Tax Tip 4: Borrowing to Pay investment expenses

Interesting question. I have never seen this discussed in any ATO publications before so am trying to think it through as I type.

You have borrowed to invest - investment is cancelled so technically the interest on this portion would not be deductible. ATO allow a mixed loan portion to be repaid without splitting on the sale of the asset that was borrowed for. So same principles should apply here. You should be able to just repay the money back into the loan.

I wouldn't wait and reuse money from the savings account as the interest wouldn't be deductible.

 

Thanks Terry,
But if I were to pay the money bank to the loan, am i right in saying I would only be paying a small portion for the non deductible portion? In this case, if i redraw 10k on top of existing 90k which have been redrawn for investment; and then refund the 10k, it means i am paying 9k into the deductible portion and 1k into non deductible portion?

 

Good you are aware of this, but I think not because of
Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan https://propertychat.com.au/communi...-splitting-before-repaying-a-mixed-loan.4729/

 

Question for you @Terry_w . If i pay for all IP cost out of LOC then when tax time comes and i claim those expenses followed by a return. where do i deposit the return - in the LOC acc or in my saving offset account attached to my PPOR. If i don't deposit the return in my LOC acc then it will grow every year. Please advise ?

 

It doesn't matter where you deposit a tax refund in terms of deductibility of interest. But best to put all share cash into an offset account attached to the non deductible home loan.

see Terryw’s Ideal Loan Structure

 

@Terry_w Can i also pay the RE commission out the LOC account and claim the interest.

 

Same principles apply. There was a thread on this recently where someone convinced their managing agent to let them pay their commission directly without having it debited from the rent.

 

and here is that thread.

 

From a LOC there may be issues where the borrower and ownership interests are different eg : If Dave has a LOC but the property is joint then the interest will also be joint. However if the LOC was used for Dave's share of ownership that may be his deduction alone. The blended nature of the LOC involving acquisition (Dave) + ongoing ownership costs (joint) may taint this. Its a blended loan for the same property !! (Its explained in TR 93/32)

LOCs are a very poor loan product for IPs. Its critical that the LOC be:
- Solely drawn for EITHER acquisition or ongoings costs - Never both unless loan is in all owners names; AND ALSO
- Used solely for one property and never blended.

An arrangement with a 3rd party (REA) intended to enhance interest deductions may be a Part IVA scheme. A scheme generally involves a arrangement with progressive actions or steps which lead to a additional or enhanced tax benefit. What other reason other than enhanced deductions ?? The predominant benefit test may be satisfied. I would not recommend this strategy without a private ruling from ATO that Part IVA does not apply.

The ATO could cancel the tax deduction if they form an adverse view.

 

Terry - I am looking for an answer as in most of the loan accounts we can not pay directly to vendor as it is not a transactional account.

Redraw from loan account is allowed to a transactional account linked to a customer.

Is it possible if transactional account is empty. Redraw from loan account to transactional account and then transfer money to vendor to pay for investment property.

Any Tips to resolve this issue.

Cheers,
salz

 

Yes Tax Tip 1: Parking borrowed money in an offset account

 

@Terry_w can i borrow out of LOC to pay interest for IP loan

 

Yes, but whether it will be deductible or not will depend.

see
Tax Tip 16: Capitalising Interest

 

@Terry_w excellent post as always. Few q's as this is new to me:
If i was to implement this on my IP's which all have normal Interest Only Loans, with various LVR's would i
1) just go to my broker and ask him to get LOC's for each property?
2) Say 3 x IP's are in Joint names (with my wife) and 1 x IP is in my name only, would it be wise to have the 3 IP's covered with one LOC and the IP in my name covered by another LOC- or won't it matter?
c) how can i work out how much i need to ask for, i.e. 2 years worth of expences? Because if i had to pay out of my savings account to keep it topped up, wouldn't it be not maximising the benefit?

thanks in advance

 

1. Ideally yes
2. Best to separate if you can. Otherwise you will need to work out the apportionments of interest.
3. You can always increase LOCs and loans at a later date - subject to serviceability etc.

 

Generally the expenses that can be paid are very limited. Taking interest and depreciation etc out of it the typical annual costs which would be available in a year would be approx MAX. $5K for a house and from $10K for a strata unit a year. This would add $250 - $500 a year to interest deductions and give a increased refund of around 30% of that....So you debt goes up $5K and the cashflow benefit is negative $4925. You are going backwards not making money !! Year after year....

For all the efforts, fees etc you need to consider if you are playing with postage stamps rather than focussing on property itself. Putting a larger amount say $40K into a kitchen / bath reno that enhances value and rents may be smarter rather than typing up equity / debt in matters that cant appreciate.

 

Quick question sorta along the same lines as the topic.

If you use an IP LOC to pay for selling fees, and the property does not hit reserve, and you decide to keep the IP, are those selling expenses still deductible? i.e. is LOC interest still fully deductible?

 

You are missing one important point. Your PPOR debt should be decreasing at the same, or faster rate. The difference is the tax savings. Overall debt would be the same or better - unless money you would have used is otherwise wasted. $500 per year in increased deductions may mean $150 extra in your pocket, which could in turn go off the non deductible debt saving further interest on interest.

 

No I don't think it would as these costs are not deductible either against income or against CGT.

 

thanks @Terry_w
If i were to pay the IP expences out of a LOC;
a) would it be wise to transfer the same amounts as each expence from my savings into another savings account that is offset against the PPOR to use for investment purposes at a later date. i.e. you would have 2 savings accounts, 1 with day to day personal use (salary income), and 1 for the saved funds and tax return money from IP's? To ensure it is not 'wasted' and give a false idea of personal savings? My thoughts it would be easier for personal accounting and see the benefits of the compounding savings and ensure all money in savings account 2 is then re-invested?