Forums / Getting Technical / Finance / Using credit card “linked to” LoC to pay IP expenses, then sweeping on a monthly basis – valid ‘nexus’ for tax deduction on LoC?

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  • Profile photo of LowRentRacketLowRentRacket
    Member
    @lowrentracket
    Join Date: 2011
    Post Count: 5

    Hi all,

    this is my first ever post here, and I'm v. happy to be contributing after having gleaned so much great info from the forum over the years.

    I have a quite specific question, concerning the deductibility of interest. I don't expect an 'answer', so much as perhaps other members being able to refer me to pertinent/authoritative sources they may have seen (preferably giving URL links where possible).

    Scenario:

    1. IP, financed with LoC.
    2. Credit Card facility "linked" to LoC.
    3. How so, "linked"? –>
       (a) same provider, sold as an 'investment loan package'
       (b) allows for monthly 'sweep' of credit card balance, debiting to the LoC
    4. Credit Card used 100% exclusivley for IP-related expenses

    Question:

    Is this deductible – ie. the portion of interest expense incurred on the LoC that pertains to the 'swept' balances to pay off the credit card every month? The ultimate purpose of the funds seems clear, but I have picked up in some threads in this forum that there can be considerable nuances around the ATO concept of 'nexus' – ie. the connection between the expenditure and the interest incurred on it. I see two potential 'nexus' issues: (A) the time lag between incurring the expense and subsequently incurring associated interest on the LoC, which will vary due to the once-monthly 'sweep' of funds; and (B) the raw fact of there being an intervening account layer. The credit card and the LoC would have two different account numbers, would be subject to different interest rates, and would generate distinct periodic reporting statements, notwithstanding that the provider is proferring them as two 'linked' elements of a 'package'.

    Can anyone share specific experience with this issue? Seen any published ATO guidance/private rulings that may be relevant?

    Thanks in advance!

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    When you use a credit card you are really borrowing money. So this is a loan. When you pay from the LOC to the credit card you are just refinancing one loan with another.

    I imagine that as long as you only use the credit card for investment expenses then the interest should be deductible. If you start using the card for personal expenses then you would get into a mess.

    Check this with your accountant.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of LowRentRacketLowRentRacket
    Member
    @lowrentracket
    Join Date: 2011
    Post Count: 5

    Cheers @terryw, I look at it this way too, I just thought that I’d put it out there to see whether anyone had run aground on the ‘nexus’ point. With respect to the notion that all I’m doing is a periodic ‘refinancing’, I don’t suppose you could point me to any ATO guidance that explicitly talks about how interest on investment-related debt remains deductible when ‘refinanced’? I’m trying to put together a private ruling application, and this credit card thing will form part of it.

    Of course I acknowledge that nothing you’ve said here or will say, or any pointers you can give to info sources, constitute advice in any way! I realise I will need to check with my own accountant to be sure, I’m just wanting to save a bit of dough by getting him to check what I’ve put together myself, rather than have him put together an accountant-style private ruling from scratch, at accountant hourly rates…

    Thanks again!

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    See the old TR95/25
    Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith
    http://law.ato.gov.au/atolaw/view.htm?locid=%27TXR/TR9525/NAT/ATO%27&PiT=99991231235958

    see especially paragraph 42:

    Borrowing used to repay an existing loan

    42. Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income ( Roberts and Smith ATC at 4388; ATR at 504).

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of LowRentRacketLowRentRacket
    Member
    @lowrentracket
    Join Date: 2011
    Post Count: 5

    Thoroughly helpful, and so quick – thanks @terryw!

    Profile photo of jacqui_03jacqui_03
    Member
    @jacqui_03
    Join Date: 2010
    Post Count: 142

    LowRentRacket, let us know how u go with your accountant and the private ruling. I was considering the same set up to maximize the up to 55 days interest free and award points.

    Cheers,

    jacqui

    Profile photo of LowRentRacketLowRentRacket
    Member
    @lowrentracket
    Join Date: 2011
    Post Count: 5

    Sure thing @jacqui_03. mind you, if my accountant is comfy with it, then I won't necessarily bother with the private ruling….

    cheers

    Profile photo of jacqui_03jacqui_03
    Member
    @jacqui_03
    Join Date: 2010
    Post Count: 142

    Ok good luck!

    I hope it’s ok with the ATO.

    Profile photo of jacqui_03jacqui_03
    Member
    @jacqui_03
    Join Date: 2010
    Post Count: 142

    How did you go with your accountant?

    Profile photo of LowRentRacketLowRentRacket
    Member
    @lowrentracket
    Join Date: 2011
    Post Count: 5

    @jacqui_03 – just wanted to get back to you…I didn’t actually raise with my guy until recently, tax time and all…he was happy with it, using same reference as @terryw had provided above, for what it’s worth. The usual caveats apply of course, namely—seek your own professional advice!

    cheers

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