Tax Tip 79: Interest Deductibility for 1 on title 2 on loans

Discussion in 'Accounting & Tax' started by Terry_w, 7th Nov, 2015.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    I don't think I have covered this before, but apologise if I have doubled up.

    In the situation of spouses banks will lend to both even though only one is on title. This includes both married and defacto spouses. I think all lenders allow this, but there may be a few exceptions.

    So where A owns the property and both A and B are on the loan who can claim the interest?
    Only A can as A is the owner of the property.

    Incidently this is generally not a good set up because
    1. The non owner is exposed to the loan and is liable for the whole debt, and
    2. The non owner has their serviceability significantly reduced because they will be liable for the whole debt and not have any of the rental income countered for serviceability.

    The only time this should be done is for serviceability reasons. Where the income of 1 is not enough both spouses can be used. Later perhaps the situation will change and the non owner spouse can come off the loan and then have their borrowing power increased.
     
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  2. L3ha7

    L3ha7 Well-Known Member

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    Thanks terry. Iur case is bit different but i got the gist.
     
  3. S0805

    S0805 Well-Known Member

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    Terry, what about capital gain liability...is it also against the spouse on title only?
    Also, what about estate protection, if non owner gets sued, is underlying property up for grabs?

    This is a bummer. when you go and release the further equity from the property, non owner spouse servicability will not help much further cause rental income and +/-gearing benefit will be considered for spouse on title only.
     
  4. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    As per usual - owner claims expenses and gets any income.

    Asset protection - if owner gets sued the property will be at risk. The non-owner will have to argue 50% is held on trust for them (see tips on resulting trusts and constructive trusts). Similar if a non-owner goes bankrupt - the trustee in bankruptcy will argue the that owner is trustee for the non-owner.

    Keep in mind that just because both may be on the loan now it doesn't always have to be that way. The non owner could come off if the owner can service.
     
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  5. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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  6. Grinners

    Grinners Member

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    Question:

    Mr. G and Mrs. G own a PPOR. They get a loan approved for 100k against the house. Both loan and house are in both their names.
    Mr. G exclusively uses the 100k to buy shares in his name.
    Is 100% of the interest deductible in his name due to him using the money for investment in his name, or does 50% of the interest need to be claimed in Mrs. G's name? (Which leads to the question of whether 50% of the shares need to be bought in her name to make her 50% deductible).

    Hypotheticallyc speaking!
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    See above!

    One on title 2 on loans...