Tax Treatment on Interests

Hi i was supposed to settle an IP house today but it was broken into and all flooded, as because i was using a loan (from other property) that i had to pay for the house, the cash is sitting in legal trust account, and the loan is billing me interests, is this tax deducitable if it is settled let say in 2 months, what is the treatment during this 2 month.

 

I would think this is a capital cost as it doesn't relate to income if the property is not available for rent.

 

If the property is intended to be rented when settled Steele's case principles may well apply and allow a deduction for the interim period.

 

Even thought legally speaking, i am not the owner of the house yet?

 

So you have put the full purchase amount in the solicitor's trust account in anticipation of settlement and then couldn't settle?

 

asked the ntaa on that one as the trust account added a nice little twist.

they advised that as the funds have been put to use to put into the solicitors trust account the nexus between an income producing use and the use of the funds is too far removed based on Steele's case . as the funds are being held on trust then the interest would not be deductible between the contract date and settlement date while the funds remain in the trust account.

 

Yes

 

And would not be a capital cost either.

 

As i am not sure how long it would take to settle as police is now involved and then will have to wait for their report and quotes for repairs etc, but intention is to settle, as it's not both side intention not to settle.

 

That doesn't change the deductibility of the interest.

you migh be better to take the money out of the trust account and put back in your loan and then reborrow a few days before settlement again.

 

So it can never be deductible if there is no nexus for that period ? Is a day in a solicitors trust account normally OK, how about three days, so why not two months given the situation ? Does adelay in mailing affect this ? After all obtaining a bank cheque and remission is normal so a day or two is typical. So what about 10 days...etc That was one of the elements to the Steele's issues that there can be differences between the matching principles of income and s8-1 deductions. Timing can be 1 day or much longer.

NTAA make it up or do they have a sound written ruling they are relying upon ?

Mike you know who taught me to question the little stuff....I'm not 100% convinced.

Rob would likely cite something..Rob ?

 

Steele's case - too soon.

 

just read the findings from the web on Steele's case but still difficult to understand (may be i am not a legal guy).

 

the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude to those activities;
·
the interest is not private or domestic;
·
the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;
·
the interest is incurred with one end in view, the gaining or producing of assessable income; and
·
continuing efforts are undertaken in pursuit of that end.
I can kind of understand the rest but what is the first condition about "too soon"?

 

The connection between you incurring interest and settlement on the land may be too distant. You are incurring interest longer than the normal one or two days that usually happens.

Furthermore the money is being held on trust for you. This is different to borrowing to pay a deposit for example. You have incurred interest but received nothing for doing so.

 

paul as with all these things depends on the facts. I agree with @Terry_w that it is incurred too soon. I think the ATO has applied the same principles in PBR 1011391962569 where the interest between contract date and settlement was not deductible

 

OK. Thats better. The ruling was for vacant land I note but the basis appears rational.
The solicitor could apply the funds to controlled monies and earn the OP some interest and that could at least allow a deduction against the income earned. That or the redraw as Terry says.

The interest on deposit or borrowings for duty etc if equity release was used still remains a concern.

 

But can i ask my legal to return the interests earned in their trust account (as i think it will take ages to settle again, e.g. waiting report from police n their insurance claims)?

 

is interest being earned on the solicitor's trust account ?

 

Solicitor trust accounts don't pay interest. You want the money held returned.