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Borrow from parents to buy a PPOR and converted into an IP

Discussion in 'Accounting & Tax' started by htopg, 3rd Dec, 2015.

  1. htopg

    htopg Well-Known Member

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    I have a friend who had 80k cash 2 years ago.
    He borrowed 550k from his parents overseas to buy a PPOR that was worth 600k.
    After 2 years, he turned that PPOR into an IP.
    His accountant told him that the interests charged on the borrowed 550k from his parents is not tax deductible because it is not from a bank/lending institution.
    Is it true?
    I thought that the purpose for that loan now is for investment property and should be tax deductible.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not true because they are not a bank.

    But it may not be deductible if not property documented and transacted.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And entering into a loan agreement well after the fact would likely constitute a fraud if dates etc are backdated. Quite correctly the ATO could easily argue that a loan was never contemplated - Certainly on terms where interest was calculated AND paid. To later reclassify an apparent gift for love and affection into a loan to obtain tax deductions just smells of a scheme. The parents would also have a tax issue with failure to comply with tax law by declaring and lodging returns for the interest that is now being calculated and paid (??). And then the withholding tax registration and compliance issue.

    Its hard to separate flour and eggs and water after the cake is already made.
     
    albanga likes this.
  5. wogitalia

    wogitalia Well-Known Member

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    Unless they've got the loan documentation to support it and can show that they've been withholding the tax on the interest payments for the period when it was a main residence correctly so that the related party loan is ironclad I'd tend to side with the accountant.

    If they haven't been withholding that tax I can't see any way that the ATO would lose an appeals process if they disallowed the deduction. Quite frankly if they haven't withheld the interest it's not even going to be a loan in the eyes of the ATO because you've technically agreed there is no interest on it if you haven't been withholding and that all repayments are principal only so it's just a non-arms length gift being repaid.

    Obviously if they have been withholding on the interest payments and they do have legal documentation it would be well worth their while to see another accountant and explain this clearly and see what they think but from the limited information provided I'd say their current accountant is absolutely correct in their treatment of it as non-deducitble even if their reasoning is completely wrong...