Tax -Debt Transfer

[Bushy]

From: Paul Bushy


G day to all,I'm a newbie to this forum. I got into property investing a few years ago after switching out of the stock market.I have a question regarding taxation. My wife and I purchased 3 high growth,positive geared properties in both our names and then purchased property #4,5,6 and 7 for our family trust for asset protection.The first 3 IP's have gained about 80%in value in turn lowering our debt/equity ratio to about 50%.We now wish to get a LOC for the extra equity available to us ,and have the loan repayments taken out it.The rent from these IP's will then be directed to lender #2 (trust Properties)so that they will be paid off early.The first 3 IP's will become negative geared and the trust IP's will become more positive geared .My question is ,Is the interest on the LOC tax deductible as it is being used to pay an expense(interest)
Thanks Paul

 

[DaleGG]

Reply: 1
From: Dale Gatherum-Goss


HI Paul and welcome

Congratulations of your investing success so far and hopefully you will share some of your secrets with us as time goes bye.

If I understand you correctly, you wish to borrow money in your personal names and then loan that money to your trust so that it can use the funds to reduce it's debt. Is that right?

If so, then I am afraid that to the letter of the law, no you cannot claim the interest as a tax deduction. This is because in lending the money to the trust, you have no certainty of getting an income from that trust simply because of the nature of a trust having a discretion as to who will benefit from the income.

Your suggested scenario sounds a lot like the "split loan" idea that is quite popular in the media at the moment. I would wait a while though as the tax office have shown great urgency in appealing this decision and we may see the tables turned yet again.

Even so, because you have 2 different owners of the properties (you and the trust) you should not be able to use that structure either.

I'm sorry to be of so little help.

Dale

>I have a question
>regarding taxation. My wife
>and I purchased 3 high
>growth,positive geared
>properties in both our names
>and then purchased property
>#4,5,6 and 7 for our family
>trust for asset protection.The
>first 3 IP's have gained about
>80%in value in turn lowering
>our debt/equity ratio to about
>50%.We now wish to get a LOC
>for the extra equity available
>to us ,and have the loan
>repayments taken out it.The
>rent from these IP's will then
>be directed to lender #2
>(trust Properties)so that they
>will be paid off early.The
>first 3 IP's will become
>negative geared and the trust
>IP's will become more positive
>geared .My question is ,Is the
>interest on the LOC tax
>deductible as it is being used
>to pay an expense(interest)
>Thanks Paul

 

[Bushy]

Reply: 1.1
From: Paul Bushy


Hi Dale , thanks for your reply.
My initial post was a bit confusing (this might not be any better).We want to borrow money in our personal names and use it to pay the interest on the loans of the IPs in our personal names only.
We will keep the Trust IPs loans separate.We will use the rent from the IPs in our personal names to pay down the principle of the trust loans intern lowering the trust borrowing costs and increasing the costs of the IPs in our personal names.

Cheers Paul