Tax Tip 4: Borrowing to Pay investment expenses

Great post thanks Terry. I'm just wondering if the loan ownership and security has any bearing. In my setup the company would incur the costs but the loan is over my ppor and in my personal name? Pretty sure an accountant told me the ATO doesn't mind where things are paid from.

 

Quite the reverse.

The private residence used as loan security is OK.

However, you have a personal loan and you need to show how the interest incurred relates to deriving YOUR assessable income.

 

It would be like me borrowing and you owning the property. We are separate legal entities so you cannot claim my interest.

What the company needs to do is to borrow from younon commercial terms and evidence this in writing.

Since this sounds like it has already happened you may or may not have a verbal loan agreement with your company which could be written down after the loan commenced. Whether the commissioner accepts this as genuine or not is another matter.

Also keep in mind whether you need or should take security for your loan.

Consider getting a new accountant and keep in mind you may need to sue the current one so keep evidence of their advice just in case.

 

No not done yet just looking into it. So I've got equity in ppor and want to use this in my company to pay my expenses. Ideally then the LOC would be in the company name irrespective of the security used. I'm not doing the Credit card thing but I assume it would need to be a company card? Just to clarify the accountant wasn't referring to interest just the bills. Ie personal CC can pay bills for trust and then reimbursed, it was my misunderstanding of this interest part, now much clearer.

 

If a company is using your 'equity' then 2 ways:
1. Loan in company name with you giving a mortgage, or
2. You can borrow and lend to the company under an arms length loan

1 is not so easy to do because the borrower is diffferent to the mortgagor. But it is possible.

2. may give better legal protection as if the company ever goes under your would be a creditor, either secured or unsecured. But with 1 you are no lending any money, but your property may be at risk if the company cannot pay its debt to the bank.

There are also succession issues to consider.

 

Terry I've been wondering what sort of account structure would you use for option 2. My expenses are roughly $10k per month, not including interest. How would I pay the bills and loan the money to the company for those paid bills?

I guess what I'm asking is what bank accounts do I need setup and where/when are the transfers done to/from? Any thoughts?

 

Could be either a loc or a term IO loan. Please see tax tip 1 for some of the issues to watch out for.

 

I have a second investment loan with a good margin of redraw available for regular IP expenses. The only issue with it is i cant pay bills directly. Funds first have to be transferred to a transaction account. From there, bpay can be used to pay rates, etc. I expect this transaction account should be used solely for this IP?

 

see tax tip 1.

 

If you have borrowed your expenses for an IP, and then later turn that IP into a PPOR, have you contaminated everything?

 

no - actually it depends where you borrowed it from.

 

Borrowed from existing released equity loan for that IP.
However, that loan is mixed with the rates for other IP's also.
Can you simply pay down the amount of the rates you borrowed for that IP/ split the account then pay down?

 

I read what you say but i am not certain how it works in practice
Say i get $4m in gross rental and have $2m in expenses (interest and expenses ) i borrow another $2m a year ...i would end up with $4m in the bank account (ignoring tax for this example) earning only 3pc on call
Would it not be better to pay off the 4.1pc debt and borrow again when you have a need?

 

That is a lot of expenses!

This thread is about borrowing to pay expenses and using the money you would have used to pay down these expenses to pay down other non deductible debt.

There would be no point in borrowing at 4.5% and investing at 3%.

 

I see now, the numbers i used in the example are rounded to millions (but i do pay $1m in interest ...all deductable)

 

Please note I was not advocating or even discussing the borrowing on interest in this thread. That is another topic - capitalising interest
Tax Tip 16: Capitalising Interest

 

Hi @Terry_w,

Everytime I find one of your posts it is always full of useful knowlege. Thanks.

Just a quick question.

LOC $80k (deposit, stamp duty, etc)
MAIN LOAN $350k

If your LOC is setup as IO and every year you are adding expenses (rates, insurance, etc). Then eventually the LOC will max out. Do you let it max out or should I be paying the expenses back at the end of every year or?

Thanks for you time.
Ben

 

I would be paying back non-deductible debt first. If you max out you may be able to increase the LOC or set up a new LOC or you pay have to stop there and start paying expenses.

 

Thanks Terry. I appreciate it.


edit - @Terry_w And just to confirm I can then use the actual expense (i.e. rates $1200) as a deduction at tax time?? (And obviously the interest)

 

Let's say you have had one IP loan 400k and a LOC Which you have used to pay your expenses of 3k

When you refinance to a new back can you merge the two borrowing expenses to keep all the money in the same account . Ie make refinance split into new loan of Original IP plus expenses 403k and LOC for a deposit for a new IP.

I assume this allows one to not cross collateralise the LOC funds .
What if before the split , the original LOC loan had 3k expenses for that IP and say another 50k used ? (Still for investment purposes )