IP Strategy

[x452]

Hi All,

Just looking for some confirmation/advice from here for an idea I have before I run it by my accountant.

Currently I own an IP with my sister valued at approx $400K, so my share is $200K. The IP is paid off so positively geared. The property was transferred to us by our parents.

My idea is to draw into my $200K share of the property, invest that $200K in a Term Deposit in my wife's name (she's in a lower tax bracket), and gear the expenses on the property (interest+expenses-income) against my income to lower my gross income from say for example $100K to use the mortgage interest.

Here are the figures I've worked out:

IP Interest
========

a. IP Value 400,000
b. IP Share (50%) 200,000
c. Mortgage (Redraw Amount) 200,000
d. Interest Rate 7%
e. Annual Interest (c x d) -14000

f. IP Income (50% of 12,000) 6000
g. IP Expenses (Income x 20%) -1200
h. IP Gearing Amount (e + f + g) -9200

Term Deposit (in wife's name so no tax implications for me)
============================================

i. Amount Invested 200,000
j. Interest Rate 5%
k. Interest Income (Gross, i x j) 10000
l. Interest Income (Net, using wife's 25% avg tax rate) 7500

My Tax Impact
===========

Now:
m. Salary 100,000
n. Average Tax Rate 30%
o. Tax Payable 30,000

With $200K Loan:

p. Salary 90,800
q. Average Tax Rate 30%
r. Tax Payable 27,240

s. Total Tax Savings (o - r): 2,760
t. Total Net New Income (TD in wife's name, l): 7,500

u. Total Income/Savings (s + t): $10,260

 

[Rolf Latham]

Don't think u are going to get a den on the money with no income possible in the future

I think deductabily will be determined by the use of the funds, not the security for the loan

Ta
Rolf

 

[joeExpat]

u. Total Income/Savings (s + t): $10,260

You forgot to include your loss (h)
u. Total Income/Savings (s + t + h): $1060

you're only saving $1060

 

[x452]

You forgot to include your loss (h)
u. Total Income/Savings (s + t + h): $1060

you're only saving $1060

Ah yes thanks, makes it not worthwhile.

 

[WASP]

Don't think u are going to get a den on the money with no income possible in the future

I think deductabily will be determined by the use of the funds, not the security for the loan

Ta
Rolf

whats the above mean?

 

[Rolf Latham]

whats the above mean?

sorry

den was missing a letter

Deduction

ta'rolf

 

[redwing]

sorry

den was missing a letter

Deduction

ta'rolf

You deducted some letters

 

[matto_]

Would an off set account change things?

 

[Jamie M]

An offset wouldn't change things in this instance.

The purpose still determines deductibility.

If an offset was set up against the loan from the start - and the funds were placed into the offset rather than onto the principle, then the funds from the offset could be taken out which bolsters the principle back to its original level.

Cheers

Jamie

 

[vaughan]

My idea is to draw into my $200K share of the property, invest that $200K in a Term Deposit in my wife's name (she's in a lower tax bracket), and gear the expenses on the property (interest+expenses-income) against my income to lower my gross income from say for example $100K to use the mortgage interest.

What is the aim of this: To make more money or to lose money? Making a loos on an investment to save paying tax isn't making money, it's losing money.

To draw into the property's equity you'll need the agreement of the other owners. Also you'll probably only get 80% equity out max. And you all end up with an encumbered property.

As others have said, it's the purpose of the use of the money that determines the tax deductibility, not the source.

By my figures, the interest on the equity loan will be ~7%, the interest you'll get from the term deposit will be ~5%, so you're down ~2% or $4,000 per year.

Not financial or legal advice, etc.

 

[x452]

The aim was to try and generate some income (TD) while reducing my tax using a low-complex strategy (eg. not having to purchase another IP).