Case Study | Financing with 100% Overseas Debt

Objectives:  
Tony, a Singapore national, wants to invest $3 million into Australian commercial property. Tony believes this will diversify his investment portfolio so reducing risk, whilst providing attractive long-term capital growth opportunities.

Facts:

• Tony is flush with funds so doesn’t need to borrow to fund the investment.
• Over time Tony will make further property investments in Australia.

Accountant’s Advice: 

• Tax Strategy 17: Family Trusts – This involves establishing a family trust with an Australian company as trustee. Tony’s Australian resident brother-in-law (Jim) will be a director of the trustee company.
• Tax Strategy 142: Finance with 100% Overseas Debt – This involves Tony lending the Australian family trust $3 million to purchase the property investment. The thin capitalisation rules do not apply to the financing of rental property investments.

Results:

• The $240,000 annual interest payments payable to Tony are only subject to a final 10% withholding tax, i.e. $24,000.
• The family trust will have annual taxable losses of $160,000 (being the $120,000 rental income less the $240,000 interest and $40,000 building write-off). These taxable losses can be used to offset tax on any other Australian income or carried forward to be utilised when the property is sold (and a capital gain made).