Opportunity Following Election

3 November 2023 by Ross Barnett in Property Accounting

Opportunity Following Election

As soon as we talk election or a new Government, I think of opportunity. The key thing is to wait until the new legislation is finalised. This won’t be for some months, but, we have a great opportunity to plan for the next few months and potentially make changes around the start of the new financial year.

If you prefer video format - video available here

Our video also covers:

  • Likely Brightline changes
  • Likely Interest Limitation changes
  • Possible Trust tax rate changing to 39%

Opportunity

With current tax laws, restructuring is very hard and, in most cases, doesn’t work. Restructuring could create a large tax bill, trigger the 10-year bright-line rule, or loss of interest deductions. All terrible things that we don’t want. With a likely change to 2-year bright-line with the possibility that interest deductions are being phased back in, we can now take another look at restructures.

Here is a case study of a restructure with over a $10,000 per year, legitimate tax advantage. George and Mildred own a personal house worth $800,000, at 49 Old St. They are in a good financial position and only owe $200,000 (meaning they have $600,000 of equity).

They want to buy a new personal house for $1m at 23 New Road and keep 49 Old St as a rental. Under current rules if it is not a new build, we would be reluctant to restructure and likely to keep the 49 Old St property in George and Mildred’s names. The tax-deductible debt is only $200,000.

However, with proposed changes, we would look at the costs vs benefits of a restructure. This would be done after new legislation is finalised. If we set up an LTC or Normal Company (ABC Ltd) and sell 49 Old St to ABC Ltd for $800,000, ABC Ltd would borrow the full $800,000 which is expected to be tax deductible (or at least start with 50% Interest deductibility and go up to 100% over the next few years).

At say 6% interest, this would create an extra interest deduction of $36,000 ($600,000 equity x 6%).

At a 33% tax rate, this would save Geroge and Mildred $12,000 in tax each year!

Commercial Reason

We need to ensure we are doing a legitimate restructure and have a legitimate reason for doing the restructure apart from Tax. Great to discuss with me (Ross) to ensure we are being reasonable in this area.

Costs

We would also look at the costs of the restructure and compare them to the benefits. From the example, the tax benefit was $12,000 per year which is huge and would easily outweigh normal restructuring costs and make the restructure extremely worthwhile.

Long-Term Plan

We need to consider your long-term plan, if you were planning to sell the property in the short term, then it might not be worth restructuring.

These are some common scenarios where it would be worth meeting with us over the next few months to plan your next steps;

  • If you have a personal house that has become a rental, or personal house about to become a rental.
  • If you have multiple structures, for example 1 rental in personal name, 1 in a partnership, 1 in a trust, we would ideally restructure these to 1 entity to reduce costs and hassles.
  • Large debt on a personal house but high equity in rentals.
  • Profit going to higher taxpayer

Restructures are complicated and there are many other factors that need to be considered. It is worth having a paid meeting with us to go through your personal situation and to plan out a potential restructure.

Article by Ross Barnett

 

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

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