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Interest on interest?

Discussion in 'Accounting & Tax' started by mcarthur, 26th Oct, 2015.

  1. mcarthur

    mcarthur Well-Known Member

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    A split loan (bank 1) paid for the deposit 10%, stamp duty, buying costs and initial quick reno on an IP.
    The interest on that split should be tax deductible (!?).

    Before the first rent comes in, there's going to be some initial interest payments on the major part of the loan (bank 2 with 90%).

    Given that the split still has some money left in it, can I use it to pay the interest on the major part of the loan (90%) with bank 2?
    Am I mucking around with the deductibility of the original use of the split?
    Is that new interest on the repayments deductible?

    I'm assuming that I can't use the split to pay off the deposit (10%) part!

    I'm sure Terry has covered it, but I can't find it and suspect I'm using the wrong terms!
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Interest on interest is deductible. But the ATO can deny the interest where money is borrowed to increase deductions artificially.
     
  3. mcarthur

    mcarthur Well-Known Member

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    Thanks Terry!
    I take it the ATO's option depends on the situation and there's no guidance?
    I did have a look on the ATO site for anything but nothing leapt out at me.
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Its a general anti avoidance issue. Part IVA deals with schemes that provide a tax benefit. The law isn't as much as a issue as the application which can be very broad. Its an advanced tax issue.

    I would argue that the use of the borrowed money for another purpose taints the original loan and loss of a % of deduction occurs. Messy.
     
  5. chylld

    chylld Well-Known Member

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  6. mcarthur

    mcarthur Well-Known Member

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  7. mcarthur

    mcarthur Well-Known Member

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    Ouch, that sounds like a No then Paul.
    I'll move to plan B and pay the interest from the PPOR offset - not deductible, but no chance of mess.

    Thanks Paul!
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It depends what you mean by 'split'.
     
  9. mcarthur

    mcarthur Well-Known Member

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    Original PPOR loan bank1 split into 3 - big bit, 1x$100k for an IP, 1x$100k for an IP. Moved savings into the 1st $100k, immediately used $70k for IP purchase. $30k still there, so thought I may be able to use for major interest payments for IP from bank2.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why not just keep this for future use to pay rates and other non interest expenses on the investment. If you did borrow to pay the interest and then the interest on interest claim was denied then you would end up with a mixed loan and then things could get messy.
     
  11. SouthBoy

    SouthBoy Well-Known Member

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    @Terry_w, I read your Tax Tips 4 & 16. Here you imply that it may be ok to capitalise expenses associated with an IP (i.e. increase deductible debt), but it may NOT be ok capitalise interest on an IP loan, once again to increase deductible debt.

    I have a margin loan which I use to purchase shares, and say if I capitalise my interest to increase deductible debt, and claim tax deductions on the interest on interest, will ATO look at this differently? The reason I ask is unlike with an IP, the only expense I will incur with shares is interest on loan and I will not incur other expenses like an IP.(e.g. rates, strata, repairs & maintenance...). I am trying to understand why ATO will give an edge to property investors, by allowing them to capitalise expenses associated with an IP.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Interest on interest is deductible if the underlying loan interest is deductible. But there is Part IVA which can deny the deduction if it is a scheme. The ATO have issued an alert saying they can regard it as a scheme if the purpose of capitalising interest on an investment property loan is to pay off the home loan sooner.

    I am not aware of any ATO publications covering margin loans.

    I think the ATO don't give an edge to property investors - it is just that there are little expenses associated with shares.
     
  13. SouthBoy

    SouthBoy Well-Known Member

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    Thanks @Terry_w, does that mean I can capitalise interest on Margin loan and claim interest on interest as a tax deduction?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes - but doesn't mean you will get away with it.

    Why are you wanting to do this?
     
  15. SouthBoy

    SouthBoy Well-Known Member

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    The main reason being, to lock in a cheaper interest rate for the year ahead and pre-pay interest. But I wouldn't be able to pre-pay interest from savings, thus considering capitalising it.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You will probably be ok with this.
     
  17. SouthBoy

    SouthBoy Well-Known Member

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    Yay!