I read in the paper the other day about putting all your rental income onto your residential home loan. The logic was that the tax man isn’t worried about where the income from the rental property goes and if you can find a lender that will let your investment loan “blow out” in the meantime you could direct all the income to your home loan, pay it off, and then direct all your income into your investment loan. Is this possible? Is this legal? Which lender will do it?
Gunner.
Hi GUNNER,
I think you’re referring to “split loans” where loans are split between a home loan account and an investment property account. Repayments are directed to the home loan, and tax-deductible compound interest accrues on the investment property. Ultimately, the strategy makes the interest on home loans tax deductible.
The main lender doing it is Austral who have been guiding this test case for the last 6 years or so.
The ATO took their product to the Federal Court saying the capitalized interest wasn’t tax deductable, but in round one the judges ruled against the ATO.The ATO then appealed which was heard in the courts on 11/04/03. Unfortunately they won the right to appeal against this earlier Federal Court decision that allowed “split loan” products. The appeal will now be heard in the High Court.
This case has been running for about 6 years now and i’d hold off in the mean time if i were you and considering it. But i guess you could still set it up in the mean time and if the ATO lose again, claim the extra interest in your tax return. And if they win, don’t claim the interest.
And of course, courts will merely apply the law as it exists, and if the ATO lose in court, they’ll probably ask parliament to change the law … in which case, due to the standard Westminster distaste for retrospective law, if you have it in place before then, you are unlikely to be punished or have to pay it back retrospectively.
Please speak with your accountant first if you are considering it.
I wouldn’t be even thinking about this until it’s cleared with the ATO Gunner… unless you have one excellent exit strategy! [
]Quasimodo [^]
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It seems to me that action has a most magic way of answering all the questions our fearful mind tries to throw before us…
__________________________________________________Umm, I was just about to post what Michael said.
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]Thanx everyone for your replies and advice.I’ll continue doing things the regular way with IO loans and paying the interest each month.[
]What about if you used a LOC as deposits (lend to your trust?) for your wraps. The when they cash you out, you use the cash you receive to pay off your home loan, without paying back the LOC. That way you are still able to deduct the interest on the LOC and decrease you home loan quicker.
If you had say 10 wraps and they cashed you out on average every 2 years, this could really add up.
eg $100,000 house. $20,000 loan from LOC and $80,000 loan. wrap it for $120,000. You will get +ve income in meantime which you can out off your home loan, but when they cash you out you should get $40,000 cash. Put this off your home loan, and increase you LOC by $40,000 and do again.
Don’t know how the ATO would view this tho.
What do you think?
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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