Noris’s strategy looks ... Fraught with danger

Q I am 49, my wife 45. Our two teenage kids are in secondary school. I have a small business in a discretionary trust. My wife and I are both salaried employees of the business and make $180,000pa after tax. We live in a $750,000 townhouse ($100,000 mortgage) and are building our dream home. We paid $850,000 for the land ($640,000 mortgage) and construction will be around $600,000 (total $1.45 million).

Construction will be funded by a $560,000 line of credit on our townhouse. Both these mortgages are based on interest-only repayments and have 100% offset accounts. The new house was valued off the plan at $2.2 million when finished. We have around $80,000 in various accounts and $20,000 in shares. Our combined super at the moment is $100,000.

We plan to move into the new house and rent our townhouse, which is in my wife’s name. However, when we move out I can buy the townhouse for $1 from my wife and begin to negatively gear it.

We can contribute around $100,000pa either towards our mortgages or super, or split between them. How should our contribution be split, or should it go 100% towards mortgage repayments?

A It looks as though you’re in a strong financial position, with a small business capable of paying a solid income to both you and your wife, around $850,000 worth of equity in your home and land, as well as cash and super. But you do make me a little nervous in two areas.

Firstly, I’d be cautious about the amount of debt you’re planning to take on. Ultimately you will have around $1.3 million of debt against combined incomes of $180,000 after tax, which does not leave you very much wiggle room if your business were to slow down. I’d also suggest that valuing the new property at 50% more than the cost of land plus the cost of construction is quite optimistic.

Secondly, you should also be wary of some of the strategies you are intending to use for tax-deductibility purposes. The tax office may not agree with some of your logic and I have absolutely no idea how on earth you can buy the townhouse for $1 from your wife and then negatively gear it! This reeks of two forms of tax evasion. To start with there is stamp duty. Presumably you hope to pay stamp duty on the purchase on the value of $1 on an asset worth $750,000. I accept that by changing ownership of the townhouse you can change the level of tax-deductible debt against it, but I really want you to get serious tax advice.

I am not a tax lawyer, but I worry this could see you in a load of strife. The stamp duty folk in particular will be very curious about a $750,000 property changing hands, in a non-arm’s-length transaction, for $1. Get clear written advice on this. I worry you’ll end up getting free board and lodging in our prison system for some time.

Once you have got your strategy sorted out, get stuck into that debt level and build your super balance once your debt is lower.

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