help me prepare this year's paperwork, honest) and was looking at our beneficiary account, wondering how I could get my hands on it :D Guess I'll just have to wait for the property value to rise a bit more.

    John.
     
  8. Redwing

    Redwing Well-Known Member

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    Personally I think there's Pro's and Cons with going this way (you lose your CGT exemption); but if you use the HDT to acquire additional IP's and have a plan (and someone like NickM or Dale GatherumGoss to assist in your planning, then why not).


    Funnily enoughI once talked to a WA Property Guru's Accountanting representative about HDT's when he was giving a seminar and he said "oh, nobody uses those anymore", I then explained about them (as best I could) and he became interested and said he didn't know much about the structures...so my advice, speak to Nick, Dale or one of the other people familar with this type of structure...it may be painfull if you dont as i've heard of HDT's that were actually DT's and the investor didn't find out until too late (Tip..Dont buy one of E-Bay ;) )
     
  9. shake-the-disease

    shake-the-disease Well-Known Member

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    Thanks for this, a very important clarrification IMHO for anyone considering putting their PPOR into an HDT and continuing to live in it.
     
  10. Redwing

    Redwing Well-Known Member

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    I'm sure there are other strategies that "wealthy people" (or thier advisors) use, such as Nominee Companies etc etc to hold properties in that they in turn rent ?

    Own nothing Control everything being the warcry... and why some presumably still seem to come through things okay after apparently "losing" everything?
     
  11. Terryw

    Terryw Well-Known Member

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    Hi Nigel,

    Your memory is good,
    FC of T v Janmor Nominees Pty Ltd (1987) 87 ATC 4813
    http://law.ato.gov.au/atolaw/view.htm?locid='JUD/87ATC4813'

    This also may be of interest:

    Taxation Ruling TR 2002/18
    Income tax: home loan unit trust arrangement
    http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR200218/NAT/ATO'
     
  12. Redwing

    Redwing Well-Known Member

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    After talking with a few people I see it as follows;

    Advantage
    1. Ability to claim as a tax deduction interest on mortgage;
    2. Asset protected by virtue of being owned by a discretionary trust;
    3. Suitable structure for rental property
    4. If correct structure used (hybrid trust) refinancing principle may apply

    Disadvantage
    1. Loss of principal residence exemption
    2. Possible land tax implications
    3. If rent exceeds deductible expenses then assessable profit being derived from non-assessable amounts
    4. If discretionary trust used then losses trapped in the trust.

    In addition to Janmor Nominee’s read the following for more information
    Madigan vs FCT (1996)
    Smith & Roberts