I am baffled as I have two accountants giving me different advice. What is your opinion or knowledge of this question.
In dec 2008 a new tax ruling came out and in reference to that what is your opinion.? see TD 2008/27
I have a rental property that I rent out as a holiday home to maximise rent return. I do have higher overheads but clearly still recieve more rent than if an ordinary rental after overheads are taken off. However I am still unable to meet the interest payments and needed to make a redraw on my loan. However my account believes I am unable to claim the interest of this redraw as this is interest on interest. However another my step- brother accountant believes in dec 2008 a new ruling came out making it possible to claim compounding interest.
What do readers think as I then recieved a tax bill that did not consider this interst on interest.I recently read a good book "Saving tax on your investment property" (see link below for reference)
http://www.holisticpage.com.au/SavingTaxOnYourInvestmentProperty_NoelWhittaker%7C9780731813629This book answers your question. I don't remember the exact details, but I'm fairly sure interest on interest IS deductible.
Cheers,
.
P.S I am not an accountant, and my financial knowledge is limited, hence refer to this book or seek professional advice!
I was just reading about this issue this afternoon. You CAN capitalise interest, as long as it isn't part of some other scheme to avoid tax.
Read the TD
http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200827/NAT/ATO/00001The question asked is "Income tax: is the deductibility of compound interest determined according to the same principles as the deductibility of other interest?"
With the answer being "yes".
So if the original loan is deductible the compounding of interest should be deductible/
And, as Dan says, if it is a scheme to avoid tax then the ATO can deny it. Fort he Definition of a scheme see the Hart's case – which was about capitalising interest (they lost because it was set up as a 'scheme').
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
Agreed. The deductibility of an outgoing is wholly dependent on the purpose for which the outgoing was incurred. Therefore, the interest incurred on interest that is attributable to a loan originally taken out for an income producing purpose is generally tax-deductible.
Dan42 is right though – if the sole or dominant purpose of letting the first lot interest be capitalised is to obtain a tax deduction on the second lot of interest, it could be argued that the second lot of interest was incurred for the purpose of obtaining a tax benefit. It follows that in the absence of an income producing purpose, the second lot of interest will not be tax-deductible.
Practically though, it shouldn't be difficult to argue otherwise.
Eddie
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