Case Studies

Case Studies

Case Study 1

Young health professional established their practice, reasonable income but very little tangible assets. Premises he was located in came up for sale at a reasonable price (about 10 times annual rental value). Probably because of his young age and lack of assets he could not get finance from his own bank or any other major bank.

After discussions with the disconsolate young professional we suggested that we go back to the seller with a proposal (with several slightly differing options for him to choose) that the seller:

  • Receive 100% of his asking price.
  • Offer 15% vendor finance for 2 years interest-only. The interest rate charged being the same as his yield on investment.

Outcome

The offer was accepted and both our client and the seller got a good deal. More specifically our client did well because:

  • He has acquired an appreciating asset at a fair price with a great tenant (himself).
  • His finance costs on the deal are significantly less than the rent he would have paid.
  • From a taxation point of view our client will be entitled to ongoing tax deductions for building allowances..

CASE STUDY 2

A young, salaried dentist client attended our office. She was keen to confirm the tax aspects of buying an investment property. This was her first real estate transaction. It was unlikely that she was going to need to live in the property, as she was happy to stay with her parents. From all accounts the property represented a very good purchase, but it did require some superficial work (painting, gardening etc)

Our suggestion to her was to seriously consider occupying the property herself for a short time. This option would cost her a small amount of tax benefit through negative gearing. But could potentially save her large amounts of capital gains tax if the property appreciated significantly.

The CGT concessions for residential property can contrive for up to 6 years after the owner vacates the property.

Our client and her fiancé recently met with us to discuss buying a substantial family home for themselves. The funding of the family home was to be met by sale of our client’s rental property and her fiancés apartment.

OUTCOME

Had it not been for the CGT exemption available to our client the sale of the investment property would have triggered a $30,000 minimum CGT. The negative gearing benefit forgone by client probably cost her $2,000 – $3,000……not a bad return.

CASE STUDY 3

A middle-aged professional client came to see us about a concern that he had accumulated a large amount of assets in his own name. Over 15 years of careful investment decisions and aggressive negative gearing strategies he had accumulated over $3 million of net equity in his name. He was naturally concerned over the CGT consequences if he sold assets, particularly as some of the real estate assets had potential scope for redevelopment in the future.

There were also issues associated with estate planning as certain asset, were to be transferred to specified family members on his demise. Transferring or selling some of the assets now was not a viable option, as the client did not want to trigger CGT and stamp duty liabilities whilst he was earning a high income.

We devised a strategy with the client to minimize the future growth of the CGT liability by putting in place ‘option contracts’ on the properties. The client’s family trust, or nominated family members have been given options (calculated on a commercial basis on a fair market value) to acquire the properties.

OUTCOME

Over a long period of time this will enable our client to both minimize his CGT liability and to achieve the objective of transferring nominated assets to nominated beneficiaries. His ability to negatively gear these properties is unaffected.

CASE STUDY 4

A mature business couple with high income (and little liquidity) at the end of financial year, urgently desired tax advantaged investment opportunities. They owned their business premises unencumbered and it was acquired pre CGT. As they had relatively modest entitlements in their SMSF we proposed a 2-3 year plan to reduce tax and effectively style a tax-friendly retirement plan.

Step 1

Gain a temporary loan of $100,000 to contribute to the SMSF to obtain a tax deduction for a superannuation contribution for them. Any interest on the loan will be tax deductible to the employer entity (which they own).

Step 2

After reviewing (and amending as necessary) their superannuation fund deed, transfer an interest in the business premises valued at approximately $400,000. This transfer is pursuant to a contract for the superannuation fund to purchase the premises from the couple. The couple receive back approximately $100,000 from the Superannuation Fund.

OUTCOME

In this instance the taxpayers (through their service entity) picked up $100,000 tax deduction in the year of transaction and (approximately) $200,000 deduction in the subsequent year. Commercially realistic rental payments to the Superannuation Fund will be tax deductible to the business.

Of course the couple received their $100,000 back.

As explained earlier, the summary of this transaction has been highly simplified and there are a range of other issues to consider. (stamp duty, CGT, RBL limits etc)

CASE STUDY 5

Several years ago, a young pharmacist decided that she would like to invest in a property in a large coastal town. She believed that the town would grow dramatically and that to defer a purchase would mean a disproportionately higher price. The town also has personal and sentimental attractions and could be a possible location for her retirement.

Funds from various personal superannuation policies together with a large, tax deductible contributions were contributed to a newly created SMSF.

The fund then acquired the property and it has been treated as a normal residential investment since. Over the last 3 years the annual income return has only been moderate (about net 3.5%) however, the capital growth has been in excess of 50%.

OUTCOME

Happy client, great investment, additional opportunities for client in retirement. With a little planning and research the right investment choices and strategies can satisfy both emotional and financial goals.

CASE STUDY 6

A new client came in to discuss a large capital gain that had already been realized on the sale of an investment property. Capital gains tax of some amount was inevitable. The client could not recollect any transactions that could have given rise to any prior transactions in the past.

After prompting the client for a detailed chronology of past financial transactions it transpired that the client had been involved in a private company venture that had failed some 12 years ago. The client lent about $80,000 to the venture and had recovered only a very small part of the loan.

OUTCOME

For the sale of about $1500 accounting and legal fees (and lots of client time looking through dusty records) the clients was able to prove, then, crystallize a capital loss of nearly $75,000. The client reduces is liability to capital gain tax by about $18,000. Again, a happy client receiving a great return on his investment on accounting and legal advice.

CASE STUDY 7

A professional couple had lived in a home for many years and had paid off most of the borrowings originally incurred to acquire the property. The clients did not want to dispose of the property, but to keep it as an investment property whist they borrowed a large amount for a new home.

Unfortunately, as the transaction was presented it is not possible to claim any of the interest expenditure on the new property, even if the new loan is secured against their previous residence.

To make the transaction relatively tax-effective we arranged for the husband to buy the wife’s interest in the previous residence. The husband borrowed about $400,000 to pay out his wife. The husband now owned 100% of the rental property and would be entitled to claim interest expense as a tax deduction. The wife has the $400,000 to apply towards the purchase of a new residential property.

OUTCOME

The husband will get a large, ongoing tax deduction on the $400,000 loan interest expense. His cost was the stamp duty upon the purchase of his wife’s interest. After about 16 months the tax benefit exceeded the costs of the transaction.

CASE STUDY 8

A young professional rang me up recently and said that an associate had commented to him about a scruffy, un-kept residential property next to his, that was pulling down real estate values of the adjoining properties.

Worse still, he had received no response form the occupant despite numerous notes in the letterbox.

A title search was organized (at minimal cost) through his local settlement agent. The deed noted the name and address of the executor of a deceased person. Apparently the previous occupant had died over 12 months previously, but because of tensions between the potential beneficiaries of the estate, the executor had very little cash reserves to tidy-up the property and to carry out superficial repairs.

OUTCOME

Client picked up the property at about a 15% discount to market value and very favorable settlement terms. The place required about $5,000 of gardening, guttering, painting and cleaning to make the house presentable.

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