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Partially Discharging Cross-Coll Loan

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

  1. Holmes2012

    Holmes2012 Member

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    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 Solicitor, Finance Broker, CTA Business Member

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    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

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    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 Solicitor, Finance Broker, CTA Business Member

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    As long as you keep the loans as is and discharge the correct one - associated with the fixed - it should be ok.