FHOG & CGT avoidance

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From: Shaun Wilkeson


Hi everyone
I've been checking current and old posts for a little while, luv the info!
I'm a virgin in the IP game and have an idea i'd like some feedback on.
Say I set up a trust, and the trust owns a company. The company buys a block, then builds a house.
If I buy the house from the company for a cheap price, ie just above cost, I can claim the FHOG, and get automatic mega-equity compared to the Free Market Value (for comparable homes). I live in the house thus qualifying myself for the 14K FHOG, and then sell the house for market value.
No CGT, mega tax free $$.
Is my thinking correct, and is a company in a trust a reasonable arm's-length transaction (after all I'm not negative gearing - that is a different issue)
I'd luv to know your thoughts.
Cheers
ShaunW
 
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Reply: 1
From: Mike .


Hi Shaun,

You said: "If I buy the house from the company for a cheap price, ie just above cost, I can claim the FHOG, and get automatic mega-equity compared to the Free Market Value (for comparable homes). I live in the house thus qualifying myself for the 14K FHOG, and then sell the house for market value."

Why do you want to jump thru hoops to get the FHOG? You will achieve the same results by doing everything as an individual (natural person).

To qualify for the FHOG:

"You must have entered a contract for the purchase of a home on/after 1 July 2000 or signed a contract to build a home on/after 1 July 2000. In the case of an owner-builder, you commenced laying foundations on/after 1 July 2000." (Quote from osr.nsw.gov.au)

So Shaun, buy the land, draw up a contract to build, apply for FHOG, move into house within 12 months of end of construction, stay a reasonable period to qualify as principal residence for capital gain exemption, sell house at market value for tax free capital gain.

Why do you want to pay setup costs plus all the legal headaches for trust and company when it's not necessary?

Regards, Mike
 
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Reply: 2
From: Terry Avery


If you can set up a company and trust structure (which will cost you
dollars) and then build a house to live in and then onsell why don't you do
it personally and save the costs of setting up a complicated structure? The
cost of setting up an artificial structure will eat into the FHOG. If it
costs you $2,000 to set up then you have given up 14% of the grant in doing
so.

Should the ATO ever look at this setup they will probably form the obvious
view that you engaged in tax avoidance by the company selling at cost as the
company made no profit. Looks like gaol time there.

Only my opinion.

Cheers
 
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Reply: 2.1
From: Sergey Golovin


Person who want to buy residential property using FHOG -


"What is the eligibility criteria?

To qualify for a grant:

The Applicant must be a Natural Person, ie not a Company or Trust; and
An applicant (or at least one of the applicants) must be an Australian citizen or permanent resident; and
None of the applicants or applicant's spouse can have previously received the grant; and
None of the applicants or applicant's spouse can have previously owned a home, either jointly or separately, or with another person; and
The contract for the purchase or construction of a home must be signed on or after 1 July 2000, or in the case of an owner builder, construction must not have commenced until on or after 1 July 2000. "



Serge.
 
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Reply: 2.1.1
From: Scott Marshall


and if you buy from a trust, it is now secondhand and you only qualify for $7000
 
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Reply: 2.1.1.1
From: Shaun Wilkeson


Thanks for the clarification, it's great having a network to bounce ideas off of.
I still believe a trust is a reasonably necessary structure
to use with investment. For instance a friend has suggested the following setup:
A unit trust is created with 100K worth of units, person A borrows 100K to purchase income-producing units.
Trust purchases a house using 100K from sale of units, and perhaps borrows a little against the house also.
A rents the house and signs a 25yr lease with several 5yr options, and pays market rent.
A's rent pays the trust's loan interest, a little principle and a minor proportion is distributed to the unit holder (A). The trust can make any repairs and maintenance and all is deductible.
A receives the income from the trust, but it is not enough to pay off A's own 100K loan, thus A is negatively geared, and receives deductions off A's other income sources. A's borrowings are tax deductible as they are income producing. If A is an employee (as most of us are) A can get a form (i'm not sure what it is called) which allows all tax deductions to be paid back through A's paycheck from his employer. Thus A gets some of his tax back weekly, rather than waiting until the end of the financial year.
After time and A want to move, the Trust sells the house for market value. The trust pays out the remainder of the loan, buys back the 100k of income-producing units A holds, and buys off A the remaining years on the lease. A will suffer hardship, as the rent A has paid has not kept up with inflation etc, thus the purchase price paid by the trust uses all the remaining funds. This 'income' for the lease has a direct relation to A's principle place of residence, so no tax there.
Thus A enjoys the house's capital increase, the ongoing tax deductions and depreciations (rates, water, new curtains, 'repair of the kitchen and bathrooms, etc)
In addition, if A has not owned his own, home, he has saved his FHOG for the next house (if he so chooses)
Sorry for the long post, but this idea was quite exciting to me, and I had to share it.
Please if you find any, point out the flaws for my ongoing education!
cheers
shaunw
 
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Renting from your Unit Trust (long)

Reply: 2.1.1.1.1
From: Paul Zagoridis


Hi Shaun

First off let me say I love and recommend trusts.

This is an area where you MUST get expert legal and tax advice. You can't just set it up after a couple of chats on the Internet.

This structure is not new. I've had a coffee or three with an advisor who uses it. It is not for the beginner investor (see points 1 & 2 below), especially if the trust has no other income (e.g. from positive cashflow real estate or businesses).

For the sake of discussion and education and criticism, here are some thoughts.

1) The ATO has extensive anti-avoidance provisions. This includes the ability to ignore structures that are created purely for tax minimisation. Hence the need for good advice.

2) You must be comfortable with arguing this transaction with the ATO, AAT and the courts if the ATO ever audits and penalises you.

3) What security is offered by "A" on the loan to purchase the units in the Trust? Banks get nervous with these structures. If the house secures the borrowing it gets tricky (not impossible).

4) If the Trust also borrows a bit extra against the house, you need to deal with second mortgages.

5) Most states have limits on length of leases covered by Residential Tenancies legislation. So a 5x5 residential lease needs a specialist lawyer in that area. There must be provisions for regular rent reviews "to market". Stamp duty is also payable on the lease value.

6) A is PAYG employee and the trust has no other income but the rent on the House. The Trust must not make a loss. Market rent must cover repairs & maintenance, depreciation, rates & utilities, and interest on trust borrowings. Trust losses are quarantined in the trust. There must be income back to A for A's deductions to stand up. A could lend money to the trust and charge interest (another valid source of income - but opens up another can of worms).

7) A fills in a 1515 (formerly 221D) application to the Commissioner to vary tax installments withheld from salary or wages (there's a proper name for this - I can't remember as I'm not a salary earner). Your accountant should know it - if not get an new accountant.

8) Trust sells house and buys out remaining term of A's lease. This is where you should have some serious advice (at least a barrister's opinion). I'm not commenting on principal residence exemptions in a public forum.

9) This structure requires a trust with company trustee, so A's up for the company's annual return to ASIC plus 3 tax returns (A, the company and the trust). Plus legals on the loan and guarantee. All of this adds up to expense.

Now assume "A" does all this and then "A's" circumstances change in 3-4 years (average 25 year mortgage is held only 7 years). Now what? Unravel the structure?

This is a case for "begin with the end in mind", but be sure you really want that end and not some other end. I think that's why accountants recommend you start simply and add complications as you get more experienced.

Paul Zag
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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Renting from your Unit Trust (long)

Reply: 2.1.1.1.1.1
From: Sergey Golovin


Shaun,

Couple of points -

1. No companies or trusts qualified for FHOG, etc. etc., only private individual never owned ... and never claimed the grant... etc. etc.

2. I agree with Paul, may be it easier to set your self up by starting simple.

It was post here on the forum earlier, talking about cost of setting all that up (have look in archives).

Also have look from another point of view: if you are qualified for FHOG and FHOG+ (all up $14K) you are literally will get house for nothing to start with. Also if it is less $200K in NSW metro and $175K country you will get 100% stamp duty exemption.

Plus later on if you decided to make it an investment property and rent it out, you will get tax deductions and offset against your salary till it is negatively geared and further down track. Instead of paying tax you might get some of it back.

Once you have purchased 2-3 properties you can set up more sophisticated structures such as trust and co. Also, hopefully, you will have enough cash by then to pay for setting up costs and all those expenses could be incorporated into you tax return?

Probably it does not make sense of what we are saying right now, but think carefully and I am sure you will find right answer suitable for you in your circumstances.

Good luck.

Serge.
 
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Renting from your Unit Trust (long)

Reply: 2.1.1.1.1.2
From: Dale Gatherum-Goss


Great post, Paul, you covered this area nicely.

Dale
 
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Reply: 2.1.1.1.2
From: Dale Gatherum-Goss


Hi

Unless your friend is a CPA or a solicitor, I would be wary of taking too much advice from them. Not every situation works for each of us. A trust, however, is a wonderful entity to use to create long term wealth and have it taxed at minimal rates.

You seem to have a reasonably good grasp of the possible situation.

However, you should also keep in mind that the tax office look at "market Values" when a financial transaction takes place between "non arms length parties"

What does this mean?

Well, it basically means that the tax office will assess the trust and you on the market rates at the time and not on the actual money changing hands.

Furthermore, I'm not sure sure that the house will qualify for CGT exemption as a PPOR through a unit trust. I wouldn't argue that one . . .

Good luck and keep seeking advice.

Dale
 
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