Should you break a fixed loan ahead of settlement to maximise tax deductions?

If you sell an IP that is funded through a fixed rate loan (and pay off loan in its entirety), the bank will ordinarily charge you a break cost.

Once you know you are selling (ie you have a contract of sale, but settlement in 60 days), you can ring the bank and break, in which case the break costs are tax deductible (Right?).

If you wait until settlement, the break costs are just incorporated into the final payout figure. Presumably, it is harder to claim the break costs when buried in this final loan discharge amount.

So, is it best to break ahead of settlement to maximise tax deductions?

 

Bloody oath.
But is the sole or dominant purpose to obtain a tax deduction?

 

Tax Tip 131: Breaking a Fixed Loan – 3 Different Tax Consequences https://propertychat.com.au/community/threads/tax-tip-131-breaking-a-fixed-loan-3-different-tax-consequences.11168/

There has also been a recent tax ruling issued on this, but nothing seems to have changed.

 

Apart from selling, breaking is also a way of bringing tax deductions forward as I see it. If the break costs are equivalent to the capitalised savings associated with breaking early and going onto a cheaper rate (ie are cash neutral over the period), breaking allows you to get an immediate tax benefit.

 

Of course, when you sell, the purchaser will generally release the deposit early to the vendor. This needs to be invested, and the best way to do that is to set up an offset account. Problem is, most banks don’t allow offset accounts with fixed rate loans. Hence, strong argument for breaking immediately on sale so you can access an offset arrangement. So, getting the tax deduction certainly not SOLE purpose. Is it ‘dominant’ purpose. Will leave for others to judge.

 

for those neophytes who are uninitiated, why is it better to break the loan rather than pay out the break costs at settlement?

Because
a) if the loan is broken now the expense will be deductible against income
b) if the loan is broken at settlement the expense doesn't relate to income as there is no rent at that point, so it will be 'deductible' against CGT.

With CGT there is a 50% CGT discount.

So a $1000 break cost now would save $1000 x marginal tax rate.

Whereas a $1000 break cost at settlement would be $1000 x 50% x marginal tax rate. half as effective.

 

This is a fairly common mistake. The loan should be broken while the property is still tenanted and prior to settlement to avoid the cost incurred being a third element CGT cost. (ie a cost for which no deduction has been claimed).

If the tenant is being removed to assist a sale that should be a key timing point. The deduction has a nexus to the production of assessable income.