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Tax Determination 2012/1 query

Discussion in 'Accounting & Tax' started by Jog21, 21st Jul, 2015.

  1. Jog21

    Jog21 Active Member

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    I am currently on hold to the ATO for help, but wanted to put the question on here to get the opinion of accountants who specialise in Property taxation.

    Scenario: Home mortgage and IP mortgage are separate accounts in a "pool" of funds set up as a Line of Credit facility. Both accounts are interest only, with interest capitalising each month.
    ALL incomes go to the home mortgage account and this will eventually reduce to zero, and the available funds in the pool will in turn increase. The IP mortgage account will remain untouched for as long as there is a balance in the home mortgage account. The IP mortgage account will not have any income deposited, and all IP expenses will be paid from this account. The interest on the IP mortgage is capitalising.

    I have been researching taxation on Investment Properties and have come across Tax Determination 2012/1 and I am now convinced that our current mortgage structure is EXACTLY the same as the structure discussed in the Determination. Which means we can't claim any IP loan interest as an expense.
    Have I interpreted this correctly? Is there ANY way that the interest (or part of the interest) on the IP loan can be claimed? What else should I be looking into to make a more informed decision about the tax implications of our current loan structure?

    I took my query back to the organisation who set us up with this facility and their response was, and this is a direct quote:
    "It is my understanding that your investment debt and the interest occurred from investment debt is fully tax deductable when you own at least two properties and one of them must be owner occupied with the other as an investment property. However I am by no means an accountant so please do seek the advise from a qualified taxation accountant."

    Their whole grand plan when we had our first meeting was to claim all interest on our IP loan, to reduce our IP income. They never once told me that there would be tax implications by setting it up this way. And it doesn't sound like they even are aware of this Determination.

    I have just got off the phone from the ATO. She couldn't give me an answer straight away and she has passed my query on to a specialist who will get back to me in 48 hours. If any accountants who know this inside-out could please give me some advice I would be VERY grateful!!
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Your interpretation is not really correct. This TD doesn't mean you cannot claim the interest, but it means the ATO can deny the deduction if it is being done as a scheme to pay off the home loan sooner.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It is irelevant whether they are accountants or not. Only 2 kinds of people can give tax advice - Lawyers and/or registered tax agents.

    What sort of business helped you set something up like this and are they licenced?

    Does the firm name start with a "C"?
     
  4. Jog21

    Jog21 Active Member

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    I am so angry right now. Yes, their exact advice to us was to set it up in this way so that we could pay our home loan off faster and turn all our debt into investment debt. How many other clients have they given this advice to and who are none the wiser and claiming 100% of their interest which is nicely growing in the untouched IP loan??? I have to take the blame for this, I should have sought legal advice before we went ahead with it. But how dare they give out these recommendations and hold people's hands through the process, knowing they are breaking the law?!! Am I allowed to name the company on here? No, they don't start with a C.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I would be interested to know what sort of company this is - what is their main area of business?
     
  6. Jog21

    Jog21 Active Member

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    Their core business is Residential Mortgage Finance, Investment Lending, SMSF Lending. So essentially a broker but they also offer other services Residential Property Development, Wealth Creation Programs etc.

    I have just spoken to a supervisor from the company and she has said that part of my "package" included a phone call from their preferred accounting firm (which I didn't receive) so they can explain to me the implications of setting up this type of loan facility. She has said that the accounting of this type of structure is extremely complicated and needs specialist accounting to ensure that it complies with legislation. (??)
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    So did this company or any of their staff give you tax advice?
     
  8. Jog21

    Jog21 Active Member

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    To be honest Terry I am not 100% sure if they have or not. There has been so much going on with this refinance that all the details of our conversations are a bit fuzzy. I can't remember if they mentioned tax when originally discussing our financial strategy. Maybe they didn't, and I assumed that all interest was 100% deductable. But there's certainly nothing in writing regarding taxation.
     
  9. MRO

    MRO Well-Known Member

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    The 'get your own tax advice' is their 'get out of jail' disclaimer. They, no doubt, won you business with the dominant part of their sale being the quasi debt recycling set up.

    Always get tax advice, but companies shouldnt push products that operate in a potential grey area without being more specific about the risks.
     
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  10. Jog21

    Jog21 Active Member

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    That's what I am most annoyed about. That they weren't transparent right from the start about the risks involved in this set up. I was really worried about their other clients being none-the-wiser and claiming all their interest expenses. But apparently all their clients who use this facility also deal with their preferred accounting firm so that the tax is done correctly. I am still very sceptical though.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Maybe it is best to have a conversation with their accountants (ask them are they tax agents too).

    When talking to them I would not mention the TD until the end, let them say their piece first and then start asking little questions - can I borrow to pay interest? etc Ask for authority, any TR or TD etc. Should you apply for a binding ruling? Would Part IVA apply?

    Then at the end ask does TD 20012/1 change things?

    Its been out for 3 years now so they must know about it, especially if they are advising on this area.
     
  12. MRO

    MRO Well-Known Member

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    I dont see how using their accountant would change anything. Any good accountant would tell you the arrangement is most likely ineffective at achieving what you want to achieve.
     
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  13. Jog21

    Jog21 Active Member

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    Thank you both for your input. I will wait to hear from the ATO and from their accountant and let you know what the general consensus is!
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    ATO will probably say to apply for a private ruling. Hope the call with the Accountant is included in the package fee.
     
  15. Jog21

    Jog21 Active Member

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    They said the accountants call is included in their fee - I should have received a call from the accountant way back in the early days apparently, so that I was fully aware of the circumstances we were getting in to. A slight miscommunication! lol
     
  16. MRO

    MRO Well-Known Member

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    I would probably get an independent view from another accountant.
     
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  17. Jog21

    Jog21 Active Member

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    So I just spoke with a specialist from the ATO. She has said that my exact financial structure reflects the structure outlined in the Determination. And if we were to go ahead with the broker's advice, we would be deliberately applying a scheme for personal gain and would most certainly be found guilty if (when) audited. She advised me to call the TPB to let them know what is happening because she said if the ATO picks up on a trend of these types of loans there will be an investigation and all people involved will be caught (including the innocent clients!). I told her that their accountant has ways around it and she said I should have a conversation with them to find out their method and then call the TPB to discuss. Yikes. I have opened a can of worms...
     
  18. Jog21

    Jog21 Active Member

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    Just out of curiosity, could there ever be a situation where it would be beneficial to an investor to NOT claim the interest of their IP loan account? Because as far as I can tell, this would be the only way around running a mortgage in this way. To not claim any interest at all. Which to me seems crazy but I know absolutely nothing about investing so if there would be an occasion where this would be suitable I would be interested to know?
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I have tried to get my head around this before and I don't think there are any tax benefits, but it could help you pay off the PPOR much sooner.

    Imagine
    $100,000 PPOR loan
    $100,000 Investment loan

    Interest is $5000 on each.

    If you didn't pay the interest on the IP loan it would mean you have $5000 more cash in your pocket. This could mean $5000 off your PPOR loan. but your IP loan would be $5000 more.

    More interest payable on the IP loan but not all deductible. The interest on the $5000 extra would not be deductible. The interest saving on the $5000 paid off the PPOR loan would also not be deductible.

    But at the end of the day you will be a large additional loan which was used to pay the IP interest, but no loan relating to the PPOR.

    Could you claim the interest on the loan used to pay the IP interest at this point? the house is paid off and this is the main issue with 2012/1 - a scheme to pay off the home loan sooner.
     
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  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The recurring problem of split loan facilities...Its a tax scheme. Inflates a deduction while reducing non-ded interest. So its a scheme that gives a tax benefit. Peddled by a finance broker who thinks it sounds clever and they get an edge over others. But its like a time bomb.. Basically they give tax advice to initiate the enquiries and make it sound slick and sexy. Advice comes in two levels. General or specific. Either way they may actually be a scheme promoter. The ATO issues taxpayer alerts when they find this going on. BUT...Reporting it means they may issue a s264 Notice to the broker / lender to identify all participants. The ATO will then know who took out these loans (they may already know it. )

    The amount of deductible becomes too hard to determine with a split loan. So ATO just deny it all and allow you to object / appeal etc to no avail. Same deal as hybrid trust deductions.

    If the facility isn't too old one of the best things you could do is consider a refinance to end that scheme. Its not perfect but the longer this goes on the worse it gets. Refinance to fix it may be more palatable to ATO.
     
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