PPOR->COVID-19 Deferral->IP

Discussion in 'Accounting & Tax' started by Newbie_9863, 22nd Oct, 2020.

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  1. Newbie_9863

    Newbie_9863 New Member

    Joined:
    10th Dec, 2018
    Posts:
    2
    Location:
    Melbourne
    Hi All,

    We purchased our current house(PPOR) in April this year with 90% LVR (no lmi) $500k PI loan and immediately applied for and got COVID-19 deferral from our bank for 6 months to preserve cash flow. Loan on this house is currently at $505k and we have saved our deferred repayments in linked offset.

    Our plan now is to convert this house from PPOR to IP in April next year (12 months minimum lock-in for FHB stamp duty benefits we received in VIC).

    As we have to start repayments from next month there are 2 options:

    (1) Pay off last 6 monthly repayments as well as resume normal repayments. Loan principal owing in Apr'21 will be $490k.
    (2) Restructure our PI loan by adding last 6 month's interest to our loan and then resume new repayments.Loan principal owing in Apr'21 will be $500k i.e. same as at the time of purchase.

    We plan to convert this PI loan into IO investment loan in Apr'21 and claim tax deduction on interest paid then onward.

    Which option would you recommend from better tax deductibility point of view? I know increasing loan size by taking out equity isn't deductible but does adding interest to principal and restructuring loan disallows deductibility as well? Given loan amount at the start of investment period is same as at the time of purchase and there are no redraws.

    tl;dr: We essentially got IO on our PI loan by using COVID deferrals and want to know whether we will get same tax benefits if ppor is converted to IP and it was IO all along.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    The lender will have its own policies regarding what occurs with a "deferral". Many extend the loan but if your loan term is already maxed they may require that the loan be bought back to the agreed term. You are one of those groups who may find a deferral isnt as deferred as you may like.

    Q : Were your incomes impacted ? If not a lender may yet seek evidence as part of a refinance or loan change request and then not be so gracious.

    The capitalisation of the loan payments may well be OK in this instance when tax law normally doesnt allow this. There are exceptional circumstances and covid seems one (like maternity leave may also be another). However since you are asking it seems that if the Commissioner knew of this post and your choice it could cancel part of all future deductions due to capitalisation to obtain a tax benefit. (Part IVA). Consider a private ruing using all the information contained above. I doubt it would be favourable. If the above isnt mentioned a ruling would be capable of being cancelled.

    From a pure tax point of view I would favour (a)
     
  3. Newbie_9863

    Newbie_9863 New Member

    Joined:
    10th Dec, 2018
    Posts:
    2
    Location:
    Melbourne
    Thanks Paul@PFI for sage advice.

    How about option 1A - pay off 6 month’s interest component but restructure principal part so that principal owing in April and November is same. Will that be considered adding to the loan?
     

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