Purchasing IP title ownership structure

Hi,

Just wanted to check whether this was the case, but our current PPOR is under both my name and my wife as joint tenants. We intend to purchase an investment property, which after doing the sums, would be most advantageous to place this in my name alone as the higher tax bracket after taking into account negative gearing and future positively gearing projections, capital gains tax, and land tax. However, my accountant informed me that to be able to debt recycle and pay down part of my PPOR loan followed by redrawing this amount to pay the deposit and stamp duty cost (as @Terry_w likes to say, borrowing 105% of the property value) to claim tax deductibility on this portion; this would require both my wife and I to be on the title otherwise we could not tax deduct 100% of this portion, but only 50% seeing as the PPOR loan is also under both our names. I would have thought given my wife and I's name will still be on the IP mortgage, and just the land title under mine, the full 100% should do be tax deductible?

Secondly, my broker was informing me that lenders are no longer offering title splits of 99%/1% between spouses, with the best only being 25%/75% (ANZ). Some banks reportedly don't take any split less than 70/30. Can anyone comment if that is true?

Kind regards,
Andy

 

Not true

 

For the first question, or for the second?

 

What's the first question?.
Second one is not correct, but you would want to avoid 99/1 anyway

 

Yep second Terry, not true about the title ownership.

Because its spousal, youre allowed to have 100% ownership under your name and still have your wife on the loan for servicability purposes.

 

Thanks Tony. Yep I think my broker was saying that too, but he was more advising that if we decided to go down a tenants in common structure rather than sole ownership or joint tenants, then the bank would only lend as a minimum 25%/75% split, with some other lenders only being 30%/70%. This was in our scenario with 90% LVR (no LMI due to medical professional exemption) and already reasonable existing debt of 4.2 million.

 

If there are 2 borrowers, tax law doesnt require that there be two names on title. You need to use a tax adviser who knows something about property taxes.

 

First question, was essentially accountant telling me that because my PPOR title and loan were both under our joint names, if we purchased an IP under my name alone with the mortgage loan though under both our names, we would not be able to interest deduct 100% of the funds 'borrowed' from our PPOR given my wife was not on the land title of the IP. He mentioned then, we would only be able to deduct 50% of these funds for 'my portion'. Is that the case?

Secondly, why would you want to avoid 99/1? If there are any tax tips/previous posts where you have answered these, please point me to them.

 

So as long as both our names are on our both mortgages for our PPOR and IP, this would be fine? There is no need for both our names on the title right?

 

Not correct.

 

You are conflating mortgages with loans.
If you borrow against the main residence both would be required to give a mortgage because both own. The loan could be in one or both names. It doesn't really matter though as if you borrowed jointly and use it to buy an asset in your name only you could claim 100% of the interest - as long as all the other general requirements met.

 

So if I follow correctly, because we borrowed jointly for our PPOR, and now we intend to borrow jointly again for our investment property, if the investment property meets criteria as an income producing asset, then the interest on the funds redrawn from the PPOR loan will be 100% tax deductible. The names on the title of the PPOR or IP are not relevant with regards to determining the tax deductibility of the funds.

 

Where spouses are involved it will be the names on the title of the investment that generally determines deductibility of interest.

 

See
Tax Tip 79: Interest Deductibility for 1 on title 2 on loans
Tax Tip 79: Interest Deductibility for 1 on title 2 on loans

 

Thanks for the link. I managed to find this link to a bantacs article that refers to the the tax ruling/ case you mentioned in the tax tip. Maybe it's a bit too technical for me, but from my understanding it should be 100% tax deductible re the initial deposit, but ATO might try to challenge this, so setting up in one of the 3 ways mentioned in the article can mitigate this risk?

‐------------‐-----------------------------

Borrowing in Joint Names but Property in One name
It is a generally accepted convention that the ATO will allow a full tax deduction for all the interest on a loan
that is used to buy an investment property in one of the borrower’s names even though the loan is in the name of
both spouses. The banks usually require both names to be on the loan to protect them from divorce or because
the family home, owned jointly, is used as part of the security.
The trouble starts when you are just one little taxpayer on your own and the auditor is looking for something
to justify ticking that box…. Audit resulted in an adjustment. They will argue that only half of the interest is
deductible in your tax return and the other half is not deductible to your spouse because it is not a cost of them
earning income.
There is not a clear ruling to back this, may be because there would be an outcry and the ATO would then be
forced to agree to a more reasonable approach. It is better just to pick taxpayers off one at a time. I have read
of the ATO arguing this as an ancillary (not relevant to the ultimate decision) argument in the courts and private
ruling requests. So it is something to avoid if possible though if you don’t mind taking on the ATO and its
unlimited taxpayer funded fighting fund then please do because this matter needs to be resolved once and for
all. Loans set up this way are just so common.
Now, onto ways to avoid it:
1) Ask your bank if the sole owner of the investment property can be the only name on the loan account,
offering your spouse’s personal guarantee rather than being a co borrower
2) If the borrowing must be done jointly, draw up formal documents borrowing your spouse’s share from
them at the same interest rate as the bank is charging.
3) Consider 1% and 99% ownership then even though the interest is charged to you jointly there is ample
ATO material (ie TR 93/32) saying that the expense must be apportioned on the basis of ownership.
If this article has come too late and you are stuck trying to defend your loan arrangement here is your
defence. As mentioned above better to avoid the situation in the first place.
In PBR 1011299816055 the ATO agrees that one borrower can claim 100% of the interest on a joint
borrowing because the PBR claims that TR 93/32 says:
“where the title deed of a rental property indicates sole ownership of the property, and the
mortgage is held in joint names; the legal owner can claim the full amount of the interest paid.”
Now the trouble is that sentence is not actually in TR 93/32 it is merely an interpretation of what is written
there. Further, PBR 101129981605 is a private binding ruling so can only be relied upon by the person who
applied for the ruling. So you are left with a persuasive argument at best, plus the fact there is actually no
public ATO statements saying half the interest would not be deductible. The only really useful statement TR
93/32 makes is that expenses associated with the property are to be apportioned on the basis of ownership.
Of further concern is that PBR 1011299816055 goes on quite a bit about the fact that the repayments are
only ever made by the owner of the property so it is also worth opening up a bank account solely in the name of
the owner of the property where his or her pay is deposited and maybe together with rental income used to make
the interest payments on the loan.
Want more detail? There is a minor point argued in Tabone and FCT 2006 AATA 466, by the ATO that the
interest is not deductible because it wasn’t solely paid by the taxpayer and the loan was in joint names. In PBR
61949 no deduction was allowed to the owner of the income producing asset because his spouse earned more
than him so the loan had to be in her name and the ATO decided she was making the repayments. Of course the
interest was not a cost of producing income for his spouse, so no deduction for her either.