Negative gearing and all that.
#1
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Joined: Jun 2005
Posts: 9,316
Negative gearing and all that.
Not really negative gearing but certainly taking advantage of the tax rules. What stops people doing the following?
Person A buys the house person B wants (with mortgage of $250pw) and rents it to person B for $250pw.
Person B buys the house person A wants (with mortgage of $250pw) and rents it to person A for $250pw.
Why would you want to do this? You can tax deduct maintenance costs and depreciation.
Any reason why this wouldn't be a good idea (apart from the obvious one about Persons A and B falling out with each other)? Would the taxman smell a swamp rat?
Person A buys the house person B wants (with mortgage of $250pw) and rents it to person B for $250pw.
Person B buys the house person A wants (with mortgage of $250pw) and rents it to person A for $250pw.
Why would you want to do this? You can tax deduct maintenance costs and depreciation.
Any reason why this wouldn't be a good idea (apart from the obvious one about Persons A and B falling out with each other)? Would the taxman smell a swamp rat?
#2
...giving optimism a go?!
Joined: Jun 2007
Location: Brisbane (leafy, hilly western suburbs)
Posts: 2,202
Re: Negative gearing and all that.
All perfectly legal and above board. Some financial planners have suggested such schemes (mainly between families to limit the risk of being screwed over by each other).
If you can find someone you trust enough to enter into this kind of arrangement then go for it!!!
If you can find someone you trust enough to enter into this kind of arrangement then go for it!!!
#3
Re: Negative gearing and all that.
Can't provide a detailed reference but as far as I know there are provisions in the tax code allowing for disallowance of deductions if a transaction is entered into purely for tax reasons with no underlying commercial basis.
Also, at the moment, market rents are far less than the mortgage interest on an equivalent property and that might open up another door for the "scheme" to be challenged (non-arms length rentals).
There are a variety of practical objections too, eg what happens when one person wants to move (job change, divorce, wants bigger house etc) and the other one doesn't?
Also, at the moment, market rents are far less than the mortgage interest on an equivalent property and that might open up another door for the "scheme" to be challenged (non-arms length rentals).
There are a variety of practical objections too, eg what happens when one person wants to move (job change, divorce, wants bigger house etc) and the other one doesn't?
#5
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Joined: Jun 2005
Posts: 9,316
Re: Negative gearing and all that.
Can't provide a detailed reference but as far as I know there are provisions in the tax code allowing for disallowance of deductions if a transaction is entered into purely for tax reasons with no underlying commercial basis.
Also, at the moment, market rents are far less than the mortgage interest on an equivalent property and that might open up another door for the "scheme" to be challenged (non-arms length rentals).
There are a variety of practical objections too, eg what happens when one person wants to move (job change, divorce, wants bigger house etc) and the other one doesn't?
Also, at the moment, market rents are far less than the mortgage interest on an equivalent property and that might open up another door for the "scheme" to be challenged (non-arms length rentals).
There are a variety of practical objections too, eg what happens when one person wants to move (job change, divorce, wants bigger house etc) and the other one doesn't?
#7
Re: Negative gearing and all that.
Funny,i could have sworn i heard you say something about having a dream....................
#8
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Joined: Jun 2005
Posts: 9,316
Re: Negative gearing and all that.
Common mistake, as they are the spitting image of each other
#10
Re: Negative gearing and all that.
If your interested in this concept start looking at the new change in SMSF (self managed super funds). Again a longer term view required but cuts out having to deal with other people.
Now I have only started looking into it so my facts are being drip fed to me by my financial advisor but:
15% tax rate (super funds)
Interest deductible
Salary sacrifice your gross income into your super fund
Salary $200K less $50K = $150K (down from 45% to 40% tax rate)
Other way to look at it is to pay the $50K interest you would need
$50K @ 45% providing net $27.5K
$37.5K @ 40% providing net $22.5K
I am ignoring negative gearing.
#11
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Joined: Jun 2005
Posts: 9,316
Re: Negative gearing and all that.
Purchase of property based only on current tax incentives would be asking for trouble - but nothing wrong with taking advantage of the situation
If your interested in this concept start looking at the new change in SMSF (self managed super funds). Again a longer term view required but cuts out having to deal with other people.
Now I have only started looking into it so my facts are being drip fed to me by my financial advisor but:
15% tax rate (super funds)
Interest deductible
Salary sacrifice your gross income into your super fund
Salary $200K less $50K = $150K (down from 45% to 40% tax rate)
Other way to look at it is to pay the $50K interest you would need
$50K @ 45% providing net $27.5K
$37.5K @ 40% providing net $22.5K
I am ignoring negative gearing.
If your interested in this concept start looking at the new change in SMSF (self managed super funds). Again a longer term view required but cuts out having to deal with other people.
Now I have only started looking into it so my facts are being drip fed to me by my financial advisor but:
15% tax rate (super funds)
Interest deductible
Salary sacrifice your gross income into your super fund
Salary $200K less $50K = $150K (down from 45% to 40% tax rate)
Other way to look at it is to pay the $50K interest you would need
$50K @ 45% providing net $27.5K
$37.5K @ 40% providing net $22.5K
I am ignoring negative gearing.
I've got a SMSF, and tax-wise, it is a no brainer. 15% on income (which typically means 15% rebate on share dividends) and 10% on CGT. If you can hang onto the assets until you meet the preservation rules you can cash them in free of CGT.
As you point out it lowers your income so you can push yourself into lower tax bands. You can even push yourself into the child benefit taper zone where every $ you don't earn you get 30c back from the ATO and 40c from Centrelink. So $1 of interest in personal income leaves you with 70c whereas if you earn it in your super instead you get 85c in your super and 40c in your pocket. The downside is that in these circumstances your marginal rate is 70%. (And you've tied your money up til retirement).
I know for sure that you're in for trouble if you live in a home owned by your super.
Last edited by MartinLuther; Apr 14th 2008 at 5:04 am.
#14
Re: Negative gearing and all that.
The recent changes are to do with SMSF borrowings
- Qualifying funds from UK only able to be used after 5 years (from residency in Oz, that is date of arrival not PR)
- Limited to 70% LTV
The big benefit to me is that its being managed by myself not by a fund manager, charging me silly rates.
Not sure what you mean about the child benefit - we got told we were too far over to consider it. We do however get some std amount which nearly covers the cost of nappies each week.
#15
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Joined: Jan 2006
Posts: 413
Re: Negative gearing and all that.
Purchase of property based only on current tax incentives would be asking for trouble - but nothing wrong with taking advantage of the situation
If your interested in this concept start looking at the new change in SMSF (self managed super funds). Again a longer term view required but cuts out having to deal with other people.
Now I have only started looking into it so my facts are being drip fed to me by my financial advisor but:
15% tax rate (super funds)
Interest deductible
Salary sacrifice your gross income into your super fund
Salary $200K less $50K = $150K (down from 45% to 40% tax rate)
Other way to look at it is to pay the $50K interest you would need
$50K @ 45% providing net $27.5K
$37.5K @ 40% providing net $22.5K
I am ignoring negative gearing.
If your interested in this concept start looking at the new change in SMSF (self managed super funds). Again a longer term view required but cuts out having to deal with other people.
Now I have only started looking into it so my facts are being drip fed to me by my financial advisor but:
15% tax rate (super funds)
Interest deductible
Salary sacrifice your gross income into your super fund
Salary $200K less $50K = $150K (down from 45% to 40% tax rate)
Other way to look at it is to pay the $50K interest you would need
$50K @ 45% providing net $27.5K
$37.5K @ 40% providing net $22.5K
I am ignoring negative gearing.
Say you borrow 100K,use ANZ as a control for the scenario.At 20$ a share you buy 5000 for 100K (raised from a line of credit on property).Dividend should be around $1.40 per share,so you have 7K going into your retirement fund ,kept outside of super.The extra shares should give more income which produces more shares/income and so on.
The interest on the line of credit @ 9.5% is $9500.Your refund will be 9.5K x 30%,so $2850.Total cost to you is $6650.
Put the same $9.5 K into super and you pay the 15% tax,so you have $8075 giong into super.
One costs $6650 and puts $7000 into a retirement fund that can be accessed any time.The other costs $9500 and puts $8075 into super which is locked up until 55 or 60 depending on your age now,and the compliance/commissions that drain it.
As the dividend rises more shares produce more money going into the fund.Stockholding should double in 10 to 15 yrs depending on DRP prices.Say 15 yrs time you have 10,000 shares producing $4 per share in dividend,interest costs are the same.Your $6650 produces $40,000 going into your fund,your $9,500 still produces $8075 going into super.You can reconstuct how the last 10 or 15 yrs have gone by going to the ANZ shareholder part of their web site.I would expect growth to slow a bit into the future,but I can't predict the future.
The rider is if you cannot stomach markets falling anywhere between 20 and 40%,keep well away from it.Just a different point of view and something to think about.Leverage will outperform super quite easily.There are no ongoing costs with the plan kept out of super.