February 2007

Breaking into property investing at 45, topping up a loan, family trusts, and the importantance of a body corporate.

Our panel of experts answers property investment questions from API readers. For more Q&As, see this month’s API magazine.

Keen to invest

Q: I am 45 and need to break into the property market as I have no pension provision. Currently I rent and I own a block of land in WA which cost $150,000 and is now worth $280,000 to $300,000 (no loan, fully paid). What should my plan be? Sell the land after a year and buy a house? Build on the land then live in it or sell it? Build a good house or a cheap house? Take the equity and put it as deposit on another property? Or just get another loan and buy a property to live in or rent? And which sort of loans do I choose? There are so many. Finally, rents don’t seem to cover mortgages here. If I have a $350,000 loan, the payment is $2500 and rent is $350. This will leave me short of $1100, how do you combat this?

A: As things stand, you have an asset that’s worth around $300,000 but isn’t delivering any income. It’s clear the asset isn’t working for you, but before you take action, you must be clear about your goals. If your main aim is to have a home to live in, it might be a good option to sell the land, borrow some extra money and buy a property you can live in for the long term. Ideally you would only borrow to a level that means your loan repayments would equal the rent you’re currently paying. This way you’ll have a long-term home that won’t put you out of pocket. If you’re focusing purely on investment, I feel you could still sell the land, because it won’t help you achieve your goals if it’s not generating income. With the $300,000 from the sale proceeds you could borrow an extra $400,000, giving you $700,000 in total to invest. You could buy two $350,000 properties and rent each one out for $350 per week. This will generate $36,000 per annum in rental income, yet you’ll only be paying off a $400,000 loan. This is a 9 per cent return and will cover most of your expenses without hampering your lifestyle. Mark Armstrong

Topping up a loan

Q: We’ve just listed our house for sale and an idea came to mind. We’re moving and would like to consider if the following option is viable in order to keep the house. Our house isn’t yet four years old, worth approximately $400,000 and has just been listed on the market for $425,000. We only owe $70,000 on a Viridian Line of Credit and can draw this up to $270,000. Potential rent is $260 to $280 per week. Can we draw the loan on this back up so that it’s cash flow positive and transfer the equity to our new purchase (looking at buying/building for around $360,000 to $400,000)? Our income would be $800 net per week for the next five years until I return to work. 

A: While you can draw down against this property and in doing so, reduce the debt against your new home, the interest on the increased draw down won’t be tax deductible, I’m afraid. This is because the Tax Office follows the money and what you do with the borrowing. As you plan on using the draw down to reduce private debt, the use of the funds isn’t income related and so you won’t benefit from a tax deduction on the interest. Sorry! Dale Gatherum-Goss

A matter of trust

Q: XYZ P/L is the trustee of ABC family trust which has an ABN, tax file number and ACN (trust number one). New trust (number two) was formed and has the same trustee, i.e. XYZ P/L. Another trust was formed (number three) with again the same trustee XYZ P/L. Can trust numbers two and three carry on business with the same ABN, ACN and tax file number since all three have a common trustee (XYZ P/L)? 

A: It’s not generally considered wise to use the same company as trustee for more than one trust. Doing so reduces the asset protection benefits of using multiple entities and can cause confusion and problems with lenders too. However, to answer your question it’s normal and appropriate for each trust to have a separate tax file number and ABN issued to the trustee of each trust. In fact, it’s not possible for trusts two and three to have the same ABN and tax file number at all. Dale Gatherum-Goss

Registering for GST

Q: If you plan to do a one-off development of three townhouses, would you recommend registering for GST? What’s the difference in being taxed as a developer to a person with usual tax treatment? If you pay someone a professional fee, how likely is it that you could end up with approval for five dwellings instead of four? 

A: Yes, if your intention is to sell the townhouses then it’s important that you register for GST. You really don’t have a choice. The profit made on the deal is taxed in exactly the same way whether you’re registered for GST or not. The only difference is that the GST that you pay to builders, tradesmen and other people will need to be removed from the costs for income tax purposes when you’re registered for GST. In the same way, the sale price will include GST too, and so the sale price will be lower for income tax purposes. That is, the GST is treated separately on both income and costs and will need to be reported to the ATO via monthly or quarterly BAS. I’m afraid I can’t comment on the likelihood, or otherwise, regarding the last part of your question. I simply just don’t know the answer and suspect it would depend upon the facts involved and could differ per property, per council and per professional. Dale Gatherum-Goss

How important is a body corporate?

Q: I have a block of three townhouses in Brisbane that is strata titled. The block isn’t managed by a body corporate. What are the issues for not having a body corporate set up and is it compulsory that I have a body corporate? 

A: A body corporate is essentially put in place to manage and maintain the common areas associated with apartment blocks or units. These include common garden areas, pathways, stairwells, elevators etc. Most apartment or unit blocks would have a number of individual owners and their common interest is represented in such a way, with the body corporate being managed and individual owners represented. Body corporate fees are charged to cover general running and maintenance costs. Check that the subdivision regulations in your area don’t specify that you require an active body corporate. If it’s not a compulsory requirement, then make very sure you’re carrying adequate insurance for the common areas associated with the property. It would be very prudent to ensure all maintenance and repairs are carried out regularly. Check with your insurance broker that you have adequate cover for not only the building, but for the common area as well. These common areas attract public liability issues and any damage may not be covered under the normal building provisions. In the event that you sell one or more of the units, then a body corporate would become necessary and prospective buyers may insist on it to ensure their interests are represented. Seek some independent advice in regard to your liability over the common areas as they currently stand. Monique Wakelin

Have a question? If you have a question you’d like to ask our panel of experts, please send it to: editor@apimagazine.com.au Please keep questions to 150 words or less.

This information is of a general nature only and does not constitute professional advice. Readers should not act on the basis of any matter on this website without taking professional advice with due regard to their own particular circumstances. The authors and publishers expressly disclaim all and any liability to any person, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether in whole or in part, upon the whole or any part of the contents of this website.