Tax Tip 34: Deductibility of LMI on loan increases

Yesterday I wrote on the basics of Deductions for LMI expenses:
Tax Tip 33: Deductibility of LMI https://propertychat.com.au/community/threads/tax-tip-33-deductibility-of-lmi.3425/

Things are more complex with claiming LMI on loan increases.

With cross collateralising securities in is pretty straight forward.

Example
Tom has a $500,000 property with a $400,000 loan = 80% LVR. He buys a $500,000 investment property and borrows $500,000 using both properties as security. 90% LVR overall but LMI will be charged on the new $500k loan so Tom should be able to claim this in full (over 5 years).

PBR Authorisation Number: 1011759809034 says LMI is deductible (for the taxpayer who applied for the PBR), but the scenario of this PBR relates to a cross collateralised loan where the PPOR is used as security and one big loan is used to buy the investment property using both the PPOR and IP as security. https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011759809034.htm

But avoiding crossing means complications.

Example
Say Jim had an investment loan of $400,000 on a $500,000 property. He wants to get at the equity to use as deposit for the next property so he borrows $50,000 by topping up his loan to $450,000 (90%). LMI is $10,000 and lets assume he pays this out of the loan so he ends up with $40k extra.

Is the $10k LMI deductible? Yes on first glance you would think it would be a borrowing cost deductible against the income of the property it is borrowed for.

But in Jim’s situation it is one big loan and the LMI is levied not on the $50k extra but on the whole loan of $450,000. So part of the LMI is associated with the existing loan and part with the new extra borrowings. The portion relating to the existing loan cannot be deductible because it doesn’t relate to the production of income.

The new $50k increase relates to the production of income so the LMI associated with this loan increase should arguably be deductible. But 50/450 = 11% so perhaps the ATO may only allow 11% of the LMI to be claimed.

However, Jim shouldn’t be increasing loans like this though as this will result in mixed purpose loans (see here why this is not good idea) so Jim would want a separate split. He would have 2 loans, $400,00 and $50,000 to clearly segregate the loans. If he can get the LMI charged to this $50,000 split he will have a stronger argument to the ATO that the LMI relates to this loan only and therefore all deductible.

Where the $400,000 loan was associated with the main residence loan it is even more vital to split the loan and to get the LMI charged on the new split. Where there is one big loan it would be very likely only 11% of the LMI would be deductible.

As far as I know there is no ATO guidance on this matter other than some private rulings which are not clear and can only be used as a guide:

Authorisation Number: 1011715947648.In this matter the taxpayer incurred LMI on the main residence loan which was refinanced to get the investment loans. LMI was not deductible in this case. But it is unclear how the taxpayer had set himself up as this PBR offers little guidance. https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011715947648.htm

If you are contemplating claiming LMI along these lines you may want to consider a private binding ruling.

Tomorrow I will write another one on LMI as there are even more tricky matters to consider.

 

I had no idea about the mixed investment loan purposes issues - cheers for all your info!

 

Don't feel bad, most people don't - brokers and tax accountants included.

 

Hi @Terry_w sorry to resurrect an old thread, but have a query on LMI that you may be able to assist with.

I bought a PPOR in 2013 and paid LMI. I refinanced it in 2015 with no LMI at 80% when it was still a PPOR. 6 months after refinance, I moved out and it is now an IP.

Is any of the original LMI deductible?

 

I think you have an argument that it is deductible in part at least.

Your argument would be that LMI was used to acquire the property and less than 5 years have passed so the LMI from the year you moved out to the end of the 5 years since incurring it should be deductible.

A counter argument by the ATO may be that the LMI related to the original loan which has been paid out with the new loan not incurring LMI.

 

On second thoughts I don't think it would be deducitble because LMI is a borrowing expense which is claimed over 5 years, or the life of the loan if shorter. the loan if your first loan expired when you refinanced it.

 

I dont think so. The remainder of borrowing expenses are deductible when the loan is paid out. I would argue no. Its akin to the issue of a person with a fixed rate loan. They turf the tenant and sell. Bank charges a break cost. Its not deductible but may be a CGT cost base issue (ie a non-deductible third element cost). However if they had broken the rate then turfed the tenant then sold it should be deductible. Timing is the key.

 

Thanks guys, I figured as much!

 

Borrowing expenses and annual bank loan fees are a bit alike. You really need to consider the nature of how the cost is incurred. With a annual loan fee if the sole loan benefit relates to a IP then its 100% but if you have a PPOR and a IP loan best basis MAY likely be apportioning.

With some LMI the sole reason why the LMI is triggered is for an equity release for a New IP and a nexus to that use MAY be established if the LMI is incurred and the new loan is drawn for a deposit and a contract to acquire a further income producing property occurs. Holding the funds in a offset can taint that nature.

 

Sorry to drag up an old thread.
I have an IP loan which was 90% LVR (with LMI) approx 3 years ago.
I was contemplating a refinance back up to 90% LVR with the same bank but my broker has recommended I go with another lender due to a better interest rate of 1% difference.
Will the LMI charge (approx $9k) still be tax deductible (over 5 years)?
The refinance is 100% investment related.

 

Possibly deductible in part at least.

 

This gettibg LMI deduction in 5 year thing is confusing me. Anyhow this tip has opened the new can of worms for me:-

Now the original loan was with CBA and settlement happened in sep 2012 with full LMI included from beginning. I hot married in 2015 and in 2016 to buy an IP me and my wife got new loans with CBA that means we used tge equity for my PPOR and her IP to buy anither IP. All these properties have seprate loan accounts and are not cross collateral loans.

Now we are selling our PPOR/first purchase so after calculating the small cgt due to keeping tenants for initual 11 months.

1.Can I still claim stamp duty, bank fees and LMI as a cost base?

2.Will I be abke to claim the interest while living there (jun 13 till now) as a cost base?

 

The biggest issue is you cant amend back more then 2 years in most cases. Its a sign of the mistakes DIY taxpayers make and then its too late to fix.

The LMI costs which may have been deductible but were not claimed would be a 3rd element CGT cost relating to the property acquired and assuming the LMI was acquired for that sole purpose and then the new funds were used to acquire...You may need to apportion v's each property.

Your affairs are a bit more complex re the later marriage bit. Third element ownership costs can only sometimes be claimed. Personal tax advice would be a good idea to avoid errors and to max the benefits

 

You should get tax advice.

Possibly the answers are
1. Yes
2. Yes

But this will depend on the circumstances.