Tax Strategy

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From: Mr S


Can anyone help me with this concept.

I am employed full time - private industry earning a salary and paying tax. I am also the Director of a PTY LTD Company.

As an individual I intend to purchase a house to lease out... ie Negative gear / depreciate.

I intend to lease it to my Company. The lease fees are a company Tax deduction and I will personally collect the rent.

The house is a personal tax deduction due to it being negative geared and depreciated.

As I am my company... I intend to operate my business from this house and live in it.

What I'm trying to achieve is to legally negative gear my private residence and I'm wondering if this tax loop is legal and/or what am I missing? I'm aware that if I ever sell I'll have to pay CCT but I have no intention of selling... I'll simply move out, lease it with positive cash flow, upgrade my residence and do it again...

But only if legal... ha ha

Cheers
 
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Reply: 1
From: PT Bear


You'd need to talk to your accountant about this, but I don't think you can rent it out to yourself. You can rent the house to your company, but only the portion which your company uses. The portion which you use to live in won't be tax deductible. If you don't live there, the company can rent the whole house.

The other problem is that if you sell it, the capital gains exception for owner occupier won't apply to the portion of your house which the company rented. That part of the house will be subject to the normal capital gains laws.

Having said that, it is a good way to get some tax exemptions out of your own home. You need to fully understand the advantages and disadvantages and weight them up.

PeteT.
 
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Reply: 1.1
From: Anonymous


I've heard about people doing this using a trust and believe it is legal.

You buy the house through your trust and rent it out. The trust makes a loss which can be offset against other trust income (ie negative geared). You can also get the lawns mowed and other house maintenance stuff paid for by the trust and hence tax deductible.

You have to pay market rent or the tax office will be suspicious.

It sounds like a good plan.
 
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Reply: 1.1.1
From: Sergey Golovin


Martin,

Nothing wrong with plan it self.

You probably have to think about the loan first (if do have loan). How are you going to structure it. If it is owner-occupier you hardly will get anything. You will, but it would not be easy - you have to show which part is yours and which one is business's as Peter explained earlier.

On other hand if that loan taken as Investment Loan then it would be much easier to claim all tax deductions.

Also, if you want to move out you can do it at any time with no explanation or with minimum effort.

Only catch is - your Company has to make/provide product or services, otherwise it is very difficult to claim against your own salary in structure of that co. Everything gets so twisted that you will never get over it.

This is why the ATO is so anxious about it. They do not mind it as long as your company provide (contribute) something to the society otherwise you are on your own.

Put it simply you do not set up a company just for tax and rental exercise alone.

However, saying all that you can do that later on when you do have few (?) investment properties. So, effectively you are running an investment business.

So, the property portfolio it self is business on it's own.

Hope it helps.

Have look in archives as well.

Hips of it written down already, even for the last 2-3 month. You do not have to go to far.

Regards
Serge G.
 
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Reply: 1.1.1.1
From: Robert Longmore


i think it is legal, but the company can only lease a % of the property. but check with professionals to make sure.
 
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Reply: 1.1.1.1.1
From: Michele B


I'm doing this too Martin - my discretionary (family) trust owns the building and I rent the upstairs apartment to live in and my business rents the downstairs office.

This is all OK provided bona fide leases are in place and a commercial rent is paid to satisfy the ATO's 'arms length' requirements - regular payments need to show up in bank statements etc. Of course my business has to pay GST to the trust but I try to time trust expenditure (from other IPs) carefully so the GST can be claimed back each quarter. GST is not payable on my private rent (being residential), and the rent itself is set at about 10% below market on the basis that I would be expected to look after my own property better than the average tenant. Hope this helps - be sure to check it out properly with your accountant.

Michele
 
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Reply: 1.1.1.1.1.1
From: Paul Zagoridis


Good reply Michele

Martin, the short answer is: NO don't do it.

Slightly longer answer is: Talk to your accountant.

Anyone who knows me will be surprised by my answer as I normally say you can structure anything.

The ATO have wide ranging anti-avoidance powers. They'll take one look at the deal and ignore it, deny your deductions, charge you penalty tax and interest. Unless there is a commercial reason forget it.

The really bad news is this wont happen when you file your tax return. It'll happen at a desk audit 5 years from now and you will be in serious pain.

If you are going to do it... Put the house in the P/L name and pay market rent. If you want the long-winded explanation please ask and I'll post it.

Regards

Paul Zagoridis
Dreamspinner
 
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Reply: 2
From: Duncan M


If you live in the house your company will be liable for the subsequent Fringe Benefits Tax.

Duncan.
 
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Reply: 1.1.1.1.1.1.1
From: Robert Alonzo


Hi Paul,
Thanks for your good posts.
a) I'd love to here the long-winded answer
you offered to give re: don't rent at arm's length from your
own discretionary trust, &
b) Do the perceived risks become acceptable
if you use a unit-trust rather than a discretionary
trust and then rent at arm's length?
c) Do things look a helluva lot better once the
structure covers two or more IP's rather than just one?

Cheers,
Rob Alonzo

On 6/17/01 8:13:00 PM, Paul Zagoridis wrote:
>Good reply Michele
>
>Martin, the short answer is:
>NO don't do it.
>
>Slightly longer answer is:
>Talk to your accountant.
>
>Anyone who knows me will be
>surprised by my answer as I
>normally say you can structure
>anything.
>
>The ATO have wide ranging
>anti-avoidance powers. They'll
>take one look at the deal and
>ignore it, deny your
>deductions, charge you penalty
>tax and interest. Unless there
>is a commercial reason forget
>it.
>
>The really bad news is this
>wont happen when you file your
>tax return. It'll happen at a
>desk audit 5 years from now
>and you will be in serious
>pain.
>
>If you are going to do it...
>Put the house in the P/L name
>and pay market rent. If you
>want the long-winded
>explanation please ask and
>I'll post it.
>
>Regards
>
>Paul Zagoridis
>Dreamspinner
 
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Reply: 1.1.1.1.1.1.1.1
From: Paul Zagoridis


Hi Robert

My answers are mixed in with your post. No *** as I don't want to infringe on TW's pending trademarks (now that is a very profitable form of IP)

On 6/26/01 12:39:00 AM, Robert Alonzo wrote:
>Hi Paul,
>Thanks for your good posts.

Your welcome ;-)

>a) I'd love to here the
>long-winded answer
>you offered to give re: don't
>rent at arm's length from your
>own discretionary trust, &

Actually that is almost what I do. Nothing wrong with it. Martin was suggesting to buy in his own name and RENT to his company.

There is a long-winded way to do that, but it doesn't make a lot of sense when you can do b)

>b) Do the perceived risks
>become acceptable
>if you use a unit-trust rather
>than a discretionary
>trust and then rent at arm's
>length?

That is EXACTLY how I'm structured. But some banks hate unit trusts. I'd think unit trusts are better than discretionary.

>c) Do things look a helluva
>lot better once the
>structure covers two or more
>IP's rather than just one?

2 or more properties mean the trust is paying it's way, is obviously a business and not just a fiction.


Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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Reply: 1.1.1.1.1.1.1.1.1
From: Robert Alonzo


Hi Paul,
thanks for your clear succinct response.
It's much appreciated and no doubt
will assist all those who
raise this perennial FAQ topic :)

Best Regards,
Robert Alonzo

On 6/26/01 10:31:00 PM, Paul Zagoridis wrote:
>Hi Robert
>
>My answers are mixed in with
>your post. No *** as I don't
>want to infringe on TW's
>pending trademarks (now that
>is a very profitable form of
>IP)
>
>On 6/26/01 12:39:00 AM, Robert Alonzo
>wrote:
>>Hi Paul,
>>Thanks for your good posts.
>
>Your welcome ;-)
>
>>a) I'd love to here the
>>long-winded answer
>>you offered to give re: don't
>>rent at arm's length from your
>>own discretionary trust, &
>
>Actually that is almost what I do.
>Nothing wrong with it. Martin was
>suggesting to buy in his own name and
>RENT to his company.
>
>There is a long-winded way to do that,
>but it doesn't make a lot of sense when
>you can do b)
>
>>b) Do the perceived risks
>>become acceptable
>>if you use a unit-trust rather
>>than a discretionary
>>trust and then rent at arm's
>>length?
>
>That is EXACTLY how I'm structured. But
>some banks hate unit trusts. I'd think
>unit trusts are better than
>discretionary.
>
>>c) Do things look a helluva
>>lot better once the
>>structure covers two or more
>>IP's rather than just one?
>
>2 or more properties mean the trust is
>paying it's way, is obviously a business
>and not just a fiction.
>
>
>Dreamspinner
>Oz Film Biz is at
>http://www.healey.com.au/~paulz
 
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