All Topics / Help Needed! / Tax deductible or not?

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  • Profile photo of L.A AussieL.A Aussie
    Member
    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488

     

    Hi Boys and Girls,

    I have a  situation looming which I would like opinions on.

    We bought a block of land for a future PPoR not long before we left Aus to come over to the USA. We have an 18 month settlement; it happens in Aug this year. Our plan is to keep the PPoR as an I.P and build a new house on the block of land.

    Have paid a 20% cash deposit, so only require 80% plus costs to settle. We have most of the finance available in usable equity already, but will need to borrow some more either using the same existing loan with the same lender, or a new loan with them or someone else.

    We decided the direction we will go with the finance is a new Lo Doc loan using my ABN, and keep our existing equity in our portfolio for future investments.

    At this stage the interest on the PPoR land loan would not be tax deductible. Our existing PPoR, which is being used as an I.P is debt free (we have used some equity for investment).

    It was suggested to me that we can change the structure to one whereby the new PPoR Land would be debt free, while the PPoR that is an I.P would be the security for the new loan, not the block of land, thus the loan for the land would be attached to the existing PPoR.

    Here's how it would work;

    Our PPoR is in both my wife's and my name. She transfers the Title over to my name only using the "for love and affection" clause allowed in Victoria. There is no stamp duty paid in this transaction; perfectly legal.

    I then have to pay my wife for her half of the house now that the Title is my name only, so I raise a loan (using the ABN) to pay her for her half using the existing PPoR as the security. There is enough equity in the PPoR to do this.

    The result is She then pays out the loan on the Land using the funds I pay to her, leaving the Land debt free, while there is a loan on the existing PPoR, which is supposedly tax deductible.

    My question is; because I have paid out my wife for her half of the existing PPoR and there is now a loan attached to it for this purpose, is the interest on this loan tax deductible? My concern is that the ATO may look at the "purpose" of the loan and decide it is not able to be classed as an investment loan, thus the interest would not be tax deductible.

    I realise that no-one is an accountant, so I won't hold anyone to their answers; just interested to know what you think, have you heard of this scenario before, and is there another angle we may try?

    Cheers,
    Marc.

    "we get sent lemons; it's up to us to make lemonade"

     

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Hi Marc

    So you are borrowing money to buy your wife's half of the property which will be an investment. On the face of it, it sounds to be ok. But the ATO could apply part IVA and say you did it with the dominant purpose of avoiding tax and thereby disallow it. Whether they would do this or not I don't know.

    To make it stronger froma tax POV, what about if your acquire your new share in a trust, so you have 50% as an individual and 50% as a trust = but this then may invalidate the stamp duty concessions.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of L.A AussieL.A Aussie
    Member
    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488

    Hi Terry,

    thanks for that. The ATO not allowing the tax deduction is my concern too.

    I actually do already have a trust set up which is attached to the company name I have. Neither have been in use for a few years, along with the ABN, although I know for sure it is still active.

    If I do this using the trust, how will that affect the ability to acquire the loan, given that my wife and I are out of the country and there is no Aus income?

    The stamp duty concessions would not be a factor as we intend to keep this property as an I.P and never sell it, so the 6 year window as a PPOR will expire.

    Would buying the other half of the house in a trust affect the "for love and affection" clause. I thought this only applied to partners transferring the Title across to their Spouse in their name?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Hi Marc

    Getting a loan for a trust is the same as getting a loan in your own name almost. ie if you qualify on your own, then you will qualify for the trust or company. St George are good for expats, no aussie income needed.

    I think the love and affection clause would not apply to a situation like this. It would probably be just between spouses as persons.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of L.A AussieL.A Aussie
    Member
    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488
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