Can I capitalise my loan repayments ?

Capitalisation occurs when a borrower pays a loan using other borrowed funds to make the repayments. Normally the answer is No and the Commissioner doesnt accept this as acceptable. A Part IVA scheme avoidance etc. But this pandemic may provide a limited exception. Sometimes.

Part IVA concerns expressed in tax rulings address a permitted exception such as maternity leave periods, lost work etc. The impacts of the virus and the economic impacts are certainly significant events that affect cashflow which may mean limited duration capitalisation of loan interest could well be OK in the interim period PROVIDED the owner is suitably impacted. Note the emphasis on owner/s. Not the tenant. A tenancy issue alone is not likely sufficient unless using all sources of cashflow this poses a major roadblock to meeting commitments.

Example that may be OK :
Fred has four properties and needs to pay 4 x rates and 4 x strata. His tenants arent paying rent and he is stood down. He has a LOC on each property and pays the loan repayments for three months from each LOC rather than seek a holiday as this just defers his problem and doesnt actually fix it.

Examples maybe not OK:
Wilma has $2m in the bank. She has 4 x IP with 2 tenants still paying rent. Her work is also in supplying services to government in the area of media advice in a crisis. Her business is booming. Wilma wants to pay her loans from the LOC on each property and capitalise this.

Peter has three properties and has sightly reduced income but is receiving rents. He could pay the repayments on the three IPs but really wants to boost his cash by switching his repayments and making these from LOCs balances. ​

 

I started a thread on this the other day:

Tax Tip 280: Loan Repayment Holidays and Tax Deductibility Tax Tip 280: Loan Repayment Holidays and Tax Deductibility