I used a LOC Interest Only (secured against the PPOR) to purchase my first IP. The LOC was used for Capital Costs and Borrowing Expenses:
Capital Costs – Stamp Duty.
Borrwoing Expenses – LMI, Deposit for the IP.Questions:
1) Can Interest on Capital Costs be claimed as a Tax Deduction?
2) Can Interest on Borrowing Expenses be claimed as a Tax Deduction?If the answer to the above questions is "Yes" then for how long can we keep claiming these deductions? Till when can I keep the Capital Costs and Borrowing Expenses on my LOC? When would I have to pay these?
Regards
Yes, you can claim the interest on both costs.
You can claim the expenses as long as you have the LOC, and the IP. There is no set date that they would have to be repaid by.
Is the rent going into the LOC, or are you making any interest / principal payments? The ATO may have an issue if you are not making any payments on the IP, and capitalising interest.
No the rent is going to the offset account linked to the PPOR.
So, if I do recieve a refund as a result of negative gearing, do I put it straight back towards the LOC?
Basically, any outgoing expenses incurrend in a Financial Year (Year 1) have to be paid back or can the expenses be carried over to the next financial year (Year 2)?
At the best you would only want to pay the interest on the LOC. Even better is talking to your accountant about not paying the interest at all and letting it capitalise – must be careful though.
If you can do this you can pay off your PPOR faster (although the ATO doesn't see this as a legitimate reason to capitalise interest)
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
Terryw wrote:At the best you would only want to pay the interest on the LOC. Even better is talking to your accountant about not paying the interest at all and letting it capitalise – must be careful though.If you can do this you can pay off your PPOR faster (although the ATO doesn't see this as a legitimate reason to capitalise interest)
How can you get away with this? My accountant told me you cant.
It has to be for a reason other than for saving tax!
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
OK. Do you have any examples of what that would be?
cashflow would be one.
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
I can understand the Capitalisation of Interest for the "Capital Costs" and the "Borrowing Expenses" from the LOC. This can claimed upto 5 yrs.
However, with all the outgoings for the IP (Water, Rates, etc.) + IP IO deductions coming out of the LOC, I assume that these outgoings would have to be paid back. That way the Outgoings for the next Financial Yr can start getting deducted from the LOC.
Clarification on this would be greatly appreciated.
cheers
AM2778AM,
You misunderstand a bit here.
There are costs which you can claim and then there are interest on money borrowed to pay these costs which can be claimed.
Borrowing costs such as LMI can be claimed over 5 years or the term of the loan, whatever is shorter.
Interest on money borrowed to pay these costs can be claimed at long as it is incurred. If you pay $1000 in rates from the LOC there is no reason to pay this back in year 1. In year 2 you can borrow again and keep paying interest. The only time you would pay to pay down a LOC is after you have sold the property and the borrowings are no longer claimable or if you have paid off your personal debt and have spare cash lying around.
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 Terry.
A follow up to your response:
At some point, the LOC will be getting thinner with all the Outgoings- i.e.IP IO Repayments coming out of LOC. So, I would have to payback some amount in to the LOC to sustain Outgoings from the LOC.
If this is correct, then would it matter when I put in money into the LOC? Beginning of the Financial Yr or the Middle of the Financial Yr? Will this affect the deductibility?
Many thanks
Am,
Do you meant the LOC will slowly be used up and the funds available will be diminishing?
That would be the case. But even then there would be no reason to pay down the LOC. You would just want to pay the interest each month. If you do start paying it down you would be diverting cash which you could otherwise use to pay down personal debt = more tax payable.
Since interest is charged monthly i don't see any difference in paying at the end of the fin year or at the begining
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
Terryw wrote:Am,Do you meant the LOC will slowly be used up and the funds available will be diminishing?
That would be the case. But even then there would be no reason to pay down the LOC. You would just want to pay the interest each month. If you do start paying it down you would be diverting cash which you could otherwise use to pay down personal debt = more tax payable.
Since interest is charged monthly i don't see any difference in paying at the end of the fin year or at the begining
Thanks Terry.
I am paying the interest each month for the LOC. However, the funds are dimnishing in the LOC as a result of the IP IO Repayments and other outgoings.
My concern is that the LOC will keep diminishing upt to a point where it will be necessary to make additional repayments in to LOC to sustain the IP Repayments.Is there a strategy to refill the LOC not to allow it to diminish up to a certain limit?
Thanks in advance.
Do you mean you are taking the IP repayments from the LOC?
Have you had advice on this or taken out a private ruling?
If you keep going the limit will be hit on the LOC, then you will hopefully have paid down your PPOR loan by an equal or higher amount and may be able to get a new LOC or increase the existing one.
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
Terryw wrote:Do you mean you are taking the IP repayments from the LOC?Have you had advice on this or taken out a private ruling?
If you keep going the limit will be hit on the LOC, then you will hopefully have paid down your PPOR loan by an equal or higher amount and may be able to get a new LOC or increase the existing one.
yes thats correct. IP Repayments are coming out from the LOC.
According to my Accountant, this is allright and is allowed by the ATO.
Rental income goes into the offset. The LOC pays all the IP expenses including interest only loan on the IP.
So hence my question, is there a level that needs to be maintained in the LOC to not allow it to diminish?What is your reason for using the LOC to pay interest on your investment loan?
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
Terryw wrote:What is your reason for using the LOC to pay interest on your investment loan?Cash Flow Management for one, offset to reduce repayments in to the PPOR. Also, if not from LOC, then from where should the IP repayments come out ?
Thanks
You will have to be very careful as the ATO could deny deductibility.
have you seen TD 2011/D8
http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2011D8%2FNAT%2FATO%2F00001%22Terryw | 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
Terryw wrote:You will have to be very careful as the ATO could deny deductibility.have you seen TD 2011/D8
http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2011D8%2FNAT%2FATO%2F00001%22Thanks Terry. I will forward this ruling to my accountant.
However, I think what I'm trying to get at is:
If the IP IO Loan Repayments are coming out of LOC and all the outgoings on the IP are also coming out from the LOC, then
How do I manage the diminishing LOC?
LOC at some point has to be re-fliled. Does this mean that the Rent from the IP has to be put in to the LOC?cheers
AMOnce the LOC runs out it is up to you to keep paying the interest on it. You would have 2 choices:
1. use cash
2. use further borrowingsCash could be wages and rent or savings in your offset.
further borrowings could be an increased LOC or a new LOC.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
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