Wraps and Tax

From: David H


I'm looking at the concept of wraps but I am concerned that I will have to pay CGT once I onsell to the purchaser at the margin above my purchase cost.

I realise I will have to pay income tax on the interest margin I charge, but how is CGT treated on the difference in sale and purchase prices?

It's fairly clear that I don't want to pay the ATO a sum upfront when I will be receiving the cashflow on a periodic basis over the time of the loan. Is there something in the wrap contract with the end purchaser that prevents this?

David
 
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Reply: 1
From: Michael G


Hi,

One system which has been discussed that I will employ is pay the tax on a marginal basis.

lets say you buy/sell for $10k and contract is for 25yrs.

Then spread that gain over 25yr it equals $400/yr gain.

on your annual return state this.

Why, well what happens if they default? you really havent made that $10k gain because the property isnt sold.

So in the event of a default you need to adjust everything again, maybe even claim that tax back.

So just run with it year by year. Have your account write an agruement for your case which you keep on file explaining your reasoning.

You can then produce this agruement if audited.

Just my own thoughts

Michael
 
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Reply: 1.1
From: Yuch .


My personal preference is to defer the CGT till 25 years later. Like Michael said, people might default and the property may change hands many times during the 25 years. If the people default, the contract's broken and hence CGT's not triggered and the payments already been paid are just rent.

Deferring it till title's being transferred, you save the hassle of having to pass the $400 back and forth between you and ATO every year. Plus regulations change all the time, CGT might not be applicable in 25 years time. (this is just me dreaming, but who knows)

Again, the above is only my personal preference.

Regards
yuchun
 
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Reply: 1.1.1
From: Dale Gatherum-Goss


Good morning

I am sure that Steve McKnight is probably the best person to answer this question given that he is so involved in wraps and an accountant . . .

However, as a CPA, my view on this matter is that the contract to on-sell the property is not unconditional until all the payments are made. Therefore, there is no CGT until that time when the contract is unconditional.

However, it will depend upon the wording of the contract and so i recommend that you clarify this with both your solicitor and accountant.

I hope that this helps

Dale
 
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Reply: 1.1.1.1
From: Frode Egeland


I won't pretend to be an expert in this area.
I will however pass on what Steve McKnight does.
He pays the CGT as he goes, rather than wait to pay a lump sum payment in 25 years.


Cheers,
Frode
CashflowSydney
 
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Reply: 1.1.1.1.1
From: Dave Tot



I do suggest you speak with your accountant.

To me, any payments received are my companies income, so hence I pay tax on an on going basis as I would with any income, and of course once my outgoings have been deducted.

It's quite basic really :)

Does a green grocer worry about the difference between the price he paid for his bananas and the price he sells them at?,.... as far the tax he is liable for?

Nope.

He sells his product for as much as the market will allow, and deducts his outgoings, paying tax on the balance.......... just like any other business.

Just my late friday nite ramblings......
 
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Reply: 1.1.1.1.1.1
From: Frode Egeland


Just to add to this quickly:

There is no Capital Gains Tax.
You do get taxed on your capital gains, but there is no actual CGT, in the way that there is a GST. (I heard this from an accountant, so I'm pretty sure this is true..)

Hence, if you're running a company, and pay your taxes on your taxable income, you should be ok. Please do check with a professional, though! :)

Cheers,
Frode
CashflowSydney
 
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Sim

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Reply: 1.1.1.1.1.1.1
From: Sim' Hampel


What Frode is trying to say (correctly I believe) is that you do not get a bill asking you to pay CGT like you do for Land Tax. You merely declare the capital gains made as part of your income tax return and the amount due is added to your income tax bill.

It's more like a levy (like Medicare) than a tax. But hey, if it smells like a tax...

Anyway, please, please, get professional advice - I am NOT a professional in regards to tax / accounting matters.

 
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Reply: 1.1.1.1.1.1.1.1
From: Owen .


Just remember that there is no such thing as a "Capital Gains Tax". All tax is just a tax on income. Some of it is calculated PAYG, some is dividend income, some is capital income as the result of the sale of an item that made a gain.

None of these are different from each other. It's all income of some type and is all calculated at tax return time. It's just that some of that income is taken from you by the government first and you get the remainder and other income is available for you to use as you see fit before paying the government their due amount once a year out of what's left.

How much is left is up to you.
 
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Reply: 1.1.1.1.1.1.1.2
From: Frode Egeland


>What Frode is trying to say
>(correctly I believe) is that
>you do not get a bill asking
>you to pay CGT like you do for
>Land Tax. You merely declare
>the capital gains made as part
>of your income tax return and
>the amount due is added to
>your income tax bill.

That's it exactly, Sim! :)
And since you declare it (the Cap. Gain) as income, you can pay it 'as you go' on a wrap, rather than up-front or at the end of the wrap period.

Thanks for clarifying for me, Sim, much appreciated!

Cheers,
Frode
CashflowSydney
 
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Reply: 1.1.1.1.1.1.1.2.1
From: Matt Wilson


The preliminary advice from my local accountant is that operating within a company simply means wrapping is just trading (i.e. buy and sell) and traders simply pay tax on income less expenses. In this situation, there is no separate need to track the capital gain; only personal ownership gets a different tax treatment for capital gain.
 
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