Tax Tip 4: Borrowing to Pay investment expenses

IP has two loans:
Loan A: Original investment loan taken out when buying the IP. IP rents go into a saving account.
Loan B :Servicing has improved over the years that I actually had organised myself an IO
investment loan with intention to buy again, but never bought. Loan hasn't drawn down
at all. This is the loan in mind to start draw down on to pay expenses for IP above going
fwd.

PPOR loan only has redraw no offset, so put away as much $ from savings including IP rent to the PPOR loan. Purely want to do this for IP expenses interest traceability and deductibility.

 

A BPR is only as good as the facts presented. If you drop your pants and are 100% disclosed it should be possible for the BPR to indicate that for the situation presented the Commissioner wouldnt apply Part IVA. But its could also be the Commissioner will say he will consider Part IVA applies and its a high cost wasted.

Its a BPR that I would task to a specialised lawyer for tax issues which could cost a bit. If I got a word wrong or was misled on a factor I could be exposed. I see that as a issue when tax work becomes more like legal work that happens to consider a tax issue. $10K and up....easily.

 

That not that shattering. Why is the arrangement occurring ? Does it act like a split loan ? The essence of Harts success for the ATO was the Peabody decision and Harts held that a scheme arrangement was evident when the need for borrowing was considered. " Here, the borrowing was an indispensable part of that which produced the tax benefit. A description of the scheme that did not include the borrowing would make no sense. " Generally the ATO will consider the complete scheme arragement eg where all the cashflows related to the borrowing are considered... and the scheme must be related to the benefit obtained.

I have seen cases where a BPR is successful because the predominant purpose is to accumulate cashflow to acquire another property for example. I now of one where the party wanted to exinguish their home loan fast so they could borrow against the equity using a single first mortgage to buy a commercial property for the business which want possible at present but when the home was discharge it would. But to exchange new borrowings that are deductible to repay debt that is non-deductible alone may be a concern. Other factors could assist eg spouse pregancy and need to consider cashflows etc

 

Hi Terry - My LoC/split account only allows me to redraw amount from it to my bank transaction account only. I do not have an option to pay expenses directly to any other account. Will that be a problem to claim the interest for tax in this case?

 

yes
see my tax tip 1

 

It is a great tip but not easy to afapt for small 1/3 IP investors as borrowing small Mounts can be an issue with loads of paperwork etc. (My assumption based on the borrowing capacity/serviceability).

 

I disagree. It is very simple to implement and smaller investors have a lot more to benefit from it.

 

And there should be no paperwork at all.

 

Let's say one have borrowed as much as they can and IP loan is fixwd P+I, now the council rates come $720 pq etc, that usually gets deducted from rent nut in this case we tell RE agent to not pay and then seek more money from bank to pay so we can claim that at tax time..

Ps- one can try to borrow the whole yearly cost in one go but when there is no serviceability?!

 

You seem not to be thinking outside the square... No serviceability is needed

 

Hi Terry,

First off thank you for all the tips you have been sharing over the years, wish I could have read this much earlier.

I have only one property which always has been my main residence. Due to work relocation to overseas (2 or 3 years, may even longer), I will turn my main residence into IP until I come back and see what to do with it next. I do not have immediate plan to invest into another property. By reading some of your tips, I am considering to release the equity of this property in order to pay IP-related expenses once this property becomes an IP.

Say the loan structure could be:
loan 1 800k (=current loan size) PI fixed 2 years to leverage the lower interest, unlink the current offset (~200k of my personal savings)
loan 2 100k (= released equity), IO variable rate with redraw facility

I will pay back the loan 2 once it is released and keep the account open. Once the property becomes IP, the ongoing expense related to it will go from this loan account. I think theoretically it follows your tip #1,#3, #4, and I am aware of Paul's warning post and the implications of CGT for expat.

My current tax advisor has not come back to me.. I would like to seek your/PC gurus' insight about whether it worths to do the refinance/top up for a to-be-IP asset, given I will not have non-deductible debt soon. Personally I think by doing so the current setup can hold for a few years without me transferring overseas earnings to fund the loan. What might be the drawbacks that I may overlook?

Thanks.

 

If i redraw on my PPOR loan to pay council rates then later convert into IP, is the interest deductible?

 

It depends. You should seek your own tax advice.

 

What does it depend on? I have 1 PPOR and will be buying and moving into another next year, after which the former will become an IP.

 

a lot. have a read of my other tax tips

 

Can you recommend any tax advisers in Canberra?

 

Hi Terry

I currently have the AMP Master Limit. Thinking of creating a split loan of $10k paying off $10k then have $10k ready for redraw. Say fees related to investment property is $5k for the year - would there be any issue if I use the remaining $5k for share investment?

Hence the split loan will have $5k for IP fees and $5k for share investments

 

see here
Tax Tip 4: Borrowing to Pay investment expenses

 

and
Tax Tip: An issue with mixed purpose loans where both portions are investment. Tax Tip: An issue with mixed purpose loans where both portions are investment.

 

Thanks Terry so probably best to just have 1 split dedicated for investment property expenses. Only issue is that, its a bit impractical as total cost rounds out to about $5k for year… so a bit impractical to use a $10k split as there will be a portion that is unused ($5k)