Tax Deductibility - Paying IP Interest with Refinanced Money

Discussion in 'Accounting & Tax' started by Mark, 23rd Mar, 2017.

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  1. Mark

    Mark Well-Known Member

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    I am planning to use the refinanced money to pay the interest of my IP loans. My accountant told me yesterday that the interest of the spent refinanced money becomes tax deductible immediately as it is used on the IPs. Is that true?
     
  2. JasonC

    JasonC Well-Known Member

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    Go read everything on capitalizing interest (especially Tax Tip 16: Capitalising Interest). I think the answer is "it depends" on why you are doing this and it is a very complicated area.

    Regards,

    Jason
     
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  3. Paul@PAS

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

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    Perhaps you misunderstood or the accountant does not know what they are talking about.

    Capitalising interest on a IP is generally seen by the ATO as a possible scheme and Part IVA may apply. If your accountant didnt mention Part IVA (4A) then they may not be property tax savvy. It should always be mentioned when discussing use of borrowed funds to pay property loan interest or expenses. Yes there is a nexus to income producing use but Part IVA covers tax scheme which give a tax benefit (ie increased deduction / refund etc). Chasing a tax benefit is the start of the concern.

    I would typically never recommend a client use borrowed money to pay loan interest unless there was a compelling cashflow reason such as maternity leave, loss of job etc.and it is short term AND in such cases it needs to be a compelling purpose.
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes true but not the whole story. The deduction might be denied.

    Why do you want to borrow to pay interest?
     
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  5. Mark

    Mark Well-Known Member

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    Terry, originally I planned to use the refinanced money to buy a property in my name. However, to minimize land tax, I started to buy properties in my partner's name.
    I probably won't buy properties in my name for a few years. I am trying to invest the refinanced money instead of keeping it in the bank account for a few years till I buy in my name again. From tax deduction perspective, is it better for me to lend the refinanced money to my partner for purchasing properties in her name and then get the money back after a few years to buy properties in my name again? By doing this, I don't need to worry about Part IVA?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You should seek specific legal and tax advice as many issues. It could be a good idea to lend but it all depends.
     
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  7. Mark

    Mark Well-Known Member

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    Thanks for your advice, Paul. The tax rules are little bit ambiguous in this area.
     
  8. Mark

    Mark Well-Known Member

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    Thanks. It is a good post.
     
  9. Paul@PAS

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

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    IMO its not. Its complex and many taxpayers underestimate what a problem a engineered tax deduction problem is. Reason why a personal tax adviser helps
     
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