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Restructure of PPOR and IP

Discussion in 'Accounting, Tax & Legal' started by schmitonian, 6th Nov, 2010.

  1. schmitonian

    schmitonian New Member

    5th Nov, 2010
    Perth, WA
    Hello all, first post so may as well jump in… Not sure if this is more accounting, tax and legal, or finance and lending.

    I have been trying to brush up on my investing and financial knowledge over the last 6 months, and have found many of the posts on this forum to be thought provoking and inspirational, and really getting the brain juices working.

    I have been working overseas the last few years and settled back into Australia over the last 12 months. In my time overseas a lot has changed for me (marriage, kids etc) and I have made some very rushed financial decisions and some poor structuring and think I should be straightening this out before it gets even more tangled and moving on in my wealth strategies. I also think that being on a reasonable wicket salary-wise, I am squandering some opportunities to save a dollar or two, or even make a dollar or two more. I have a few small ideas I think I should implement, and few bigger ones that I am still getting my head around, that I thought I’d bounce of the forums.

    A brief synopsis of things for us:

    I am in the top income tax bracket, my wife is stay-at-home mum with no income.

    Title in my name only (wife was not an Aust resident when purchased)
    Current value = $700k (it has gone backwards)
    P&I loan = $650k, with $50k offset account
    It was originally rented from day 1, so I will not be eligible for full main residence exemption.
    We are happy with house and do not have any plans for upgrading in the near or medium term.

    IP (my prev PPOR)
    Current value = $420k
    P&I loan = $175k
    Rented for last 5.5yrs

    I know the IP should be IO, but considering the restructuring changes I am proposing and the refinancing which accompanies it, I want to get the structural ideas right before going for the refinancing.

    The couple of ideas I had were as follows:
    1) Transfer 50% of PPOR to the wife, using spouse stamp duty exemptions. That should provide a “reset” on half the property for main residence CGT exemptions, but also provide me with a CG event (loss) to carry forward for future (any possibly eliminate any partial CGT liability from my previous mistake). This looks like a no brainer to me.
    2) Set up a HDT and sell the IP to the HDT. The funds from selling the IP would pay down the PPOR P&I loan. I would then set up a LOC and draw down to 80%LVR to purchase units in the HDT. Using the HDT units as collateral, we would set up a third loan at a 50% LVR (or higher if possible!?!) to purchase additional units in the HDT. These units would provide the base funds to purchase the IP at the start, and the HDT would take a fourth loan (LOC? IO?) to complete the purchase of the IP.

    In numbers, the second idea would look like this:

    Personal Assets
    PPOR = 700k
    HDT Unit holdings = 310k

    Personal Liabilities/Equity
    PPOR L1 (P&I w/ offset) = 650k, paid down to 405k (245k equity from IP)
    PPOR L2 (LOC) = 155k
    HDT Unit L3 (IO) = 155k (HDT Unit cash = L2 + L3 = 310k)
    PPOR Equity = 295k, drawn down to 140k by L2 LOC

    HDT Assets
    HDT IP = 420k

    HDT Liabilities/Equity
    HDT IP L4 = 110k
    Unit holding Equity = 310k

    Does this look legit? I know stamp duty and establishment costs need to be added in, and it would all be subject to getting go ahead from the banks. My cashflow check would indicate the HDT is near enough cash neutral after admin costs making it commercially viable for the HDT, my net interest/cashflow is similar to present when tax deductions/refunds for interest are considered, and I think I have convinced myself that ATO should have no Part IVA concerns.

    I would appreciate any comments before discussing it in detail with my accountant. Sorry for the length of the post.

  2. JPM Group

    JPM Group Member

    7th Nov, 2010
    Moorabbin, Victoria
    Hi Chris,

    I am also new to this site but come on to assist individuals like yourself as an owner of a financial service license AFSL, financial adviser, accounting and lending group. I am a director and a qualified advisor and you view our website below for more information;

    JPM Investment Group Pty Ltd | Innovative Financial Planning and Insurance

    I have read through your situation and note the following details. Feel free to email to [email protected] should you like.

    1. PPOR - How long was this rented out for before you both occupied the residence? I am assuming you have been in the residence for 5.5 years considering the IP has been rented for 5.5 years. Is this accurate.
    2. Instead of selling, you can transfer the IP asset into the new entity but this would trigger a CGT event and stamp duty (not sure if this is the best case). What i would suggest is to extract the equity from IP (up to 80% LVR) and lend this to the HDT. This capital can then be used as deposit for another IP with the borrowing helds in the HDT. The HDT will then be the vehicle for further asset purchases.
    3. Covert existing IP to interest only, and any future investment loans also maintain IO. Focus on repaying as much on the PPOR now - the impact and future savings is substantial with extra repayments.

    Other considerations we assist clients;

    Super - Our private clients are in SMSF structures (super assets 100K+). Need to ensure this is managed appropriately (we dont use managed funds). Total wealth = assets held inside and outside super and all combine to attain true net asset position.

    Tax Planning - No doubt the investment loans are providing tax benefits, depreciation etc. We can also look at other measures but would need to determined cash flow positon before providing advice.

    Protection - Considering you are the sole bread winner, family protection critical (i.e income protection & life insurance) - ensure life insurance held inside super for tax purposes.

    Hope this information is helpful. If you are looking for wholistic advice, happy to talk further. We do assist clients across Australia and have clients in WA and we can certainly provide this service at an affordable price.


    James Merchan
    BBus (Finance), DIP FS
    Director & Financial Advisor
    JPM Investment Group [AFSL 339151]