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From: Mike .


first ip, salary sacrifice
From: Dee
Date: 22 Jan 2001
Time: 22:27:11

I'm looking to buy 1st ip, still living with parents. I'm trying to compare these 2 situations 1) save 20000, buy IP up to 200K on an interest only loan 95%, rent it out with reasonable yield, get tax variation, ie negatively gear and wait for capital growth

2) buy a 1st home/townhouse, at say 120k live in it as primary place of residence, obtain $7000 first home owner grant, and stamp duty concession, move back to parents house after 2months, rent the house out and obtain tax deductions on interest, building depreciation etc. In addition my employer is offering salary sacrifice into home mortgage repayments which could be used to pay off principal so in effect - principal and interest loan is mostly paid off with pretax income. I could probably purchase another ip in maybe 2yrs.


Option 2 looks highly enticing for building equity quickly without relying on capital growth alone.

Thanks, Dee
 
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Mike

Reply: 1
From: Mike .


Re: first ip, salary sacrifice
From: Mike
Date: 22 Jan 2001
Time: 22:47:33

Hi Dee,

I like your first idea because of the greater leverage, which is such an important principle in property investing. By leverage, I mean that you want to have capital growth working on the largest amount of capital you can control. In otherwords, the Cap Gain on $200,000 is a lot better than for $120,000. I hope you like your parents.

Regards, Mike
 
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Grant

Reply: 1.1
From: Mike .


Re: first ip, salary sacrifice
From: Grant
Date: 23 Jan 2001
Time: 12:19:18

Dee, your second option will not work because you cannot claim any tax concessions on your property as your original purchase was not for investment purposes (ie you want to live in it) It does not matter that at a subsequent time you do let it out for investment, it is the original purpose that counts.
 
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Alston

Reply: 1.1.1
From: Mike .


Re: first ip, salary sacrifice
From: Alston
Date: 23 Jan 2001
Time: 13:06:38

Grant

I would suggest you check your sources on this. As I understand it you can change on owner occupied property into an IP simply by moving out and making the place available for tenants. You will need to document the date at which the property will be available for tenants. This will generally be the date at which you vacate. From this date onwards all costs are deductible, including a pro rata of prepaid expense, such as insurance and land rates, etc.

This is quite a common practice. It may occur where you move interstate. This also has the advantage of making the property your primary place of residence for CGT purposes. As long as you don't live in another house that you own, this benefit will continue for a period of 6 years after you vacate. This can be very powerful.

Note: this is only my understanding and you should check with you accountant
 
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Owen

Reply: 1.1.1.1
From: Mike .


Re: first ip, salary sacrifice
From: Owen
Date: 23 Jan 2001
Time: 13:20:28

You are right Alston. We did this with our house when we went back to NZ for a year. All rental costs, loan costs, management fees etc were claimable. We then just moved back in again when back in Sydney.

You can do this with your primary place of residence for up to 6 years "at a time" without losing your capital gains tax free ability. I don't know how long you have to live in the property again for between each 6 year period though.

Here's a question. As the above is true, say I am renting and have 3 IP's. Can I nominate one of them as my primary residence and if I sell it within 6 years, not pay any CGT? Would I have had to have lived in it for a period of time first? If so, then how about buying a property, moving in, paying, say, 6 months worth of interest, move out and rent it and then sell it after 5.5 years of capital gain and pay no tax on it. May be a good idea.

Just thinking out loud here.
 
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GerardC

Reply: 1.1.1.1.1
From: Mike .


Owens thoughts
From: GerardC
Date: 23 Jan 2001
Time: 14:00:01

Owen, I am going through this very scenario at present. I lived in a house for 2 years, moved out and leased the house and rented elsewhere. I am now selling the house.

My accountant tells me that any capital gain made after I moved out would be taxable, calculation would need to be made via registered valuers report. Now I am not 100% confident that this is right, and please, please someone tell me its not as the CGT I'll pay will be very painful!
 
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Sim

Reply: 1.1.1.1.1.1
From: Mike .


Re: Owens thoughts
From: Sim'
Date: 23 Jan 2001
Time: 14:27:02

It depends on how long you have not lived in the house.

You normally have up to 6 years before the property can no longer be claimed as your "principal place of residence" (PPR), but note that you cannot have a second PPR during this period.

You should be okay, as you have been renting yourself, but I think the problem may arise if you sell while not living in the house. I do not know whether this makes a difference to the CGT issue.

My thought (not to be taken as advice !!) is that you should be able to claim the CGT exemption, provided that you have been living away from your property for less than 6 years, and you have been renting a property during your time away.

Sim'
 
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Owen

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Owens thoughts
From: Owen
Date: 23 Jan 2001
Time: 14:59:01

Gerard,

You shouldn't be up for any CGT in your situation. I continued my own train of thought and got onto the ATO site. Check out http://www.ato.gov.au/content/individuals/downloads/TPRP_CGT_Guide_1999_2000.pdf especially Page 31 onwards.

The example of Ian moving being transferred to Brissie is a good one. He actually bought a house in Brissie while renting his one in Sydney, claiming all costs and then selling if he had sold within 6 years it would be CGT free.

Note the last paragraph of this example. He pays CGT of both the houses he sells in Brissie and Melbourne because the Sydney one is still his main residence. So buying or renting elsewhere doesn't affect the status of your home.

I am guessing that if Ian had sold his Sydney house within 5 years (no CGT) then the house he was living in at the time would become his main residence, say Melbourne. If he had already lived in it for 2 years while still owning the Sydney home, then when it came time to sell Melbourne then he would be up for CGT for the 2 years it wasn't his main residence regardless of how much longer he lives there.

On page 26 the book defines what is your main residence showing the intention to move in is not enough. You have to put your stuff in it and hook up the utilities. I guess if you wanted too you could

1) Buy house (IP1) and move in for a while

2) Move out and rent somewhere independent. Continue buying IP's for another 6 years because you should.

3) Just before selling IP1 (which is still CGT free) buy another IP (IP2) and move into it. Sell IP1 and then IP2 becomes main residence with only a few months of CGT liability. Then you can move out again for another 6 years and repeat.

Of course you would also keep buying IP's anyway which would be liable for CGT because 1 every 6 years isn't going to get you far. The benefit of this would be every 6 years you get to sell a CGT free property and someone has paid it off for you because it was rented for 5.5 years of that time.

Can anyone be bothered with this or am I talking through a hole in my cheeks? :0)
 
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The Wife

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Owens thoughts
From: TW
Remote Name: 202.139.64.38
Date: 23 Jan 2001
Time: 17:24:28

Owen, I reckon you spend far to much time at the tax site, but we love you for it!

So.....what I want to know is...who's afraid of CGT?...means you made a profit doesn't it?

So you have to give away half your profit, oh well, its only money...

So like, if you had a house every 6 years that you sold, paying a minimal or no CGT, versus a property every 6 months that you pay half you profit away on CGT, which is better?

I can hear the guys calculators running hot already!
 
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Owen

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: Owens thoughts
From: Owen
Date: 24 Jan 2001
Time: 08:30:07

Hi TW,

Like I said, just thinking out loud. I came to the same conclusion as you which is why I said you have to keep buying properties while doing this with one IP every 6 years. You are right though, it's not worth the hassle. Not for me anyway. I like to K.I.S.S it instead (I'm waiting for a reply to that one)

As for spending time on the ATO site. I read The Wife's profile but had to fill in the rest of my work days somehow!!! Nice site by the way.

[email protected]
 
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GerardC

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Owens thoughts
From: GC
Date: 25 Jan 2001
Time: 11:25:19

Thanks to Owen & everyone for your input. TW, I actually don't mind paying tax, just the least amount legally possible! Heck I'm not complaining - bought house in 1996 for 155k and now selling for mid 300's, and yes I have to sell it, before anyone comments. Thanks all.
 
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Chook

Reply: 2
From: Mike .


Re: first ip, salary sacrifice
From: Chook
Date: 23 Jan 2001
Time: 12:33:19

In order to obtain the 1st homebuyers grant, you need to live in the property for a substantial period of time - I am not sure of the exact wording, but I don't think that 2 months would satisfy the OSR (Office of State Revenue). You would need to look into this further.
 
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Crystal

Reply: 2.1
From: Mike .


Re: first ip, salary sacrifice
From: Crystal
Date: 23 Jan 2001
Time: 20:36:39

I contacted the Office of State Revenue regarding the same scenario. ie After living in the property for a month or so and then moving home and renting the property coz I *couldn't afford the repayments*. I was told that as long as I moved in to the property WITHIN 12 months, there was no time period that I had to stay in the property.

Hope this helps, Crystal
 
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Dee

Reply: 2.1.1
From: Mike .


Re: first ip, salary sacrifice
From: dee
Date: 24 Jan 2001
Time: 15:33:52

Thanks Crystal but after you move back home can you still claim the tax deductions? Because I get the $7000, the original purpose of the house was as a principal place of residence.
 
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Crystal

Reply: 2.1.1.1
From: Mike .


Re: first ip, salary sacrifice
From: Crystal
Date: 24 Jan 2001
Time: 20:16:32

Hi Dee,

I was led to believe that you receive the $7000 for fulfilling the requirements (as discussed previously). If your situation changes and you move home and turn the property into an IP you can claim the tax deductions.

Please note that this is the information that I was given by one fellow at the Office of State Revenue. I would suggest you try asking the same questions of as many OSR employees as you can, to ensure the information is correct.

Good Luck, Crystal
 
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Mike

Reply: 3
From: Mike .


Re: first ip, salary sacrifice
From: Mike
Date: 25 Jan 2001
Time: 00:07:39

Hi Dee,

"...my employer is offering salary sacrifice into home mortgage repayments..." Is this legal? The following three articles suggest the ATO are cracking down on this sort of thing.

Regards, Mike
 
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Gary

Reply: 3.1
From: Mike .


Re: first ip, salary sacrifice
From: Gary
Date: 25 Jan 2001
Time: 10:33:05

It is legal, providing that the arrangement is entered into before the employee does the work that generates the salary, and the employer pays FBT on the value.

Now, the interesting part. If the payment is for an investment, then the employer does not pay FBT on the amount. So, Dee, if you could talk the employer into paying you the amount they were willing to pay in FBT as well, you will be well ahead.

So get an investment loan, and get the employer to salary sacrifice the interest payments. And get them to increase the amount they pay by the amount of FBT they would have paid if it was for your home mortgage. Should be able to just about double the size of your loan. Assuming you want to take on that amount of debt of course. And work out what happens if you lose your job, or take another one that won't do this.

Gary
 
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Terry A

Reply: 3.1.1
From: Mike .


Re: first ip, salary sacrifice
From: Terry A
Date: 25 Jan 2001
Time: 21:45:58

I doubt you will get the employer to add the FBT as they get a tax deduction for paying FBT as a business. The FBT is at 47% and company tax is 30% so it is worthwhile for the company to allow you to salary sacrifice. No tax deduction to the company no benefit to them so I can't see them doing it.
 
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Sim

Reply: 3.1.1.1
From: Mike .


Re: Article 1
From: Sim'
Date: 25 Jan 2001
Time: 10:03:00

I remember reading something about this, but when talking to the financial director (ie. accountant) at work (my old job), he knew nothing about this stuff.

His opinion was that you could sacrifice any arbitrary amount of your existing salary into something like super, or just about anything else.

Something to keep an eye on ! Sim'
 
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Jeanette

Reply: 3.1.1.1.1
From: Mike .


Re: Article 1
From: Jeanette
Date: 25 Jan 2001
Time: 10:44:23

Isn't the difference that if the employer allows the salary to go into superannuation, there is no charge to the employer, but if it goes into something other than superannuation, the employer has to pay fringe benefits tax?

And in the second scenario, I have heard of an employer passing on the FBT to an employee, so that the benefit to the employee was reduced.
 
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