Book by Paul Fitzgerald - Grocery Money

From: John P


I would like to share something with you that I read in a book by John Fitzgerald (Very Good Book) called "Seven Steps to Wealth" . In one paragraph he says:

Under Section 51(1), you can pay 10% of the total rental income to a spouse, a friend or other nominated person, as a fee for managing the books of your rental property. (It is commonly known as grocery money).

So if I managed my IP's myself, theoretically, I could pay my best mate a 10%. My question is: What's the catch??

Would that friend have to operate as a business?? Would the friend need an ABN?
Can someone enlighten me on this rather interesting little tidbit.
 
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Reply: 1
From: Duncan M


Your friend would need to declare it as income.

The mere act of giving your friend 10% of your rental income doesnt mean you can deduct that 10% from your own income.

Claiming the deduction but continuing to manage your own properties is clearly a blatant attempt at tax evasion. The money given to your friend without a service provided is clearly a gift.

Duncan
 
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Reply: 1.1
From: Alan Hill


When I suggested 10% to my accountant he said that this was very unlikely. If it is to cover the property management, it would have to be in-line with standard management fees of 5-7%.
 
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Reply: 1.1.1
From: Paul Zagoridis


Fees are deregulated and should be charged for services renderred.

If you are getting premium service and additional features there is no reason you can't pay above standard (but commercially reasonable).

I'd argue the call with my accountant.

Dreamspinner
 
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Reply: 2
From: David Brady


Hi John,

Asked a similar question 10th April 2001.

Had a particularly good response from Greg Mitchell.

As Follows;
------------------------
I have been paying my partner to manage my properties for about 5 years now,I was a little concerned when I was audited by ATO last year but it did not present itself as a problem I pay her a flat 10% qualifications was not an issue.

It did highlight that accurate record keeping can go a long way to justify claims, and maximise your (legal) deductions.
-----------------------------

Will be trying for 10% this tax year.

David Brady.
 
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Reply: 1.1.2
From: Sim' Hampel


I know of property managers who charge depending on the location and type of property being managed and the total number of properties in the portfolio under management for an investor.

These fees range from 5% to 10%.

 
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Reply: 2.1
From: Felicity W.


Hi all
I was talking to my accountant yesterday, and he was telling me that the rules have either changed or are about to change on the whole "paying your partner as your bookkeeper" thing. Apparently the ATO in all their modern wisdom have decided that your wife (if you're a man) should take care of your books as part of your marriage deal. And she shouldn't get paid, either.
Hmmmm.... I think I'll bite my tongue at this point....
Keep smiling
Felicity :cool:
 
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Reply: 2.1.1
From: Robert Forward


It must have been a male at the ATO the decided that little tid bit.

Robert
 
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Reply: 2.1.2
From: Apprentice Millionaire


Felicity,

That is in line with the stupid narrow minded view of the ATO that mothers at home working (I was about to write slaving) do not receive an income. I would like to see the commissioner of taxation stay at home for a week and do the housework: I bet he would change his mind.

Cheers
Apprentice Millionaire
(aka Jacques)
 
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Reply: 2.1.1.1
From: GoAnna !


Is this 10% "book keeping" in addition to property management fees or does this 10% pay for a partner who manages the property directly?

GoAnna !
(aka Anna before she got real)
 
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Reply: 2.1.1.2
From: Terry Avery


I would suggest that the ATO is continuing to reward its workers for finding
ways to reduce your claims. Four years ago they attacked sporting equipment
for military personnel and removed it as a deduction despite physical
fitness being a compulsory job requirement and a reason for sacking. The
Defence Force got around this by "branding" the sportswear used by their
personnel so they have ADF runners, ADF shorts....

I would suggest that their sexist suggestion should be taken up with your
local member and feminist groups to kill the idea off.
 
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Reply: 2.2
From: Terry Avery


the Defence Housing Authority charges a management fee of 15% and covers all
repairs for life of the lease. Repaint and recarpet and the end of the
lease - about 9 years.

I think that as long as you can justify the expense then you are covered.
 
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Reply: 2.1.1.1.1
From: Felicity W.


GoAnna!
The 10% is in fact paying your spouse to be your bookkeeper, keeping track of investments etc, and so is separate to the property management side of things.
I'd also like to see the Commissioner of Taxation stay home with a couple of small children for a week, or try property inspecting with them, he might change his view on whether or not little wifey deserves to earn this 10%!! OR maybe do some renovating...
Keep smiling
Felicity :cool:
 
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Reply: 2.2.1
From: Alan Hill


This is fascinating! My wife both manages our investment properties AND looks after all the books etc. so that I nice simple summary needs to go to our accountant at the end of the year. For this extremely valuable service she charges me 7% of rentals(which she declares as income!). From some of the previous posts, do I understand that approx 10% is ok IN ADDITION to the management fee. Please tell me, I'm happy to get belted around the head by my wife for under-paying her if I can get a bigger deduction? Love to hear the feedback....
 
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Reply: 2.2.1.1
From: Felicity W.


I believe 10% is allowable, but the point I made earlier is that the rules are changing, and your wife will probably not be able to charge for doing this any more - she's EXPECTED to do it as your wife.
The only possible way around it is if she is trained as an accountant or bookkeeper.
But I repeat, I'm not sure if this is actually in place yet, it's certainly been touted as a possibility. I believe it's come about because of people using techniques like this for "income splitting" and hence reducing tax - anything to stop people reducing tax!!!
Keep smiling
Felicity :cool:
 
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Reply: 2.2.1.1.1
From: The Wife


The ATO would like to call it 'Tax Evasion'.

If your accountant cant give you a clear and immediate answer as to whether you are evading tax or not, get a new accountant BEFORE you find out FROM the ATO that your accountant is slack.

I believe the above scenario has a limited lifespan, check it out with a professional, and while your there, form a plan with your accountant, so you know exactly what your goals are and how you are going to achieve them. Also ask them what’s the NEW way of splitting income.

The private sector is always 5 jumps ahead of the public sector, which is why it always amuses me, when people bemoan the fact that some loop hole has been closed, there is always another way of doing business, may cost you in the short term to re-adjust, but that’s what the wealthy do, they re-adjust, sacrifice small dollars for the re-adjustment now, and reap the big dollars later.

I think everyone here on this forum, is focusing on the later, and the big dollars. The goal at the end of the plan.

And of course I’m sure everyone on this forum has a plan?

Personally we always have our accountant sit in on our goal setting and he assists us with the necessary structures as we map out our plan.

Sound expensive?

Yes it is, but its not as expensive as it would be if we were floundering around trying to work out what is right and what is wrong, wasting all that precious time on the small details that you pay an accountant for. We have bigger fish to fry, our accountant is part of our 'team' of advisors, I don’t like to waste my brain power on things that are in his department, he went to uni for that degree, I don’t need to know it all, I just need the best advice I can get, which is why there is an accountant on my team.


TW
~Life is a daring adventure, or nothing at all~
 
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