employing partner for managing property investments

[monster24]

Hi there,

I have heard from a couple that the husband (higher income earner) has employed his wife to lok after their IP's. So, doing all the things IP investors have to do, but he paid her some money that of course is tax deductabile.
This is of course double cool, because you save on tax and you also increase the 2nd income that helps to borrow more.

Has anyone done that before. How many IP's do I need to do that and how much per month I could "pay" my wife ???

Thanks
Thomas

 

[wylie]

We do this, and hubby "pays" me. I do all the management and organising to do with his IPs and get similar to what he would pay a PM. It makes no difference to what we can borrow, as I am a stay at home mum and it is my only income.

 

[Quasar217]

I'd never thought of this. My wife is also a stay-at-home mum, but does help with a lot of the maintainence work on our properties. Would she need to be registered with an ABN for me to pay her for this?

 

[wylie]

I don't have an ABN. I was worried about hubby paying me at first, but our accountant does not allow anything that is not proper, so I have full confidence in him.

And, ultimately, I actually do everything for the houses, just like a PM would.

 

[marg4000]

We did this for one of our IPs that was self managed. As there was not much work involved, hubby "paid" me $500 (rose to $800) per year to manage it. He claimed it as a deduction, I listed it as income (under "other income").

We didn't save that much tax, but every little helps.

So long as you keep it a bit below what a PM would charge I can't see a problem.
Marg

 

[LynnH]

We also do this - and I don't have an ABN. I don't think there is a minimum number of properties that you must own in order to be able to make such a claim - AFAIK you can do it with 1 IP.

I keep a separate IP diary and write in it details of all the administrative work I do, and hubby pays me for the number of hours I work, according to the rates outlined in the State Government Clerical Employees Award. This can be downloaded from WageLine at:
http://www.wageline.qld.gov.au/awardsacts/showDoc.jsp?Awards/C0682/5.3+Wage+rates

The wage rates are increased in September each year - I download and print a copy and keep it with the IP records. I think it works out being slightly less that the fees a PM would charge.

Cheers
LynnH

 

[Emily_Zac]

We also do this - and I don't have an ABN. I don't think there is a minimum number of properties that you must own in order to be able to make such a claim - AFAIK you can do it with 1 IP.

I keep a separate IP diary and write in it details of all the administrative work I do, and hubby pays me for the number of hours I work, according to the rates outlined in the State Government Clerical Employees Award. This can be downloaded from WageLine at:
http://www.wageline.qld.gov.au/awardsacts/showDoc.jsp?Awards/C0682/5.3+Wage+rates

The wage rates are increased in September each year - I download and print a copy and keep it with the IP records. I think it works out being slightly less that the fees a PM would charge.

Cheers
LynnH

We use a PM but I still put quite a bit of work in can I still be paid for this ????

 

[Rolf Latham]

Hiya

As far as servicing is concerned it may help a wee bit depending on circumstances such as tax distrib , but remember, that when paying someone out of IP incomes................one side of the profit and loss must be lowered by the same amount as the ampunt paid out.

ta
rolf

 

[alexlee]

And are there extra complications like GST, or payroll tax, super, etc?
Alex

 

[Dazz]

Good question

Hi Thomas,

The wife and I used to do this 10 years ago or so, with the obvious intent of shovelling as much cash out of my (at the time) 47% marginal tax rate to her 20% marginal rate.

Great stuff indeed....or so we thought.

We dug a little deeper, when one year our accountnat pulled us up over our little sideline enterprise and queried whether my wife had the necessary formal qualifications to justify charging me a management fee.

Phhffttt....yeah right - is that necessary ?? Umm - yes it is was the reply.

Righto - no worries at all, send the wife packing, off to do a formal certificate in Property Management by the REIWA. OK, too easy, 5 days of study, one little exam - certificate in PM issued - job done.....or so we thought.

We dug a little deeper, and bugger me....it still wasn't enough.

Mental note to self 10 years ago, - don't assume anything, keep digging until the exact legislation is quoted and staring at you in black and white before embarking on any course of action.

We were hit with the realisation that only a Triennial Certificate holder is lawfully able to charge investors fees for property management. You'll notice this in every agency. All of the ladies (what is it with that by the way, all the PM's are either old and crabby ladies, or up and coming young ladies who are being taught the crabby ways.....where are all the men ??) are actually like my wife, holders of PM certificates, who are employed under the authority of the Triennial Certificate holder. He's the big fat cat sitting in the back office who makes the agency's "policy" and fine tunes all of the exact wording in the PM agreements to stitch the newbies up.

If you don't like the exact wording in the PM agreement and want to argue the toss, this is the cat you'll have to eventually have it out with. Rounds 1 and 2 are with the PM ladies just to soften you up. The TC holder is saved for the killer knockout punch. They are usually, but not always, the principal of the agency.

Anyway, to cut a long story short, without this Triennial Certificate, your goose is cooked. We looked into what it took to achieve this TC, and the conditions were too onerous for us to pursue.....henceforth, for the last 10 years, we don't play that little side game anymore.

It's a damn shame, and a good lark was curtailed mores the pity, but there's nothing you can do without a TC.

 

[nomadic]

This is of course double cool, because you save on tax and you also increase the 2nd income that helps to borrow more.

The banks won't lend you more based on a 2nd income because the balance sheet shows the total household income remaining the same. The 'wages' will be listed as income for the wife but as an outgoing for the husband.

 

[Perp]

Thanks, Dazzling, for sharing your experience.

My immediate reaction when I heard this was "this is too good to be true". Whilst I'm sure everybody here has done this in good faith, I'm often staggered at tax arrangements that people have and think are legitimate. Their response if I seem doubtful is "I've done this for years and had no problems". Well, that's probably because we have a self-assessment system and you haven't been audited yet! That doesn't mean that it won't be ugly when the day of reckoning comes...

Be very careful with the ATO! You don't want to be famous for being the name after "Commissioner for Taxation vs" in a famous test case!

 

[monster24]

Dear all,

thanks for all this expert advice and for sharing your stories. Hhm, the conclusion is that it is obviously not that easy to set-up in the first place,
and of course we are not "increasing" partners income, because household income is the same, and the tax benefit is only marginal ...

So, it seems not really worth doing...especially when she has do all the
courses and exams. Wow, haven't thought about that ...

Anyway, thanks all of you for your comments.

Cheers
Thomas

 

[TheBacon]

I'm sure there are a number of ways around everything.

How about charging and paying for services which DO NOT need a formal qualification?

Administrative work, book keeping, gardening, general cleaning and maintenance?

Probably wont help servicability much but may help with reducing income tax a bit.

 

[wylie]

This must be how our accountant gets around what I do. I have no certification, and our accountant is very conservative, and certainly tells me when something can and cannot be done.

He would never claim anything dodgy, so I feel quite comfortable.

 

[toony]

I see no specific issue with it. I am a wage earner and spend my time earning assessable income in the IT industry. I invest in negative geared properties and I have decided to outsourfce to my wife all the matters related to managing the properties eventhough we also have a property manager.

What she charges me is an expenses incurred in me earning assessable income from the properties. I do not have the time to do it so I outsource it to my wife.

 

[Mry]

Paying your spouse a salary always brings to mind the Wells vs FCT case.

In short, the guy in trouble with the ATO was a Westpac business development manager whose job was to get loans. He was paid on the basis of getting new loans. He hired his wife through an associated company to help fill out the documentation and as a result earned more income. The ATO disagreed and took him to court where the AAT decided that yes, it was deductible because "there is a real connection between the activities of the wife in providing the services through the company and the derivation of the applicant's assessable income by means of the increased commissions derived by the applicant because of the services provided by the wife."

Furthermore, she had the experience and qualifications to do the job, and was engaged in what was considered principal work since Wells was specifically asked to prepare the forms as they were the basis for him getting paid.

Now if the ATO in those completely reasonable circumstances still thought Wells was doing something dirty, how will they look at you?

So to those paying your spouse, you need to ask these questions -

Does the work he/she does give you the ability to earn more income?
Do they have the proper qualifications to do this work?
Do they have relevant experience?
Do they have other clients, or just you? Do they advertise?
How did you arrive at the fee that was charged? Is it comparable to the going market rate for the work?
Is there a written agreement / contract for the work you perform?
Are invoices generated?
Do they have an ABN?

The ATO regularly considers payments to spouses as payments of a private nature, so bad answers to the above question will likely lead to the deduction being denied in the event of an audit.