Tax Tip 4: Borrowing to Pay investment expenses

Discussion in 'Accounting & Tax' started by Terry_w, 18th Jul, 2015.

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  1. Unyonion

    Unyonion Member

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    Cool thanks Terry_W ;)
     
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  2. Nabsinna

    Nabsinna Well-Known Member

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    Hi Terry,
    @Terry_w

    Thanks alot for your contribution

    Following on from your loan structuring tip
    - i have a ppor - fixed loan 400k and variable 180k
    - 150k in offset connected to variable
    - looking to buy my first IP and wanting to borrow all costs in regards to IP as per you tips

    Now let's say restructure my variable to 2 loans. Loan A 30k and Loan B 150k. Place 150k offset money in loan B.

    Use Loan A for ongoing incoming- salary rent etc

    At time of purchase and settlement pay purchase cost from Loan B only. Then the interest will be tax deductible? Have i got it right.

    Also if it's Interest only great but will this strategy be applicable for P&I if it comes down to it.

    Let me know what you think


    Kind regards
    Nabrees
     
  3. Terry_w

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

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    Best to seek specific tax advice. I don't know what you mean about using loan A for incoming salary, rent etc. You probably shouldn't do that!
     
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  4. NickWCBA

    NickWCBA Well-Known Member

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    Warning - This has all the marks of a ‘scheme’ with a dominant purpose of increasing tax deductions. Don’t implement this without professional tax advice. Members of the ATO have indicate they are looking into this, but there are no ATO rulings which warn against it so far that I know of.[/QUOTE]

    Firstly.... sorry for bringing up an old thread... but I’ll blame the person from yesterday who did it first.

    Has there being an ATO ruling around this? I ask as I have raised this strategy with two accountants now who both said it is a “scheme”.

    I’ve also looked on the ATO website and am unable to differentiate between the example Terry has provided and the definition of a scheme.

    Many thanks in advance,

    Nick
     
  5. Terry_w

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

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    Hi Nick

    I have seen nothing new in this areas since I first posted this over 5 years ago. I haven't come across any private rulings even.
     
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  6. Paul@PAS

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

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    Using a loan to pay investment expenses and outgoings isnt a scheme. The Commissioner has issued rulings and other guidance on use of borrowed money to make loan payments as this may capitalise interest but that too isnt the concern. The scheme needs to also consider that a non-deductible loan is repaid sooner at the expense of the deductible loan being enhanced or maintained. The Commissioner in this material clearly doesnt specify general outgoings as being a concern. In addition, the Commissioner accepts that at times a taxpayer may even have grounds to use borrowed money to make loan repayments which could be considered "capitalising" a loan and this might not be a scheme with a dominant purpose to obtain a tax benefit. The taxpayer may be in a financial position where such action is required eg COVID, maternity leave, lost job etc However I would also be cautious about a person who uses such events as permission to then capitalise as risky. Necessity is a better driver than choice. eg Mary works for Qantas. She is now reliant on jobseeker alone. Her financial resources are so stretched that she is drawing down a line of credit to support her own rent and also drawing down a LOC to make IP repaymnets. Its evident Mary has an arrangment more based on the decision in Spotless. ie it is not tax driven. Her dominant need is financial necessity.

    TD 2012/1 is a good guide. Note it is very specific to the arrangment and para 3 g is quite specific in description :
    The line of credit is drawn down to pay the interest on the investment loan as it falls due.

    I have always believed it isnt necessary to use a commerical debt facility "arrangement" to have a home loan payment arrangement. A taxpayer could easily estblish this themself and any arrangement that uses borrowed funds to pay outgoings Its also commonly overlooked that TD 2012/1 describes a arrangement which can include a offset as part of the scheme. The "home loan" doesnt need to be paid off sooner if a offset is grown sooner.
     
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  7. Terry_w

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

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    note that TD 2012/1 relates to the capitalising of interest
     
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  8. Nabsinna

    Nabsinna Well-Known Member

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    What i meant for Loan A was that it is used as general expenses and and where personal income is deposited instead of placing it into Loan B - to avoid contamination of loans
     
  9. Terry_w

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

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    That is something I would recommend not to do
     
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  10. FXD

    FXD Well-Known Member

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    Hi Terry, re-visiting this old but popular tip of yours.

    Can this borrow to pay for expenses strategy be back dated retrospectively?

    Since not everyone start out with PPOR having enough equity to draw for deposit for an IP plus
    more for ongoing expenses.

    For example, 3 years after owning IP, both PPOR and IP have gained enough equities, can I then
    organise split IO loans from both PPOR and IP to pay myself back for the ongoing IP related
    expenses (excluding the associated non deductible interests as may be too messy to calculate)
    incurred for the 3 years before? How will I declare this on tax return, if at all, to make this legit?
    THAnks
     
  11. Terry_w

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

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    How can you pay yourself?

    An impossibility.

    I think my next tax tip was on not being able to reimburse yourself
     
  12. FXD

    FXD Well-Known Member

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    Maybe my choice of words is poor in this context. It's not about reimbursing myself in that pure
    sense although the net effect amounts to that. The same expenses are still incurred but just that
    whether it's be paid from saving with no deductibility vs borrowed funds with such benefit.

    Can I "borrow back" from an investment loan the same expenses amount
    incurred in the past today in order to account for their future interests incurred going
    fwd for deduction purpose?? May be this is a better way of putting it and just
    questioning if there are any rulings specifically against this??
     
  13. Terry_w

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

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    How you already paid for these expenses?
    If so, then
    How can you borrow to pay something you have already paid?
     
  14. FXD

    FXD Well-Known Member

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    I cannot lol.

    On same thread, can I borrow from my own trust or company to fund these expenses as this may
    be related party loans? Again, need private ruling for such lending?
     
  15. Terry_w

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

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    Potentially can, but this is something you should take advice on
     
  16. Paul@PAS

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

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    Private rulings are of no effect to create any deduction. The key issues are
    1. is there a loan ?
    2. Is the loan on corect terms anso tat deductions arent at risk?
    3. was the borowed money used bto acquire income producing propertty or outgoings relating to same ? wihout craetinh concerns eg capitalising interest.

    Its pretty straight forward tax advice. in most instances. A binding private ruling is like going to a medical specialist who says - You have a cardiac issue and need a stent to avoid open heart surgery. Then writing to a another doctor who hasnt seen you and run tests and asking f the first Doctor is right. Guess what they wil say ? They may say they have no idea or ask all the right questions and confirm the advice. BPRs should usually be sought when a tax adviser says - There may or may not be concerns with what you are looking to do.
     
  17. FXD

    FXD Well-Known Member

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    Thanks Terry & Paul.

    It's not about capitalising interests, have no interest in that at all.

    It's purely about if my related entity (eg DT) has some uncommitted surplus funds but not
    significant enough to purchase a property, and at the same time if I can borrow from it at market
    rate to pay for IP expenses (in my own name), then why not borrow from it with benefits of
    no credit check, minimal/no red tape, ease of access, cheaper (no app fee), flexible terms etc
    vs borrowing from other lenders. Seems like a win win for myself and my DT.

    The part asking about PR is about if related party/entity lending requires one, not about getting
    PR for tax deductibility purpose. May have been confusing the way I worded it before.
     
  18. Terry_w

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

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    Separate legal entities can contract with each other. Interest can also be deductible if charged and the basis for this is s8-1.
    But if a trust or a company is the lender then Div7A could apply.
    If your money has been gifted to the trust then Part IVA could apply in some circum,stances.
    If there is no arms length loan agreement then the ATO could deny the deduction in some instances.
     
  19. FXD

    FXD Well-Known Member

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    Have discussed with my accountant and have determined my plan (if I proceed) will be very similar to that
    of loan arrangement 1 using a standard loan for private home and an IO loan for investments as
    per Hart's case.

    However, he still advises that I obtain PR since the wordings are "it is unlikely that Part IVA will apply ...", ie not definitive or guaranteed.
     
  20. Terry_w

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

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    It is very hard to get a private ruling on whether Part IVA will apply or not. Time consuming as well.

    What is the scenario?
     
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