Hi all, A friend has been advised by his accountant about the following strategy: All of the interest referred to is that incurred by investment loans. By "borrowing against the portfolio" isn't that using borrowed funds to pay interest on those or other investment borrowings, i.e. effectively capitalising interest? Is that allowed as it would result on interest on interest? If interest on interest is avoided by using a separate borrowing solely for prepaying interest (and paying off that borrowing's interest normally) what's the difference vs regularly paying interest out of an ordinary savings account?
Yes this is capitalising interest. It can be deductible - the interest on interest in certain cases because someone may be getting a discount for prepaying yet not have enough cash to pay it so may need to borrow. Seek tax advice before trying this at home. Here is an old PBR RBA Content Note it doesn't consider the question - will Part IVA be applied to deny the deduciton.
Thanks Terry for finding such a relevant PBR. However it's still possible that an individual without cashflow problems (and could easily pay the interest normally) would be denied the deduction?
@chylld - I agree with Terry. With your follow up question, I believe that TD2012/1 may apply to deny the deduction. You definitely need to seek tax advice on the above!
See example 10, variation 2 NTLG consultative workshop on Part IVA amendments And then the discussion under example 10 at: NTLG consultative workshop on Part IVA amendments
I read it differently. I read the advice is to using a LOC etc and prepay a years interest on the IP (or shares?). Then when CGT profits occur from shares the additional deduction for one offsets the extra income. The key problem with a prepaid interest strategy is that next year (2018 ?) the loan has no interest deduction unless the interest is prepaid thereafter. Part IVA would not apply to prepaid loan interest provided the period prepaid is one year. Banks generally only permit 12months to comply with ATO rules on prepaymnets anyway.
Still trying to wrap my head around this... does that mean that there's no benefit until the shares are sold, and the CGT that would normally have resulted is offset?
Yes. Extra income offset a enhanced deduction in year one. Key issue is how much tax does that save v's the next year effect. If say the taxpayer planned maternity leave in Y2 there could be a benefit in bringing forward the deduction from year two to year one. In year one a higher deduction that offset the gain and also in year two they then have +ve income taxed at low rates rather than neg gearing without income to offset it.