Loan Tip: Outgoing Lenders Deliberately Delaying Refinances

When a person refinances their loan from one lender to another the mortgage must be discharged with the outgoing lender – the one they are moving away from. This means a ‘mortgage discharge’ form needs to be signed and submitted to the outgoing lender.

In the old days faxes went missing and forms were never received and this allowed the outgoing lender to delay the settlement.

These days it seems forms still go missing even though they are emailed in. But recently we have had one where the client’s signature on the discharge form apparently did not match the signature on the banks records. The client had to go into a branch to show ID and prove it was them to submit the discharge form.

Another, actually the same lender, wanted the spouse to sign the discharge form too, but she was not on title and could not have given a mortgage, but she was a borrower.

In both cases it was the day of the proposed settlement that this happened.

Another non-bank lender – but under a company owned by the same bank above, they have developed their own special discharge form which is not available online. The client must ring them up to get the form sent to them. This allows the lender a last attempt at discouraging them from leaving by making further offers of discounts etc.

These tactics appear to be

a) delaying tactics to allow the outgoing banks to get more interest, and

b) making it hard to leave discourages people from leaving, and

c) it is a form of punishment for leaving

When refinancing where funds are needed for settlement of another property, I suggest you get in early, send the discharge form even before your new loan is approved.

If there are any delaying tactics ring the lender’s complaints section, and threaten reporting them to the AFCA Home – Australian Financial Complaints Authority (AFCA)

I should add one way around this is to use a ‘fast refi’ type process where the new loan settles without the discharge of the old mortgage. A few lenders offer this, and the first thing the old lender knows about it is the repayment of the loan by the new lender, then the discharge of mortgage.

See discussion at

https://www.propertychat.com.au/community/threads/loan-tip-outgoing-lenders-deliberately-delaying-refinances.41658/

The Tax Issues of Buying a Main Residence which is initially tenanted

Imagine you buy a property with the intention of moving in, but there is a tenant whose lease doesn’t expire for another 6 months so you keep renting and wait for them to move out so you can move in.

What are the CGT consequences of this?

Well, that property will always be subject to CGT as you did not move in straight after purchase.

But all is not lost because CGT will be minimal to almost nil where you remain living in the property for a number of years. Furthermore 3rd element cost base expenses can be used to reduce CGT even further.

Example

Homer buys 123 Smith Street, but the contract indicates it is not vacant possession. It will come with a tenant with 6 months left on the lease.

Contracts signed on 1 July 2019, but Homer doesn’t move in until 1 Jan 2020, with a hangover.

Let’s say Homer sells that property in 2030, signing contracts on 1 July.

Will he pay CGT?

He might, but it may be a very small amount.

The first thing to consider is work out the time period it was rented as a percentage of the total ownership period.

6 months/132 months = 4.5%.

So, at the most the capital gain would be 4.5% x 50% x the gain or 2.27% of the gains on the property. Bugger all – note the 50% is the 50% CGT discount applied for holding the property more than 12 months.

But before this is done, the cost base has to be worked out. The capital gains is the sale proceeds less the cost base.

The cost base expenses include buying and selling costs and, importantly, the interest, rates, repairs and costs while living in the property can be taken into account here and they will further reduce any CGT, potentially bring it down to nil as over 11 years these costs would add up.

Getting your wage deposited into a trust Bank Account and the risks

A client has advised they were ‘advised’, on an expensive course, to deposit their wage into a bank account of the trustee of a trust rather than into their own personal bank account..

This is for asset protection supposedly.

The idea is that the money never touches your account so it cannot fall into the hands of creditors.

How silly!

In situations such as this, the trustee would be holding the money for you as bare trustee. There is no asset protection if you were to go bankrupt, die or go through a family law property settlement as it is still your money.

Furthermore, you have additional issues to consider such as what if the trustee

  1. Dies
  2. Goes bankrupt
  3. Loses capacity
  4. Gets divorced
  5. steals

You would probably have worse asset protection issues.

If you did end up bankrupt the money could easily be clawed back.

Tip: Don’t do this without proper legal advice tailored to your situation.

Discuss at https://www.propertychat.com.au/community/threads/legal-tip-232-getting-your-wage-deposited-into-a-trust-bank-account.40643/

Indefeasibility and the Torrens System

I don’t advise on property law, but this topic is relevant to asset protection.

The Torrens system of registration of title for real property was first introduced in the late 1800 and it has slowly been replacing the existing system since then. The existing system of title is known as ‘old system title’ and it was complex and cumbersome.

In old system title when a property was sold the ownership had to be proved by both the physical title and locating all the previous transfers relating to that title. Sometimes documents went missing and it was a real pain in the arse being both time consuming and costly.

Torrens was introduced as a system of registration to replace all of this. The name registered on title was the legal owner. This is enough proof.

Indefeasibility refers to the fact that what is registered on title is proof. So, a registered owner is proof of legal ownership. A registered mortgage is proof of the legal mortgage. It is said to be a ‘system of title by registration’.

But this doesn’t mean registered ownership takes priority in all cases.

An example is fraud. Where title to a property is fraudulently transferred to someone else then them being registered owner does not mean it is indefeasible. This can happen with mortgages too. There is a recent case where one spouse mortgaged a jointly owned property to borrow money by forging the signature of their spouse. Since this was fraudulent the lending bank could only recover half of their money.

Keep in mind that there are also unregistered or equitable interests. The legal owner may not be the beneficial owner of a property. This happens where they are acting as trustee under an express trust, such as a discretionary trust, or where a trust is implied such as a resulting trust. In these cases the courts will enforce transfer of title based on equitable grounds.

Then there claw back provisions in various legislation such as

  • S 37A of the Conveyancing Act NSW (and other state equivalents)
  • S 120 to s121 of the Bankruptcy Act
  • Family Law Act
  • Succession Acts

Title of a property might be held by person A but the courts can reverse this and transfer it to person B and then to creditors, spouses, missed out beneficiaries etc.

So, in summary, indefeasibility does not mean a property dealing cannot be attacked, but it is evidence of the current legal ownership of property.

Discuss at https://www.phttps://www.propertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/ ropertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/

Electronic Signing of Deeds – Don’t!

I have recently come across a client who had their trust deed signed by the settlor, electronically. The settlor had inserted a jpeg of her signature in the deed and emailed it to the client for signing. There was no original copy. It was also electronically signed by the witness of the settlor. It is not known if the witness was present with the settlor when it was signed, or if they signed the same document.

This deed would fail. It is not executed.

Another client had their deed signed by the accountant who set the trust up, but it was also witnessed electronically – one of the accountant’s witnessed the client’s signature. Interestingly signatures were ‘witnessed’ from afar!

This deed also fails.

Deeds cannot be signed electronically in any state of Australia. There is one exception now due to recent amendments to the Conveyancing Act, s 38A, in NSW. This new legislation does allow for deeds to be signed electronically, from 2019, but the legislation does not cover side issues such as how can an electronically signed deed be witnessed? When 2 people sign a document on different computers they are not signing the same document so will this be valid?

Can companies sign electronically?

What happens when someone dealing with the trustee wants to see the original deed? If you were to print it out would it be original? How could a certified copy of the deed be made?

My tip: Do not sign any deed electronically, even if you are an individual based in NSW. Print out the deeds and sign with a pen.

If you have signed a deed electronically seek legal advice on how to rectify this problem, even if located in NSW. And don’t go back to the same firm that caused the problem in the first place as they are likely to not know about the issue or how to fix it.

Discuss at:

https://www.propertychat.com.au/community/threads/legal-tip-222-electronic-signing-of-deeds-dont.40226/

A Strategy to increase the Pension when Have Too much in assets

The assets test can prevent someone from getting a full or part aged pension. A way around this might be to ‘double dip’ by spending up to reduce your assets. But that is wasteful. Spending $150k wastefully just to get an extra $10k doesn’t seem to be wise (yet people actually do this!).

A better way would be to upgrade the main residence. But this is also wasteful in terms of suffering stamp duty and other costs – you will lose roughly 10% of the value in selling one house to acquire another.

Another solution is to build a granny flat or second dwelling in the existing house. This will use up a chuck of cash, but also add value to the property.

As long as the granny flat is not rented out, or family stay there it will be treated as a part of the main residence and there will be no income taken into account.

This could help a person both get the pension as well as help family out by allowing them cheap accommodation.

Section 11A(1) of the Social Security Act

As of July 2019 the assets test for a single pensioner is $258,500 for a home owner. That is a single pensioner can have assets of $258,500 or less, other than their home, and still get the full pension.

Example

Homer’s wife Marge just died and he is on a single pension. He has a $400,000 house on a large block as well as $400,000 in the bank. Homer could get a part pension only with his assets exceeding the assets test level.

His pension would be $12,836 per year

If he used $141,500 to build a granny flat the pension would jump to $22,509 pa

Using this great calculator: http://yourpension.com.au/APCalc/index.html#CalcForm

Homer uses $141,500 to build a granny flat in the back yard.

His pension increases by almost $10k per year.

He let’s his son Bart stay there and Bart helps around the home. Bart is now saving $300 per week on rent – so he is $15,000 per year better off.

If Bart moves out or if Homer ever needs more money he can always rent the granny flat out, but this would reduce his pension. If he rented the flat out for $300 pw he would get $15,000 pa rent plus $16,377 for the pension. $31,377 pa

He could also sell the property by about $180,000 more with the granny flat

So, all up building the granny flat has benefitted Homer in at least 4 ways:

  1. Larger pension
  2. Family close by
  3. Potential rental income plus part pension making more cashflow than doing nothing – more than $31,377 compared to $12,836
  4. Greater tax free capital asset for him and his family (if rented won’t be tax free completely)

SMSFs Negative Gearing

Not many realise but a SMSF can negative gear property, and even shares potentially.

It works the same way inside a SMSF as outside. Any loss from an investment can reduce the taxable income of the fund which saves tax on that income.

Example

A SMSF has a property with a $15,000 loss after all expenses are taken into account.

The member of the fund contributes $20,000 into the fund in the form of compulsory employer contributions. This is normally taxed at 15% which would be about $3,000 in tax.

But with the loss from the property the income of the fund becomes $5,000 (-$15,000 + $20,000 = $5,000).

The tax on $5,000 would be $750.

So, having the property would be saving the fund $2,250 in tax in that year.

Note that I am not suggesting that I think property in a SMSF is a good investment.

5 Different ways to Fund Retirement

Retirement can be funded from 5 basic classes of income/assets, which are:

  1. Income
  2. Capital gains
  3. Capital
  4. Borrowing
  5. Government pension

Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.

Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.

Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.

Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.

This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.

It could also be from the proceeds of shares of property after they are sold.

Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.

One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.

The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.

Note that I didn’t include superannuation as a separate category above, as income from super wil be in one of the above forms anyway.

Discuss at

https://www.propertychat.com.au/community/threads/5-different-strategies-to-fund-retirement.39972/

Trusts and Incapacity

There are several issues which can arise when a member of a trust loses their mental capacity.

Trustees – a trustee must have mental capacity to act as trustee. Where capacity is lost, and that person is a trustee they will automatically be removed as trustee. The terms of the trust deed will need to be read to determine what happens next. Often it will be up to the appointor to appoint a new trustee.

A trustee’s attorney cannot act in their place.

Example

Homer is trustee of the Simpson Family Trust. Homer has appointed Barney as his attorney, under an enduring power of attorney document, if Homer where to lose capacity. Homer does lose capacity and can no longer act as trustee. However, Barney cannot act as trustee in Homer’s place.

Appointors – The appointor of the trust is the person who has the power to hire and fire the trustee. Also called the Principal or Controller in some deeds. If an Appointor loses capacity often, they are automatically removed as appointor – this is often built into the deed of the trust. If this happens a successor appointor appointed by the trust deed or a second deed may determine who the next appointor is. Where there is none there may be no appointor of the trust. Where the trustee and the appointor are the same person this could causes problems as the trust would be out of anyone’s control and an application may be needed to the Supreme Court for them to appoint a new trustee (very costly).

Where the appointor is not automatically removed then the appointor’s attorney may be able to exercise the power of appointment of the appointor.

Example

Homer has made an enduring power of attorney appointing Barney to act on Homer’s behalf. Homer is the trustee and Appointor of the Simpson family trust. Homer loses capacity. Barney cannot use the POA to become trustee, but he can exercise Homer’s power as appointor of the trust to appoint himself as trustee.

Beneficiaries – a beneficiary is just a potential recipient of income and/or capital of the trust. A beneficiary losing capacity doesn’t change this, they can still receive income and/or capital from the trust.

Company Trustees – If a director of a company loses capacity often the company constitution will work to automatically remove that person as director of the company. If a shareholder loses capacity their attorney can act in their shoes by using the voting power and shareholders can vote in a new director. A director’s attorney cannot act as director but must be appointed director of the company first.

It is also possible for a company to have successor directors or substitute directors. These are appointed by the constitution of the company and need to be set up before capacity is lost.

Example

Homer is the sole director of Simpson Nominees Pty Ltd which acts as trustee for the Simpson Family Trust. Homer has appointed Barney as his Attorney. Homer loses capacity. Barney cannot simply start acting as director of the company or operating its bank accounts etc. The shareholders of the company must appoint a new director. In this company Marg owns 50% of the shares and Homer owns 50% of the shares so a meeting of shareholders would need to be called a vote counted – Barney could vote on Homer’s behalf and Marg on her own behalf (the constitution would deal with situations where there is a 50/50 tie in voting).

However, it is later recalled that the constitution of the company was amended a few years ago so that if the current director lost capacity Bart Simpson would immediately be director – no further consent was required (however the shareholders could vote Bart out, depending on the constitution of the company)

Discuss at

https://www.propertychat.com.au/community/threads/legal-tip-219-trusts-and-incapacity.39809/

Strategy to Avoid CGT for generations to come (forever?)

When someone dies their assets pass via their will, or intestacy laws, without triggering CGT. The beneficiary’s cost base of the asset is generally the same as the cost base of the person who left it to them.

Example

Homer dies and leaves some shares to Bart. Neither Bart nor the estate pay CGT on the shares passing through to Bart. If Bart sells, he would pay CGT on the shares and his cost base would be the same as Homer’s cost base. So if Homer bought them for $100,000 and they were worth $500,000 on Homer’s death and Bart held them for 10 years and then sold them for $1mil, Bart’s cost base would be $100,000 and he would have made a capital gain of $900,000 (the tax would be about $210,000).

But if the shares are not sold but hung onto and the passed on via the beneficiary’s will, there will still be no CGT payable until they are sold.

Example cont.

Bart inherits Homer’s shares and then Bart dies. Bart some Bartyboy inherits the shares. If Bartyboy sells the shares his cost base will be $100,000.

So, the way to avoid CGT is for each generation of the family to keep the shares without selling. Selling the assets inherited is like killing the goose that lays the golden eggs.

Shares could be sold and later the proceeds reinvested, but each time they are sold up to 25% of the value is lost in CGT. Therefore, not selling for hundreds of years could allow for some massive compounding.

But what about the inflexibility of income distribution? One drawback of inheriting shares is that there is little opportunity to divert income to a spouse, and/or children unless they are held in a discretionary trust. Holding assets in a discretionary trust means those assets cannot pass via a person’s will. Trusts generally must vest every 80 years so that means CGT would be triggered every 80 years time, wiping out about 25% of the value of the assets.

However, there is a way around this too.

In this thread,

Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT            https://www.propertychat.com.au/community/threads/tax-tip-194-transferring-a-property-from-a-testamentary-trust-to-a-beneficiary-without-cgt.38844/

I showed how it is possible to transfer assets out of a testamentary discretionary trust (TDT) to a beneficiary without triggering CGT.

Therefore, the solution to avoid paying tax is to set up a TDT in the will. Upon the death of the testator the assets will pass to one of more trustees of a TDT. Income from the shares can be streamed to the primary beneficiary and their spouses and children with real tax advantages (as well as asset protection).

When that primary beneficiary is about to die, or possibly even after their death, the assets of the trust, such as shares are transferred into their estate and then out into a new TDT. Their children will control this trust and can stream the income out and then upon their death, the same thing can happen.

The result is hundreds of years of compounding of the capital based with very little tax paid on the dividends in between – in theory, and assuming current laws allowing this will not change.

Example

Homer is fit and healthy and writes his will incorporating a TDT for each child. Homer buys some shares and keeps compounding the returns so that at his death he has a large amount paying good dividends. His will leaves 1/3 to each of 3 TDTs each controlled by one of his children.

Bart controls one TDT and keeps the shares in it with the income being streamed to his children and spouse largely tax free. Bart keeps investing in shares outside the TDT (as injecting money into it won’t result in tax savings).

Bart comes down with a diagnosis of cancer and has 4 weeks to live. Dr Hibbert tells him the bad news and says sorry it has taken you 3 weeks to get an appointment to see me, you only have 1 week left.

Bart causes the assets to be distributed from the TDT to himself, without triggering CGT.

Bart dies a few days later.

Bart’s estate is now much larger than when Homer died.

Bart’s will also has a TDT and he goes for the same strategy.

Bartboy junior continues the tradition and does the same thing as his dad, Bart.

Bartyboy  junior dies at a rave party, without children. But luckily his wills sets up a TDT with his siblings taking over the tradition.

This strategy can work well with shares as there is no stamp duty on the transfer of shares, but with property passing from a trustee to a individual is it likely to trigger duty in many states – perhaps exemptions might apply in VIC and WA in certain situations.

The best thing though is if one generation decides they want to sell up and abandon the tradition, then there will still be tax savings by utilising a Testamentary Discretionary Trust.

Discuss at:

https://www.propertychat.com.au/community/threads/tax-tip-220-strategy-to-avoid-cgt-for-generations-to-come-forever.39833/