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Tax Tip 35: Is LMI Deductible in These Situations?

Discussion in 'Accounting & Tax' started by Terry_w, 1st Sep, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Following on from Tax Tips 33 and 34, there are more questions concerning LMI and whether it is deductible or not.

    Q 1 - What if I increase the loan on my PPOR now, under a separate split, but don't use the money until 2 years later when I take the money to use as deposit on an investment property? Will the LMI on the increase be deductible, and if so when?

    A - Buggered if I know, but I would say the LMI will probably be deductible in full. There is no clear guideance on when, but I would suspect it could not be deductible until the investment proeprty was acquired and then only deductible over the remaining 5 years since the LMI was incurred.

    I did find a private binding ruling relating to a similar situation:
    PBR Authorisation Number: 1011366296645 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011366296645.htm

    In this ruling, which is also unclear, it appears the LMI would be deductible - but it doesn’t say when.

    Q 2 - What if the PPOR is in the name of 2 spouses, a new loan split is established on the PPOR in both names, and then a new investment property is purchased in the wife’s name using the money in the new split. Is LMI claimable and by whom and how much is claimable?

    A - Again there is no guidance from the ATO that I can find, but I would suspect that the LMI would be deductible to the wife as it relates to her investment property.

    Q3 - What if the PPOR is in one name and the loan is increased, under a new split also in same name, and LMI is incurred and then the funds as used as a deposit on the new IP which is in both names?

    I believe the LMI would be deductible to both spouses as the owners of the new investment property. Again there is no authority that I can find to say this is the case. There is a PBR which confirms it won't be deductible against the owner of the PPOR in full though:
    In PBR Authorisation Number: 1011685701210
    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011685701210.htm

    which is also not very clear, it appears only part of the LMI will be deductible to the owner of the PPOR as they are only the owner of part of the investment property (shares in this case), but it doesn’t say whether the other spouse can deductible the other portion.

    Please note that PBRs can only be relied on by the taxpayer that they relate to. But we can use them as a guide of the ATOs reasoning.

    If you have any of the above situations you may want to apply for your own PBR.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    With respect of Q1 I would argue that a taxpayer would take a risk claiming deductions for the LMI as the purpose for the refinance relates to a non-deductible purpose at the time of refinance. There is no apparent plan or purpose for a future use of the funds. The ATO position in numerous BPRs and other guidance considers the primary purpose of the refinance. Now that is not to say the taxpayer may plan a "future" acquisition. Where there is no nexus to a new IP then its a long shot.

    However, its possible that:
    1. The former LMI etc on the original loan (if it was for a IP !...I do note your example says PPOR but if it said IP then this applies.) would be triggered as immediately deductible; and
    2. New LMI etc may be deferred so that it would deplete over the next 60 months as non-deductible until a trigger event arises. So for example in 2 years when the new proceeds were used then at that time the remaining LMI etc would be deductible over 3 years.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Paul - sounds reasonable. And good idea about the LMI on the original loan.
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Consider a tax ruling if its not clear and apparent. Too risky to just shut eyes and walk across the road. The recent ATO borrowing expenses audit caught a fair share of these claims.
     
  5. miked

    miked Well-Known Member

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    If LMI is paid for a PPOR, which later on is rented out, is the original LMI deductible?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my 2 other tax tips on lmi for the answer.