In May 2010 we sold one of our investment properties and this will result in a capital gains tax event to occur on our upcoming tax returns 2009/2010. We do not have any mortgage for PPOR and all our loans are related to investment properties only.
The question that I have is can I pay the capital gains tax bill from my line of credit (Investment use only) and then legally claim the interest on this amount?
My current accountant has said No, the bill must be paid out of personal savings / profit from the sale of the property, however a fellow property investor said that he had a similar situation 2 years ago and that his accountant said that Yes, you can pay the tax bill from your line of credit and legally claim the interest as it is a result of the investment.
Does anyone know who is right and how I can confirm this without having to call the ATO to get a ruling?
best to check with another accountant
I would ask why you would want to use borrowed funds to pay this?
If you don't need to then pay it from profits.
While I am not a tax agent, my view would be similar to the second accountant above, the debt arose due to an obligation relating to the sale of an IP, there is a connection between use of funds and purpose.I am not sure you can get a definitive ruling except from the ATO via a private ruling.
Good luck
GregHi Cataldop,
If you take a strict interpretation of the tax law, you cannot claim a tax deduction for income tax paid and costs incurred to pay the said amount of tax (ie: if I was to take out a loan to pay tax, the interest component would not be tax deductible). I would agree with the advice you have been given by your accountant.
HOWEVER… if you can prove you are in the business of investing in real estate (what is a business in the eyes of the ATO can be somewhat grey) then you have an argument to say that the amount has been paid from "working capital" which you can legally claim a deduction for. Take for example a farmer who may pay or draw a wage from an overdraft account while waiting for harvest income, interest in this situation is tax deductible to the farmer.
You could try another accountant to get a second opinion but I would say you will get the same response. If you do want to claim try and get an ATO ruling, although these can take a while for the ATO to get back to you. In the situation you claim a deduction from the interest on the tax payable and the ATO investigates and disallows this, the ATO will issue an amended assessment and you will be liable to pay any back taxes plus a"general interest charge" which is around 12% pa on the tax that should have been paid.
One last point, don't fall into the trap of listening to what other people have done. Get the right advice from the right people that is based on your personal situation. I have seen too many people come majorily unstuck by doing what "a mate has done".
It's probably not the response you are looking for but I hope this is of assistance.
Thanks Greg.
The reason I would like to keep the all of profit if possible is so that I can renovate my home PPOR or buy a bigger home without having to take out a mortgage (E.g. Non deductible interest).
Thanks Matt.
I understand your point about "the business of investing in real estate" and as this is a once off and I am currently employed full time and as a result make a greater percentage of my income from a paid salary I think I would be wasting my time trying to prove my point with the ATO. Thanks for your thoughts
I recall reading somewhere that interest borrowed on funds to pay tax is not deductible – i don't have a reference ATM tho.
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
Hi cataldop,
Matt’s right.. if your considered to be in business (more disadvantages than advantages IMO) then you could claim the interest, provided the money you borrow to pay it is indeed from your LOC, and not a separate loan.
CCH Master Tax Guide 16-856:
It has generally been accepted that interest on a loan taken out to pay personal income tax is not deductible under ITAA97 s 8-1 (eg Case V48 88 ATC 380). However, where a business taxpayer uses an overdraft to pay income tax or pays the tax out of a larger loan taken out to meet general business expenses, the ATO will not disallow that part of the interest on the overdraft or loan that is attributable to the payment of tax. Further, the Commissioner accepts that, where a business taxpayer borrows money to pay income tax, the interest incurred on those borrowings is deductible provided the borrowings are connected with the carrying on of the business (Taxation Ruling IT 2582; see also Case 14/98 98 ATC 201). This also applies to a sole trader (ID 2006/269). Partners are not entitled to a deduction for interest on borrowings to pay personal income tax (Taxation Determination TD 2000/24).Thanks Mr 5o1,
My estimated CGT bill is $20 – $25K and based on the feedback I have recieved so far I'm not sure I can pay my tax bill from the LOC because based on what I have read in the past the ATO does not really consider property investing a business unless it is a persons main source of income.
You can always pay from a LOC, but whether the interest on this is deductible is the question.
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
cataldop wrote:Thanks Mr 5o1,My estimated CGT bill is $20 – $25K and based on the feedback I have recieved so far I'm not sure I can pay my tax bill from the LOC because based on what I have read in the past the ATO does not really consider property investing a business unless it is a persons main source of income.
sorry.. i didnt explain very well,
even if you could satisfy the criteria for being “in business” (there’s a number, none of which definitive on its own), its exceedingly likely that you wouldnt want to, given that the disadvantages would outweigh the advantage of the tax deductibility of interest on $25k.
My advice.. cop it on the chin.
I had pretty much already factored in to my calculations at the time of selling that I would be paying some of my profit to the ATO but just wanted to explore my options. Thanks to all of you for your feedback.
You may already be doing this but will be in your favour if you delay lodgement of the return until next year. If you go through a tax agent they will get until mid May 2011 to lodge FY10 returns (they can even apply for extensions until June), will give you some more time to save some $$ or will save you interest. Also if you pay from your LOC technically you will need to apportion interest between deductible / non-deductible components going forward which can be a pain from a paper work perspective.
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