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Passing on the cost of an investment property

Discussion in 'Accounting & Tax' started by Phill, 20th Jul, 2015.

  1. Phill

    Phill New Member

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    Hi!
    If I have a loan in my name that was used to buy an investment property for my wife (in her name), can I pass on the costs of that debt (interest) for her to claim as a deduction?
     
  2. Phill

    Phill New Member

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    To clarify.. I would invoice her for the cost of the loan.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You are essentially onlending the money to her so she would claim the interest.
     
  4. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    is the loan commercial ? do you have a commercial loan agreement ? what interest rate is being charged ? is this in line with other commercial practices ? what security has been provided for the loan ?

    does the agreement between you and your wife result in a breach of the original agreement between your bank and yourself. are you even able to on-lend the funds ?
     
  5. Phill

    Phill New Member

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    Thanks Terry,
    That's how I'm looking at it too. So there's no problem doing that? Am I allowed to 'onlend' to her?
    I imagine my invoice might say something like "costs and interest incurred to purchase (investment property) on (my wife)'s behalf"
     
  6. Phill

    Phill New Member

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    No. It's not a commercial loan.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should probably have a commercial loan agreement to be safe.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes a sensible approach. A tax risk without an agreement. When the ATO look they will ask for the loan agreement. Its easier when it exists.
     
  9. Greyghost

    Greyghost Well-Known Member

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    Loan agreement would have the same terms as the original for simplicity sake. "back to back" loan agreement.
     
  10. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    the terms should be different. Interest rates shouldn't be the same. Should be some form of security and recognition on the personal property register. Would you commercially borrow from a bank and lend to someone else at the same rate with no security ? That's the question I saw posed in the offshore voluntary disclosures i worked on.
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    In my dealing with individuals and spouses who onlend the ATO have never raised a concern where its back to back and documented. And there have been a fair number. However its not always the case. eg where there is a trust involved etc and there is no documented agreement etc. Especially where there is a issue within other entities . A great example is non arms length terms such as IO for 25 years. There may be a Part IVA issue also where one party derives a tax benefit too. eg a non-income earning spouse lends $ to a high income earner through a round robin.

    And as always the original settlement of such a loan must be evident. ie an advance. Its a poor choice for hubby to pay the solicitor directly and then argue he lent $X to his wife who should have transferred funds to the solicitor. Devil is always in the detail. Way too often these are skipped by well intentioned people seeking to save a bank cheque or monthly transaction fee.

    Mike's concerns are valid in commercial arrangements (eg offshore dealings, investment enterprises, (schemes) etc) but ATO accept that in common law spouses wont deal on arms length in the same manner that say would operate if I was to ask Mike for a loan. eg : secured loan, absolute recourse etc. But that doesn't mean you can bypass terms and agreements. One of the key benefits of back to back is that the precise interest and debt is reflected in the source bank loan. So along come ATO in 4 years and they ask - How much is really owed ?? Record keeping a key issue and the source bank account can be a easy way to validate this fact.

    And I'm sure Terry would also suggest that there is a important family law issue to always document and repay / deal correctly with such loans. It could form a point of difference in a family law property division. eg the wife may claim she has a indebtedness from her husband etc.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That might be difficult as the lender's loan agreement will be complex. They will also be taking a first mortgage as security and there will be a 30 year term. The loan agreements would be substantially different in this case.

    Also make sure the agreement is followed. If the terms are monthly repayments of interest and there are no monthly payments then there is a breach of agreement. What does the agreement say if this occurs? Penalty interest rates perhaps.

    Heaps of other issues - death = deal with loans in the wills. Asset protection - is it a valid loan agreement, would one spouse be a creditor of the other if they went bankrupt? Or would it be considered a sham.

    Limitations Act - what if there has been no repayments for 7 years, is it statute barred? What effect will this have if one dies? Executor could be faced with some hard choices and could breach their duties and be sued if they get it wrong.
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    All good reasons to seek pro advice when its not vanilla. As always good tips Terry