We would like some advice regarding interest being deductible on the loans of 2 ex-PPR properties.
We are Aussies living in England ("non-resident of Australia for tax" and "resident of England for tax") and have 2 properties in England that we purchased as PPRs with very small loans (because we had good savings and paid large deposits). Under English tax law we can claim as an expense the interest on loans for these properties up to the market value of the properties on the day they “entered the rental business” (made available for renting as an investment – as in example 2 in http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm).
We are in the process of returning to Australia (and becoming resident for tax in Australia) and we understand that the ATO will only consider the loan that was originally used to purchase the property. For example, one of our properties in England was purchased 10 years as our PPR for $450k, but we only borrowed $300k. We moved out 5 years ago when it was worth $1million. We now have a loan on this property for $600k and the Inland Revenue in England allows us to claim 100% of the interest as a deduction. We have a similar issue with the next house we lived in in England (purchase for $1.2m with a $700k loan and worth $1.7m when it became an investment property – England will allow as to claim as a deduction the interest on $1.7m, but Australia will only allow interest to be claimed on $700k).
Initially we were told by every UK accountant we asked that England operates the same rules as Australia, but after a lot of research we found BIM45700 on the UK tax office web site (see link above) which clearly states a difference and England's tax office have agreed with us. England’s justification for this allowance is that we contributed personal assets worth $1.2m & $1.7m into our “rental business”, just like other business people may inject personal cash of that amount into their business…
Has anyone come across this situation, and found a way of claiming the interest on a loan up to the market value of the property on the day it was converted from PPR to investment property? I don't think this is specific to overseas ex-PPRs, rather any ex-PPR that is retained as an IP.
Thanks in advance!
Scott.
Hi Scott
This is a complex area, which I don't know much about, but wouldn't you just pay tax in England under their rules and under the double tax agreement the Australian ATO would not tax you on your overseas properties again?
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
Thanks TerryW, but I don't think it works like that.
England will calculate the tax due according to UK law (allowing me to claim as an expense the interest payments on the ex-PPRs market value), and then Australia will tax me AGAIN (not allowing me to claim as an expence the interest payments beyond the original loan used to purpose the properties). Australia will give me a credit for the tax paid in England.
To put this into context, there is $1.6million between the amount I borrowed for my 2 ex-PPRs in England and their values when I converted them to IPs. England allows me to claim the interest on this full amount as a deduction, while Austraila will not. Assuming an interest rate of 6% (in England), this will cost me about $100k each and every year in lost tax deductions.
I read in a number of ATO publication that a business needs to exist in order for payments of capital back to an individual to be deductible, and publication IT2423 says that the existence of a business is measured (in vague terms) by the number of properties ("…if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business”.). Has anyone come across this and made a case to the ATO based on this?
Scott.
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