Tax Tip 12: Credit Cards and Tax Issues

Credit Cards and Tax Issues


A credit card is a loan facility so all the usual tax issues that apply to loans in general also apply to credit cards.


Where a credit card is used for something, whether private or investment, there are usually no tax issues if the card is paid off in full - this is because there would be no interest incurred.


But where the card is not paid off there will be interest incurred. This will be deductible if the interest relates to the use of the funds for investment or business purposes. Where there are mixed uses of the card for both private and investment purchases the interest will need to be apportioned.


This will be difficult after the first month as it will be a mixed purpose loan.


But the number of investors doing this would be limited. Nearly everyone would pay off a credit card in full. Some use credit cards for short term cash flow issues such as renovating a property before being sold. In this case it would be better to use a card one for one thing, either private or investment expenses, and don’t mix. YOu might have 2 cards and can use investment for one and private for the other. Pay off the private one first and this interest won’t be deductible.


Since a credit card facility is a loan it is possible to refinance this loan with another loan without changing the deductibility of interest. But again problems can arise where the credit card has been used for private and investment expenses and is a mixed loan.


e.g. X has a $5000 limit and buys a $800 hot water system on his credit card and then uses the same card to buy groceries of $200. It is now a mixed purpose credit card and X cannot simply transfer $800 from his LOC account to pay off the investment portion.To understand why see Tax Tip 3: Mixing Loans - Don’t do it https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/


What X could do to avoid this problem is either:

1. use separate credit cards for investment and private stuff or
   
   
2. Pay off the debt before incurring the expense
   

X could have incurred the $800 expense while the card had a $0 balance and then gone home and transferred $800 from his LOC (ie. refinanced). Then he should have done the grocery shopping.


Or X could have done the grocery shopping first and then paid off the balance to $0 and then do the investment shopping.


Either would be easy to do these days with apps.


Also watch out if your credit card is actually a debit card then the consequences are completely different as you will be just drawing on your own funds and not borrowing. Once you have paid for something with your own funds you cannot later borrow to acquire it as this would be reimbursing yourself. Tax Tip 5: Reimbursing yourself - Impossible https://propertychat.com.au/community/threads/tax-tip-5-reimbursing-yourself-impossible.1737/

 

Thanks for the tip once again, Terry.

With all the banking apps now easily accessible using smartphone, this could be fantastic. Pay the expenses using credit card and transfer it from the related account to the credit card before the interest free period finish then earn reward points too!

I wonder if we can pay deposits or stamp duty using credit card just to earn the points. Considering the large transaction amount probably no? Anyway around this without getting charged cash advance rate?

 

I know you can pay income tax such as BAS with credit cards - but the ATO charges the merchant fee. You can probably pay stamp duty with credit cards. Deposits - nope as it needs to go into a trust account.

 

Great post as always!

 

Hi Terry,

Great tip!

I have been paying the investment expenses out of my offset accounts but some things I had paid with the credit card I use for personal use, this credit card I pay in full every month. Is this ok? Or should I pay everything from my offset account?

 

@Terry_w

 

If you pay the cc off every month there is no interest and no tax consequences.

But did you read this. Tax Tip 2: Debt Recycling https://propertychat.com.au/community/threads/tax-tip-2-debt-recycling.1472/

 

I'll do it now thank you!

 

Hi Terry,

So even if I mix expenses on my credit card (investment and personal) yet pay the card off every month, I can reimburse myself for investment expenses from my card, and the debt is deductible on the IP loan?

OR

Do I need to clear the credit card balance (intra month) each time I incur an IP expense for it to be able to be reimbursed by the IP loan and also deductible?

 

No to the first.
Sort of for the second - you need to refinance that debt while there is no other non deductible expenses on the card.

 

Great, that is what I understood from your first post. Best off to get a separate card!

 

I don't have a PPOR. I am renting and investing the savings in IP

 

Hi Terry, thanks for all the helpful advice. Most grateful for clarification on the below two points -

1. I have a credit card I use for personal expenses. If I pay for investment expenses on that card, and clear the whole balance each month before any interest becomes due using salary, does this affect the deductibility of the investment expenses?

2. I have a credit card I use for personal expenses. If I pay for investment expenses on that card, and clear the whole balance each month before any interest becomes due using salary for the personal expenses and money in an offset account to a loan for investment purposes for the investment expenses, does this affect the deductibility of the investment expenses ?

Benefit in both cases would be points on the card only.

Thanks!

JB

 

JB

1. No
2. Yes if the offset money is borrowed money parked, no if not.

 

Thanks for the clarification Terry,

JB

 

Hi @Terry_w sorry for labouring on this point.
We recently refinanced our loan from Westpac to St George. My wife's IP will settle this Friday. (in her name only, but two names on loan application)
Westpac accounts are still not closed at this stage. We have 2 credit cards with them, Amex and Mastercard.

With St George, my wife has CC and debit card.

So my present loans are set up in the following ways:

1. Offset account against PPOR loan (wife's name only)
2. Offset account against IP loan or cashed out funds from the equity drawn from PPOR (wife's name only)

We will soon get a new kitchen, painting, appliances for the IP. My broker told me that I can purchase appliances on CC and then use the cashed out funds (No. 2) to pay it in full. The rest of the expenses can be done by bank transfer from (No. 2).

We don't have any CC specifically for investment expenses at this stage.

Are we on the right track?

 

Larry - best not to take tax advice from a broker.

If the cc contains other funds it will be a mixed loan and you will get into trouble.

 

So apart from paying items using bank transfer from my cashed out account I need to have a dedicated credit card for IP expenses?

 

No, you just need a card with no other debt on it during the period of use for the property. I think I have covered this above.

 

Ok thanks terry.