'Buying each other's PPOR'

[No Probs]

Hi guys,

I've been thinking about an idea lately and was wondering if there would be any legal/tax issues with it.

My mother is thinking about buying a new PPOR in the next few years and my wife and I are also thinking of buying a PPOR in the near future. The idea is that we both buy each other's preferred property and then rent them to each other, therefore making all costs of the properties tax deductible and helping with future borrowing serviceability. We would have a lease in place and charge fair market rent.

I am aware we will lose CGT Exemption but we would with a normal investment property too.

Has anyone had experience doing something similar? I appreciate any advice.

Dillon.

 

[marty998]

No expert on this but what in happens in future when after paying rising market rents you find both households paying tax on this income (+ the aforementioned CGT on sale?)

Have you also considered that you may get slapped with land tax too?

 

[Terry_w]

Try to use the 6 year cgt rule.

Also consider land tax

 

[Paul@PFI]

The proposed plan has the required elements of a scheme if the objective is to derive tax benefits.

 

[Brady]

I've heard this question before... possibly on YMYC

Answer was same as above, sheme for tax benefit. So a NO

 

[coastymike]

The proposed plan has the required elements of a scheme if the objective is to derive tax benefits

Not necessarily Paul. Part IVA may not necessarily be applicable.

We spent an entire chapter on Part IVA in our Masters of tax. Just because there is a scheme doesn't mean Part IVA will apply. Needs to be other factors as well.

https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011466416163.htm

 

[GaryT]

I really cannot see this as a Part IVA issue as long as the usual caveats of ensuring market rates / arms length transactions apply.

Also using Terry's suggestion of utilising the 6 year CGT rule would maximise the benefit.

 

[Paul@PFI]

Yes I agree its not automatically a Part IVA issue however if two persons (related) mutually entered into such an arrangement at the same time the motivation of a tax benefit must be considered if both seek negative gearing benefits. That was the question asked in the original post. But is it a dominant purpose ?? Thats a question the Commissioner will determine. Where the parties are related and both mutually acquire there is a risk. It could be a scheme. In the absence of a private ruling I wouldn't be advocating such a scheme.

There are many instances where related persons enter into such "swap" arrangements after acquisition etc'or have related party occupancy (ie mum occupies rental). This isn't the same.

 

[No Probs]

Cheers for the advice and tips guys, I thought it may be a touchy one. If we were to go ahead with it I think we would need some paid individual advice.

Land tax wouldn't be an issue as we would still be investing either way. Just need to spread the portfolio as we reach land tax thresholds.

I understand the proposed plan has the required elements of a scheme so would need to be careful. It just makes sense to do it this way as we would have a higher level of confidence in settling down in said residence, would save on property management fees and have a trustworthy tenant in place.

Using the 6 year rule does make sense but as Paul and Brady have alluded to I think we would need advice on this as it could help with a case against us with regards to the scheme to derive tax benefits.

This plan is just an idea in the pipeline but grateful for all your input.

Cheers,

Dillon

 

[Jess Peletier]

I think in this situation it would be especially important to buy the property as an investment first and foremost - ie do your due diligence as you would for any other investment. I would document your reasons for purchase to prove it's an investment first and foremost and not a scheme.

You all want to be sure that if your mum wants to move/dies/shacks up with a drug dealer that she has all the normal tenancy rights and you have all the normal landlord rights ( and vice versa) and you have a house you're happy to hold no matter what happens.

At the end of the day it will be your house, not your mums and if she is the tenant it makes it more incidental and probably easier to prove it's all legit.

 

[Rob G.]

I really cannot see this as a Part IVA issue as long as the usual caveats of ensuring market rates / arms length transactions apply.

I think the High Court dispelled that argument with the Spotless case. Part IVA can apply notwithstanding the fact that an overall commercial scheme existed.

The Commissioner could also argue that more than one purpose is present and apportion (scale back) deductions accordingly. The related party dealings may suggest some ordinary private or domestic purpose. He would not have to apply Part IVA, deductions could be limited to assessable income and voila ... no net income/loss is the same result as if it were not entered into !

There have been favourable private rulings on similar arrangements between unrelated parties.

However, the costs of specialist legal advice and structuring combined with the prospect of costly litigation would be factored in by more informed taxpayers.