Wrap tax issues

From: Glenn Mott


I am interested to hear from an accountant's point of view, the tax implications for wrapping a property and different scenarios that may occur.

Correct me if I am wrong, if someone was to sell their property via vendor finance with a contract of sale (keeping the property in their name), the payments received would be a combination of:

a. return of capital
b. capital gain
c. income (interest)

This then allows for the payments to be treated differently for tax purposes, reducing the tax liability below what would be payable for income only.

However, say the contract of sale states that if the purchaser walks away from the deal prior to 5 years from inception without refinancing, the title stays with the vendor, the buyer's caveat is void and no monies are payable.

Does the vendor then become liable for income tax on the amounts claimed as return of capital or capital gain minus the amount of tax already paid on the capital gain portion?

Glenn
 
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Reply: 1
From: Dale Gatherum-Goss


Hi Glenn!

This is an interesting question and one that I'm aware would be best answered by Steve McKnight as he is both an accountant and a wrapper. It's a pity he does not grace our forum very often, nor share his knowledge . . . especially with questions like this one.

As I understand it, a lot will depend upon the actual structure that you establish, and, the wording of your wrap contract.

However, there should be no capital gain involved because the purpose of the business is to sell property (which, in this instance is trading stock) via vendor finance as opposed to the sale of an asset. Therefore, all receipts are income - whether as sales or interest.

If the wrappee walks away from a deal, the house is put back into trading stock and resold. Thus, we will end up with more cash and more profit.


Does this help? I'm happy to be corrected, if someone has a different understanding.

Dale
 
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Reply: 1.1
From: Paul Zagoridis


Hi Dale

That is broadly how I account for my wraps. Plus it is not a sale until the final instalment is made.

And you are right, the detail is commercial in confidence to most wrappers. As is the nuts and bolts of the precise business procedures.

You can learn a lot about the hamburger business from watching a McDonalds, but you wont get their procedures manual for the price of a Big Mac.

Another possibility... Some people want to research all the details of wrapping. Often they research so much they never do a wrap. I'm not suggesting Glenn is one of these. But as a result many wrappers won't answer "advanced" questions until there is evidence that the question results from some experience.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 3
From: Always Learning


<p>
Just a quick question about wraps.
<p>
How does the typical "bank" feel about holding title and hence lending money on a property tied up in a complex wrap legal structure?
<p>


<table border="0" cellpadding="0" cellspacing="0" >
<tr>
<td rowspan="4">

</td>
<td colspan="2" align="center">
<p align="left"> Investment Laws</td>
</tr>
<tr>
<td align="right" >1st Law:</td>
<td>"What ever you don't invest you forfeit."</td>
</tr>
<tr>
<td align="right">2nd Law:</td>
<td>"What ever you reap is what you've sown"</td>
</tr>
<tr>
<td> </td>
<td><p align="right">Jim Rohn;</td>
</tr>
</table>
 
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Reply: 3.2
From: J Parker


This issue of financing wraps is where there is a lot of conflicting advice. I am told that basically Mortgage Insurers will not finance a wrap if it is disclosed. What is everyone's experience with this issue?

Cheers,

Steve
 
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Reply: 3.2.1
From: Michael G


Hi,

I've done it, but its not easy. Use a broker, fully disclose to them, then let them handle it.

But always disclose to someone.

Michael G
 
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