Forums / Property Investing / Help Needed! / LOC to pay IP loan interest

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  • Profile photo of cheersycheersy
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    @cheersy
    Join Date: 2010
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    Hi All
    I have read conflicting opinion re the tax ruling on the following scenario.
    Rent from IP goes into PPOR loan or offset account. Interest on IP loan and other expenses is paid from LOC.
    Is this ok with ATO?
    Cheersy

    Profile photo of TerrywTerryw
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    @terryw
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    depends how it is set up.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of itsandrewitsandrew
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    @itsandrew
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    Hi Terry,

    Do you just mean that the LOC is used exclusively for investment and is not being diluted by nondeductible reborrowing?

    Andrew

    itsandrew

    Go as far as you can see and you will see further.

    Profile photo of TerrywTerryw
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    No, there is more to it than that. You must make sure it doesn't look like a scheme to reduce tax. Best to get a private ruling i think.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of itsandrewitsandrew
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    Thanks Terry.  Interesting point.  I'd be thinking more about my cashflow than a tax reduction scheme (although it is good to pay less tax if you can).  How routine (and expensive) are private rulings?  I'd never heard of them before I came to this site.

    Andrew

    itsandrew

    Go as far as you can see and you will see further.

    Profile photo of TerrywTerryw
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    @terryw
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    Probably would cost you around $500. see bantacs.com.au they do them for this – and recently had one rejected.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of cheersycheersy
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    @cheersy
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    Is anybody doing this and how did you structure it so it doesn’t look like you’re just trying to avoid tax? Would appreciate any thoughts.
    Cheersy

    Profile photo of jacqui_03jacqui_03
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    @jacqui_03
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    Hey Terry,

    Do you know why it was rejected? Do you recommend this type of debt recycling for everyone that has non deductible home loan debt? My only worry would be your really relying on capital growth on your IP…?

    Do you know if the ATO would allow it if you were putting rents/wages into a linked offset account on your home loan rather than repaying directly on loan or LOC?

    Jacqui

    Profile photo of TerrywTerryw
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    @terryw
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    I haven't seen the private ruling, so not sure why it was rejected but think it was due to the LOC being secured against the same home as the main loan. So this made it look too much like the scheme in the Harts case.

    I would still recomend trying to set up a debt recyling strategy – just do it property so that it is not a scheme. Best to pay for some advice to be safe.

    You are not really relying on captal growth on the IP – unless you only have limited euqity I guess. Overall your loan levels should remain the same. You non deductible debt will be reducing at the same rate as the deductible is increasing.

    There is nothing wrong with putting wages and rents into an offset account. This is what you should be doing, otherwise you will end up with a mess. The question is should you be borrowing from the LOC to pay the interest on the investment loans and should you bepaying the interest on the LOC or letting it capitalise?

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of jacqui_03jacqui_03
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    Thanks for your help Terry. I will look into it further to see if it could work for me.

    Jacqui

    Profile photo of Garry MacGarry Mac
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    @garry-mac
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    Hi Jacqui & Cheersy

    This strategy can be a very good one, however Terry’s advice is spot-on…you need to seek professional advice.
    Some general comments include:
    * you need to ensure your primary purpose is NOT to gain a tax advantage
    * the interest will only be deductible if the original interest is deductible
    * you require 3 loans: Home Loan, Rental Property Loan and Line Of Credit (LOC)
    * rental property loan should be interest only
    * interest and all other costs are paid from the LOC
    * all rental income to be paid into the home loan
    * loans must not be linked, ie they must be separate accounts
    * beware of financial institutions offering these types of loan products – could compromise the dominant purpose
    * nexus is critical (eg don’t use LOC for other purposes)

    This is an intricate area of property investing and needs to be set-up correctly. SEEK PROFESSIONAL ADVICE!!

    Trust this helps.

    Garry

    Profile photo of cheersycheersy
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    Thanks Garry, off to see a Property Accountant soon, hopefully he will be able to help. Thank you (and Terry) for the tips.

    Profile photo of Garry MacGarry Mac
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    You’re welcome cheersy. Hopefully you know a good accountant…let me know if don’t. Good luck!

    Profile photo of niffnuffniffnuff
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    Sorry to Hijack the thread but do you know of any good independant accountants on the Nth end of the Gold Coast garry??

    Profile photo of jacqui_03jacqui_03
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    @jacqui_03
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    Hi Garry,

    When you say must not be linked do you mean they have to be separate loan facilities or not crossed collaterised?

    Eg. I have homeloan with LOC both with the same security but have IO investment loan another bank? Would that be suitable if I applied for a ruling?

    Can the wages/rent just credit the home loan offset account and not get directly paid onto the loan? Or would the ATO not like that as you are technically not reducing the principal only saving on interest?

    Thanks,

    Jacqui

    Profile photo of jacqui_03jacqui_03
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    Sorry that was meant to read home loan AND LOC for investment purposes against the same security

    Profile photo of Garry MacGarry Mac
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    niffnuff wrote:
    Sorry to Hijack the thread but do you know of any good independant accountants on the Nth end of the Gold Coast garry??

    Hi niffnuff
    I do know a few accountants on the Gold Coast, however I’m not confident in terms of their experience/knowledge. The organisation I would suggest is Chan & Naylor in Fortitude Valley Phone 07 3252 8777. I’ve had dealings with them in Sydney and they are very professional.

    Cheers
    Garry

    Profile photo of Garry MacGarry Mac
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    jacqui_03 wrote:
    Hi Garry,

    When you say must not be linked do you mean they have to be separate loan facilities or not crossed collaterised?

    Eg. I have homeloan with LOC both with the same security but have IO investment loan another bank? Would that be suitable if I applied for a ruling?

    Can the wages/rent just credit the home loan offset account and not get directly paid onto the loan? Or would the ATO not like that as you are technically not reducing the principal only saving on interest?

    Thanks,

    Jacqui

    Hi Jacqui
    By ‘linked’ I mean they must be totally separate loans. While you can certainly apply for a private ruling based on your situation, this strategy MUST be established ‘with all the ‘t’s crossed and ‘i’s dotted so I would strongly suggest speaking with someone who knows exactly how to do it. They would also be able to answer your questions (which I’m reluctant to do as there are tax/legal issues involved).

    If you’re looking for someone in the know, contact Jenna Ford from Chan & Naylor Finance (Chan & Naylor are accountants as well as finance brokers) Ph: 02 9391 5008 Web: http://www.cnfinance.com.au. Jenna is based in Sydney BUT that will not be a problem. Let Jenna know I said to call – she will certainly look after you. By the way, I receive no financial benefit from Chan & Naylor.

    All the best.
    Garry

    Profile photo of Richard TaylorRichard Taylor
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    niffnuff

    Pesonally i wouldnt have any dramas with Chan & Naylor but would certainly get a quote from them before you give them the green light.

    For an Accountant on the Gold Coast feel free to contact my Accountant who is an expert on property structures and based in Southport.

    His name is Steve Hodgkinson and he is a partner at the Gold Business Group.
    Contact number is 07 5532 2855.

    Steve is a forum member and has helped hundreds of my forum clients.

    Tell him i sent you as most good property accountants are not taking on new clients especially this time of year.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of CatalystCatalyst
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    @catalyst
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    I have one small LOC that pays everything.

    The interest goes out of this into all the loans. All the bills are paid out of this same LOC. All the rents go into this LOC. Easier for the accountant. He only needs to look at this one LOC. The interest on this LOC comes out of itself.

    Hopefully soon it will start going down and paying itself off.

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