All Topics / Help Needed! / Capitalized Interest?? and the system you use to pay off loans quicker….

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  • Profile photo of keenan031keenan031
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    @keenan031
    Join Date: 2013
    Post Count: 5

    Hi,

    Ive recently read the book 0 to 130 properties in 3.5yrs and found it very informative. I have not yet started to invest nor have a bought my first home yet, but I do have a fair sum of cash saved from working offshore. Ive been trying to educate myself in the going ons on how to invest in property with the goal of becoming financially free and came across a system used by a firm I wont mention on this site but wanted to get your insight or opinion on.

    The system involves I think for what Im trying to understand is its something to do with capitalizing interest on the IO loan on an investment property and directing all cash flow from it and other income to pay off say for eg your PPoR really quickly that has been set up after with a LOC….in essence reducing your non decutable debt??

    It seems that you can then use the capital and security against what you have already bought to then purchase another IP with no deposit maybe…. lets say you now have 2 or 3 IPs and all the funds are paying off the first house and then the second and third etc get paid off completely while still growing your property portfolio. You could then have the option to go into shares or find property that with give you passive income to speed the process up…

    I hope your able to follow what Im trying to get at and ask….If you know the system Im trying to explain as im still wrapping my head around it, are you able to shed some light into exactly what Im trying to say and what your thoughts are on such a system….

    Thank you in advance

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Yes, it is capitalising interest. This involves borrowing to pay investment property interest and diverting the rental income to pay off your non deductible debt.

    ATO will likely disallow this if you are doing it with the dominant purpose of a tax advantage. See the

    TD 2012/1

    Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Determination?

    http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20121%2FNAT%2FATO%2F00001%22 from 20

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

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

    Profile photo of keenan031keenan031
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    @keenan031
    Join Date: 2013
    Post Count: 5

    Hi Terryw, Thanks for you post. I notice your name and have actually just finished reading the threads on the invested.com.au forum that you also posted on. 

    Is there anyone else that has anything further to add on this strategy or dare I say scheme? :)

    The company which again I wont mention on here seems to do it all legit, but as Terryw pointed out…..it has confused me some what. Thoughts?

    Thanks again

    Profile photo of Mark CoburnMark Coburn
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    @mark-coburn
    Join Date: 2006
    Post Count: 181

    TerryW has nailed it on the head with an excellent reference.

    You may get away with it for a while, when the ATO works out what's going on with your tax returns they will inflict pain.  As you sign the tax returns, the pain will be yours and not the company with the "bright idea" that told you it was ok.

    Mark Coburn | Coburn & Co - Investment Advisors & Buyer's Agents
    http://coburnandco.com.au
    Email Me | Phone Me

    |Ph: 0405 243 547 | Property Investment Advisors |Mortgage Brokers|

    Profile photo of Alistair PerryAlistair Perry
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    @aperry
    Join Date: 2004
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    My understanding of the legislation is that you can capitalise rental losses s there is no requirement to top up cashflow from outside an individual investment but, as Terry stated, you can not have a particular structure that's only purpose is tax reduction. It would be pretty difficult to justify how directing all income from a property to pay down a non deductable debt would be for any purpose but minimising tax. You shouldn't trust anybody but a tax accountant on issues such as this.

    Profile photo of trickeymickeytrickeymickey
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    @trickeymickey
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    I've often wondered about the title of that book and dismissed it as being too good to be true. If you read the ATO ruling, it says that whilst each case must be judged separately, if a reasonable person thinks a tax advantage has been obtained, then they won't allow you to do it. Did the book say anything about that ruling keenan031?

    Profile photo of keenan031keenan031
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    @keenan031
    Join Date: 2013
    Post Count: 5

    Trickeymickey,

    The system that I was enquiring about is NOT out of the book. It is how a particular property services company acquires IPs for your portfolio…..or as far as I am aware at this stage.

    I found the book to be a good read.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    You might also want to look at

    TD 2008/27

    http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200827/NAT/ATO/00001

    The principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest

    PBR 69725

    PBR 78123

    PBR 94265

    PBR 81797

    PBR 93707

    PBR 94313

    PBR 93035

    PBR 1011345133229

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

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

    Profile photo of TerrywTerryw
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    @terryw
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    keenan031 wrote:
    Trickeymickey,

    The system that I was enquiring about is NOT out of the book. It is how a particular property services company acquires IPs for your portfolio…..or as far as I am aware at this stage.

    I found the book to be a good read.

    If you are talking about that company (C….) then I believe they are not tax advisors and don’t advise, but their method involves capitalising interest, but not claiming the interest on the capitalised portion.

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

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

    Profile photo of keenan031keenan031
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    @keenan031
    Join Date: 2013
    Post Count: 5

    [/quote] If you are talking about that company (C….) then I believe they are not tax advisors and don't advise, but their method involves capitalising interest, but not claiming the interest on the capitalised portion.[/quote]

    Terryw….yes that's the one I'm on about. Does this mean that they do it in a legit way? 

    I have substantial savings and this was the reason for my initial enquiry…..I want to be able to over time (hopefully) … use property to create financial freedom and wanted to know the thoughts on this way of doing business. 

    Profile photo of TerrywTerryw
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    @terryw
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    keenan031 wrote:

    If you are talking about that company (C….) then I believe they are not tax advisors and don't advise, but their method involves capitalising interest, but not claiming the interest on the capitalised portion.[/quote]

    Terryw….yes that's the one I'm on about. Does this mean that they do it in a legit way? 

    I have substantial savings and this was the reason for my initial enquiry…..I want to be able to over time (hopefully) … use property to create financial freedom and wanted to know the thoughts on this way of doing business. 

    [/quote]

    Hi Keenan

    I imagine they would be doing things properly. but I am not sure of the details . I think they refer people to Bantacs for the tax side and Bantacs are legit.

    If you have substantial savings there are other strategies to consider as well for added tax and asset protection.

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

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

    Profile photo of keenan031keenan031
    Member
    @keenan031
    Join Date: 2013
    Post Count: 5

    I assumed that to still be running they would have to be legit….the website makes it look so easy but goes against most stuff I've read of late. 

    Will need to seek professional help I guess to see what is best for my situation. I just wish I knew where to start haha…

    Thanks for your input Terry

    Profile photo of fxdaemonfxdaemon
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    @fxdaemon
    Join Date: 2013
    Post Count: 114

    Hi tax experts,

    I’ve been recently challenged with this ruling by accountant when I describe what I plan to do to provide temporary cash flow relief.

    My plan is NOT to compound interest but the following:

    1. Organise a LOC against the IP itself when it has built enough equity
    2. All rental income of IP goes to PPOR loan offset account
    3. All IP loan interest comes out of PPOR loan offset account
    4. All other misc expenses related to IP (council rate, insurance, water rate, accounting fee, repair, maintenance, agent fee, etc)
    to be funded by LOC. Every month LOC interest only is paid for from PPOR loan offset account
    5. At end of each FY -OR- when- LOC limit is reached, full balance be paid off from PPOR loan offset account
    6. Repeat above

    In none of the step above, I compound interest on interest with sole intent to pay down PPOR as I am still paying for the short fall
    between gross rent and interest.

    But I was told that it may be deemed illegal and bordering breach of TD 2012/1.

    I dont understand but disagree as I am only deferring expense payment until as late as EOFY then reset entire LOC balance to 0 so immediately I can claim deductible from tax return.

    Is there a problem with above ?
    Do I need a new accountant ? :-)

    Thanks,
    FXD

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