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Tax Tip 15: Transfers for No Consideration and Deductibility of Interest

Discussion in 'Accounting & Tax' started by Terry_w, 11th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Transfers for No Consideration and Deductibility of Interest


    This is an obvious one, but people are still not realising the mistake.


    Interest on a loan will generally only be deductible where the borrowed money is used to purchase an income producing asset.


    I have come across several people who transfer property between themselves and their spouse, mainly for tax reasons, and who do this without consideration - i.e. as a gift.


    If you receive a property as a gift you cannot claim any interest on a loan on that property.


    E.g. Jack and Jill are spouses and Jack wants to increase his tax deductions on their negative geared property which they own jointly as tenants in common 50/50. The loan is for say $500,000 but the property is worth $1,000,000. Jack thinks he can transfer Jill’s share to himself and increase the loan to $800,000 and then claim all the interest.


    He goes to a conveyancer who says a contract is not needed and all they need is a transfer. Consideration on the transfer is listed as Nil. Title changes to Jack’s name only. Bank is happy to change the loan to Jack’s name only too.


    Jack starts claiming interest on $800,000 against his income. But he is audited by the ATO and finds out he cannot claim the extra interest because the loan does not relate to the purchase of the property - his new 50% share was a gift. In fact Jack can only claim interest on $250,000 of the loan because this is the amount relating to his initial 50% share.


    Get both legal and tax advice before attempting any transfer of property or increasing of loans.

    See this thread relating to trustee transfers without stamp duty where this issue can also arise:

    Legal Tip 54: Stamp Duty Transferring a property from a trustee to a Beneficiary in WA https://propertychat.com.au/communi...y-from-a-trustee-to-a-beneficiary-in-wa.2684/
     
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  2. Doraemon

    Doraemon Active Member

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    Hi Terry,

    Great Post. Just wondering if you can further clarify on a few of my questions below:

    1) So if Jill did transfer her 50% of share at the market value of $1Mil, then I guess the most of which Jack is entitled to claim interest on the homeloan, would be just that $750,000? (Jack's initial 50% at $250k & Jill's 50% at current revaluation of $500k)...Deductibility of the remaining $50k would be treated under the usual s8-1 of ITAA97 - i.e. the purpose for which the found would be used for? Am I right?

    2) So I guess Jill in the example above mainly transferred the property without consideration for the sake of avoiding the stamp duty which would otherwise be payable on the transfer?

    Thanks in advance of your comments.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. Yep, that sound right.

    2. Jill was just being silly. She tried to skimp on legal advice to save money but it cost her a fortune. Stamp duty varies from state to state - nil for market value transfers between spouses in some states.
     
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  4. Doraemon

    Doraemon Active Member

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    Thanks for your share of knowledge! Truly appreciated.