Partially Discharging Cross-Coll Loan

Discussion in 'Accounting & Tax' started by Holmes2012, 14th Aug, 2015.

Join Australia's most dynamic and respected property investment community
  1. Holmes2012

    Holmes2012 Member

    Joined:
    20th Jun, 2015
    Posts:
    21
    Location:
    Brisbane
    Course of events:

    Transaction 1: Purchase IP 1 with variable loan
    Transaction 2: Purchase IP 2 with fixed rate loan, cross-collaterised with IP1
    Transaction 3: Sell IP 2

    The fixed rate loan is out-of-money. The bank allows me to discharge the Variable loan instead of the Fixed Rate loan and avoid having to pay break cost upfront (yes over time it means the same thing, but liquidity benefit).

    Assume the LVR is maintained and there is no net increase in loan against IP1, except it has effectively been internally refinanced to be a fixed rate loan.

    Does ATO see the discharge of the variable loan to mean that IP1 is debt-free. And consequently, disallow all interest on the fixed rate loan, because there is no income with IP2 sold?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    What do you mean by: "The fixed rate loan is out-of-money"

    The variable loan was used to by IP 1. If you pay this off the interest will no longer be deductible. Security is irrelevant.
     
  3. Holmes2012

    Holmes2012 Member

    Joined:
    20th Jun, 2015
    Posts:
    21
    Location:
    Brisbane
    out-of-money - i used it to indicate the derivative is a liability, ie. I owe the bank.

    It is a cross-collaterised loan. If I get the bank to refinance internally ie switch the loans before discharging, wouldn't that work then? Because, when a loan is refinanced, the tax deductibility of the interest is not lost.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    As long as you keep the loans as is and discharge the correct one - associated with the fixed - it should be ok.
     

Buy Property Interstate WITHOUT Dropping $15k On Buyers Agents Each Time! Helping People Achieve PASSIVE INCOME Using Our Unique Data-Driven System, So You Can Confidently Buy Top 5% Growth & Cashflow Property, Anywhere In Australia