Tax Tip 4: Borrowing to Pay investment expenses

Tax Tip 16: Capitalising Interest
I just found your tip about this... so basically I shouldn't do this way, right?

 

If your offset account contains only cash then there is not issue.

If you have borrowed and parked in an offset account and were to use this to pay the interest you would essentially be borrowing to pay interest - which you should learn about in another tax tip - capitalising interest

 

@Terry_w @Paul@PFI

Is this still accepted by the ATO?

This ATO video makes mention that your deductions could be rejected by the tax office for using this method. Starts @2:15

Just wondering why its a "maybe" and not a simple yes or no.

 

They are discussing capitalising interest in that scenario, not using a LOC to pay operational expenses.

 

Exactly - the words they used were (to the effect of) 'defer payment on the investment loan'.

Nether the less you need to get your own tax advice on whether the ATO may apply Part IVA to deny the deduction of interest on loans used to fund investment expenses.

 

Looking at how popular this thread is surely the ATO has made a private ruling either way.

 

Not that I am aware of.

 

Hi Terry,
Thanks for all the advice, tips and knowledge you share on the forum.
I am a newbie so please bear my lack of knowledge.

I understand if we do all the expenses from the borrowed money (LOC) that means more money in the PPOR's offset from the rent and we can pay off the PPOR loan faster.

But does it mean that the extra money in the offset (say $4000/year) going to increase my annual income as well and say I am earning over 87K, do I have to pay 37% tax on it?

 

Is t

Is the credit card surcharge tax deductible?

 

Money in an offset is just savings not taxable income.

But indirectly it could mean more tax - example you have an offset on an investment property = less interest paid = more profit = higher income = more tax

 

If the underlying expense was deductible I would think the surcharge would be.

 

A surcharge is treated as if the original amount was higher for income tax purposes. It is not a separate cost.

 

I have a new thread on this issue.
Warning - Paying Rental Expenses Using a Loan
I have offerred to assist a taxpayer apply for a private ruling at no charge. My concerns are explained in that new thread.

This offer may appeal to someone proposing to undertake such a process to capitalise interest on property expenses (not interest) rather than someone doing it already.

 

Thanks for the fantastic tip Terry!

I have also read this tip:
Tax Tip 72: Borrowing to Pay Income Tax and Deductibility of Interest

So my question is - can the LOC be used to pay the income tax? even though you might be mixing tax deductions as a sole trader and say using the same LOC to pay rates for your investment property.

 

Hi @Terry_w

Can 1 IP offset account (offset with cash, not borrowed funds), be used to pay for multiple IP's expenses? All in one name only. Do I need to use separate offset accounts to pay expenses for each separate IP?

If the answer to Q1 is yes, then can 1 IP offset account also be used to pay expenses on a property in a trust/co structure? This would be using cash offset in my name to pay for expenses on an IP in a trust name.

Thanks

 

Yes but it would be a mixed loan.

You should get some tax advice before doing this.

 

You can use your cash whereever you like with no direct tax consequences.
Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest https://propertychat.com.au/communi...-account-on-an-ip-and-claiming-interest.6012/

But should you be paying for someone elses expenses? If you do pay trust expenses how will you be reimbursed? Will it be a loan or a gift? It might be better for the trustee to borrow, from a bank.

 

Where multiple expenses all need to be paid around the same time a person may have a greater justification in borrowing to pay these expenses.

 

@Terry_w Thanks Terry for great posts - i've also read your tax tip 1 - parking borrowed money in an offset account
My questions is, if I have the below 2 available facilities to pay for my tax deductible/investment expenses, equity drawn from a PPOR turned investment property.

Option 1 - LOC, higher interest rate
Option 2 - Interest only investment home loan, lower interest rate, no offset, redraw facility, no contamination i.e. money going out are directly for investment expense

Which will be the better option? or is it logical to think that the investment home loan is better, since the interest is lower.

 

Lower rate would be better as long as you can pay from the loan account.