All Topics / Legal & Accounting / Rent Deposit from IP into PPOR Loan

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  • Profile photo of amsaini15amsaini15
    Participant
    @amsaini15
    Join Date: 2009
    Post Count: 64

    Hi Guys
        I have just bought my 1st IP. I would like to know ATO guidelines in regards to rent deposit. Can I get tenants to deposit rent in my PPOR Loan (non-tax deductable) to reduce everyday balance OR ATO won't allow me to use rent to reduct non-tax deductable debt and take tax deduction on interest accumulated on the IP Loan.

    Thanks
    Aman

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

    You can put your rent where you want to. Best to put it into a 100% offset account attached to your home loan

    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 TrevTrev
    Member
    @trev
    Join Date: 2006
    Post Count: 39

    I have two IPs each with an IO loan.  When I asked my accountant about using the rental payments to pay off my PPOR he suggested that I should make an application to the ATO for a private ruling; the issue for me is that the size of my IO loans could potentially increase while I use the rental income to pay off my home.  I didn't apply for the private ruling, not wanting to shake the hornets nest.
    I would be interested to read other responses to this query.

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

    Do you mean you will not pay the interest on the IO loans, but let them capitalise?

    There is a tax ruling which says capitalised interest retains the character of the main loan.

    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 amsaini15amsaini15
    Participant
    @amsaini15
    Join Date: 2009
    Post Count: 64

    I think you still have to pay interest on an IO loan. Trev, how could the size of your IO loan increase if you still pay your interest .

    Terryw, Is it possible to setup loan in such a way to let Interest capitalize and direct all income and rent into PPOR loan. I asked my accountant and he advised this would not be possible in Australia (Possible in US)

    Thanks

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    amsaini15 wrote:
    I think you still have to pay interest on an IO loan. Trev, how could the size of your IO loan increase if you still pay your interest .

    Terryw, Is it possible to setup loan in such a way to let Interest capitalize and direct all income and rent into PPOR loan. I asked my accountant and he advised this would not be possible in Australia (Possible in US)

    Thanks

    Yes, it is possible in Australia. Some have applied for private rulings and been successful. You just have to be careful that you are not doing it as a scheme to avoid tax.

    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 TrevTrev
    Member
    @trev
    Join Date: 2006
    Post Count: 39

    Hi amsaini, the two properties are negatively geared.  The rental pays off part of the interest payments and the remaining interest debt accumulates. 

    Profile photo of amsaini15amsaini15
    Participant
    @amsaini15
    Join Date: 2009
    Post Count: 64
    Trev wrote:
    Hi amsaini, the two properties are negatively geared.  The rental pays off part of the interest payments and the remaining interest debt accumulates. 

    I wasn't sure if you can let remaining interest debt to accumulate while directing all payments into PPOR loan as ATO will see this as a scheme where we are paying off non-tax deductible debt while letting tax-deductible debt to grow. So if you have this arrangement, without the private ruling, you would not be able to claim deductions on increased interest component of your loan?

    Terryw wrote:
    Yes, it is possible in Australia. Some have applied for private rulings and been successful. You just have to be careful that you are not doing it as a scheme to avoid tax.

    Terryw

    Terryw, I would believe the only purpose of interest capitalisation is to claim more deductions while paying off your PPOR. What can be another reason for this to explain ATO? Thanks

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

    cashflow.

    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

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