Using LOC to pay IP bills

Having a brain f@rt this evening.

If I pay IP expenses using the LOC, I can claim the interest paid on the expense.

When can I claim the expense: a) when it arises or b) when it is paid?

If it is a) why can it be claimed if it hasn't been paid but added to the debt?

If it is b) how do I track how much of each expense is outstanding?

 

Tax Tip 4: Borrowing to Pay investment expenses

 

I believe it is claimable from when it has been paid

 

But what is 'paid' in this instance, the vendor has been paid but the funds used are not paid until the loan balance is zero (unless I am mistaken).

@Terry_w - yes it is debt recycling but when can I actually claim the larger expense obviously not when I have borrowed but when I have paid the charge. Sure it may be more efficient to retire non-deductible debt but if you aren't carrying any NDD, is there a point?

 

The legislation has the word 'incur'. This means something like being legally bound to pay. Such as when interest is added to your loan - you are stuck with it them.

With land tax it is incurred the year it relates to, not when it is paid. For most expenses it will be when you transfer the money from your LOC to the recipient of the service/product.

If you have no NND then it would still be advantageous to build up large cash buffers to use for private expenses.

 

What's NND?

 

non-deductible debt

 

Interest is deductible when it is incurred. That is normally when the bank ascertains and charges it. This is evident with interest in advance...Its a one year fixed loan for the interest charged in June. During the next year no interest is then charged.

Some lenders charge on first of month, or last date of month for the preceeding month and others charge based on a designated calendar date (usually based on drawdown).

So the issue is that if interest is permitted to compound then the incurred interest remains deductible. It doesnt have to be "paid"....But a loan with a false expectation that repayment may never occur would pose a major concern especially if its a related party. Just need to ensure that compounding interest arrangements arent a contrived scheme that benefits say a PPOR being repaid faster at the expense of a IP with a growing loan balance. That may fall under Part IVA as a scheme and lead to deduction concerns.