How to reduce your tax while paying off your loan !

For years it’s been a misconception for new property investors that paying off the loan is a tax deduction – wrong! …..But not any more !

More experienced investors know that it is only the interest that you get the tax deduction, paying of the principal of the loan is not a tax deduction, this is because paying of the loan in effect means buying the property which is an asset not an expense (deduction). 

Well the Great News is that with the tax changes that were made a few years ago, the banks and lawyers have now got through the detail and are now offering these loans to investors where…..wait for it…..you can actually get a tax deduction for paying off the loan…. in an indirect way that is.

In brief this is how it works:                                                        
 

(2) Your existing Superfund(s) ----------- we can help you		Instalment Warrant Structure
(1) Your Own Self Managed Superannuation Fund ----------- email us for Our Financial Services Licensee to create one for you.	4	3) Separate Trustee ----------- email us for Our CPA Accounting Firm to create a company for you to act as trustee.	5	5 Lender (Bank) ----------- email us for our Finance Broker to organize the best lender for you
	6	Your Property ----------- email us if you want to join one of our property syndicates.
6
You

1. You set up your own superannuation Fund with its own bank account (we an help)
2. You roll the money from your existing superannuation funds that your employers use to pay your super into, (we can help).
3. You setup your own company (we can help) to purchase your new property (or join one of our property syndicates).
4. You use the money in your super fund to pay for the deposit on your property (or your share in the property syndicate)
5. At the same time go to the bank to lend you the balance of the money (we can help) to purchase the property.
6. Each year you can make additional salary packaged superannuation contributions into your own self managed superannuation fund (shown in the diagram above) which is then used to pay off the loan off your property (shown in the diagram above)

Congratulations you now have a income producing property, that will pay for the loan and expenses. Even better you …… can make additional salary packaged superannuation contributions and get a tax deduction for money used to reduce your loan on your property……now that’s a smart way to create wealth.

To understand more contact us, or read the full details on how to do this below.

 

Investing in property through superannuation means you (or your accountant, we can help here) need to understand the rules of the SIS Act and how you can invest without breaching the law. The SIS Act was introduced to ensure that Your superannuation money is protected by restricting the investments a superannuation fund can make so as to preserve the superannuation funds for your retirement.

Investing in property means borrowing money, and previously superfund could not borrow money (except for special situations, click here), however now with the changes made you can through an installment warrant structure.

We will now take a look more closely at these Instalment Warrant structures and related parties:

Instalment Warrant Arrangements
S.67(4A) has introduced an exception to borrowing money. Paragraph 3.7 of EM to TLA (Measures No. 4) explains the meaning of an ‘instalment arrangement’.  This was introduced in Tax Laws Amendment (2007 Measures No. 4) Bill 2007 (TM (Measures No. 4) effective from 24 September 2007. The legislation allows superannuation funds to invest in instalment warrants, but the investment in the asset must be non recourse to the fund and the member.

Instalment warrants are considered to be borrowings (under S.67 SIS Act) from both the ATO and AFRA and because many public offer superfunds were investing large share placements such as Telstra, which was in breach of the SAS Act. Because of this the Government changed the law to legalise this practice.

The rules for the new exception from to borrowing under S.67(4A) are as follows:

 

1. The property is not one that the superfund is not allowed to purchase under the SIS Act.
1. S83 - in-house asset greater than 5%.
2. S66 - from related parties, note exceptions such as listed shares, or business real property at MV from a related party.
2. The superfund acquires a beneficial interest in the property, but not direct ownership. This is the reason for the formation of a separate company to act as trustee that owns the asset. It also allows the bank to take a charge over the asset and the trustee and not the superannuation fund. When the loan is paid out, then at this point the property can vest inot the superannuation fund without tax implications.

 

Tax Tip – Some banks are asking to own the asset directly so you cannot use your own trustee company and are charging for the privilege. We recommend against this.

 

3. S67(4A) gives the right for a superfund payment(s) to acquire legal ownership of the asset from the legal owner (trustee).

 

Tax Tip – You through a separate entity can act as the bank to lend the money to the trustee, you do not need to use a bank. This has now been clarified in  ______.

 

4. The lender’s rights of recourse are limited to the proceeds from the sale of the property, the meaning of limited here gives meaning to the phrase “limited recourse”.

Tax Warning – We recommend that the member not provide any guarantees for repayment of the loan, as this may be construed as the lender’s rights not being re-course in nature and as such you will breach the law.

 

It was suggested that the trust could be an in-house asset, however S.71(S) states that an asset purchased under an instlamanet arrangement is specifically excluded, provided that the asset in question is the same asset the subject of the instalment arrangement, ie not a alternate asset.

 

Written August 2009, please read disclaimer and terms of use in conjunction with this article.