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amsaini15
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@amsaini15
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August 10, 2012 - 1:37 am
Apologises for hijacking this thread My Ques is similar to the one posted by stu82. I have a line of credit on my IP which is under joint name. My and wife's share in the IP is 99/1%. If I borrow from LOC to invest in Shares under her name, Will the interest on the loc be claimed in the same percentage (99/1) or My wife can claim fully as Shares are under her name only. Please advise. Thanks
amsaini15
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@amsaini15
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June 7, 2012 - 11:16 am
Rob G. wrote:
I didn't say anything about capitalising interest. The senior courts are quite happy with this concept based on the facts of numerous cases. Its up to you and your competent adviser to decide on your facts.
I was referring to borrowing from your LOC to pay an expense for which you will receive an amount back later. Whether by reimbursement or recoupment. This amount is deemed to have reduced your deductible borrowing when received even if you don't pay it back into your LOC (see TR 2000/2 examples).
Cheers,
Rob
Oh ok I was thinking you are refering to paying for general expenses from LOC (I am thinking too much about it these days ..Ahhh) . I know Terry has confirmed this is correct setup but I cant find any ruling to say that Part IVA will not apply on such arrangement.
amsaini15
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June 7, 2012 - 2:09 am
Terryw wrote:
With water you are borrowing to pay something that you will be reimbursed for. This is different to rental income.
Terry, by water expenses I mean to say service and sewerage charges which has to be beared by Owners.(Tenants pay usage charges only)
amsaini15
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June 7, 2012 - 12:25 am
Rob G. wrote:
Provided the recoupments from the tenants go directly into the LOC, otherwise you contaminate the loan.
Cheers,
Rob
Rob G, you mean to say if rent from tenants is going in the LOC, we can continue to pay rental exoenses like council, water, insurance,etc and interest payment of the loan from LOC. ATO does not see this as a problem? It may still be capitalizing interest if property is negatively geared.
Whereas if Rent is going in your personal offset but property expenses coming out of LOC, we need a orivate ruling to prove why we want topayoff our PPOR Loan faster? Is that right?
I would really appreciate if a accountant or broker can clarify all these scenerios? Thanks
amsaini15
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@amsaini15
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May 24, 2012 - 4:22 am
Thanks Terry.
     Just one last quick Question. Tenants pay the Water Usage charges of the Water Bill. If I am paying full Water Bill from LOC but getting Usage charges paid back by Tenants later, will that be still fine with ATO?
amsaini15
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@amsaini15
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May 24, 2012 - 3:51 am
Dan42 wrote:
Th ATO are cracking down on this. If the rent from your IP is going to pay other non-deductible debt, then you may have an issue. The ATO would argue that you it's not a a cashflow issue, it's a tax avoidance issue, similar to Hart's case.
The question you would need to answer, is why, if you have a cashflow issue,. is the income from your property not going to pay down your IP debt?
I know, LOC are already under increased scrutiny by ATO and to make up cashflow reasoning to pay IP mortgage from LOC is inviting trouble.
Does anyone know if there is there any timeframe I need to pay back on LOC once I have been using it to pay IP council,water bills from it ? I have an IP loan of 320K and 50K LOC. From tax-deduction perspective, it seems good if in 5-10 years time I have used up all available on LOC and can continuing claiming deduction on 320 +50K for the life of the loan (or get another LOC down the line and use it same way). Wouldn't that be seen as a scheme by ATO?
amsaini15
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@amsaini15
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May 22, 2012 - 11:33 pm
Terry
   Initially I wanted to clarify if eligible for tax deduction when borrowing for general expenses, shares and mortgage. The first two have been confirmed all ok. Thanks to you as well.
But now question is with borrowing to pay for interest? What are the acceptable reasons for ATO to believe that it is not a scheme but a genuine management of cash flow depending upon individual situation. Julia has mentioned couple of them on http://www.bantacs.com.au/QandA/index.php?xq=368 but not sure if anyone has tried them.
My accountant is not that Property savvy to assist with the correct reasoning depending upon my situation. Can anybody assist with obtaining private ruling on this?
amsaini15
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May 22, 2012 - 1:37 pm
Hi All
   I send a general email to ATO as well. Please see the reply I got. Reading from text in red, it seems it is safe to say that interest on loan taken to pay for expenses incurred to maintain property are tax deductible. It does not seems ATO has any problem if the rent is going into PPOR offset instead of LOC.
It will be interesting to see if anyone has tested any of the 7 cases answered by Julia recently on http://www.bantacs.com.au/QandA/index.php?xq=368 to arrange for mortgage payment on IP from LOC. Any thoughts?
"If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you start to use the property for private purposes, you cannot claim any interest expenses you incur after you start using the property for private purposes.
Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes – for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income – you cannot claim the interest after your intention changes.
While the property is rented, or available for rent, you may also claim interest charged on loans taken out:
– to purchase depreciating assets
– for renovations
– for repairs.
Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property. Many of these products permit flexible repayment and redraw facilities. As a consequence, a loan might be obtained to purchase both a rental property and a private car. In cases of this type, the interest on the loan must be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes.
If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and for rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan; that is, you must separate the interest that relates to the rental property from any interest that relates to the private use of the funds.
Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is so whether or not the loan for the new home is secured against the former home.
For further information about rental income and deductions, please refer to the following Tax Office publications:
'Rental Properties' (NAT 1729)
'Guide to Depreciating Assets' (NAT 1996)
'Guide to Capital Gains Tax' (NAT 4151)."
amsaini15
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May 20, 2012 - 11:34 pm
I just spoke to ATO and they advised you cannot claim tax deduction for council,water and other expenses related to investment property and at the same time claim tax deduction on interest on LOC used to borrow for paying these expenses.
Has anybody got more information on this? If you can choose one of them only, I would imagine claiming expenses will be better than just claiming tax deduction on interest.
amsaini15
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May 18, 2012 - 11:08 am
Thanks Terry.
I will also look into Private Ruling to pay mortgage from the LOC.
amsaini15
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May 18, 2012 - 10:08 am
Terry, Do you mean to say the $50K LOC I have setted up along with my IP loan Can be used to pay for investment expenses? Can I keep borrowing from LOC or is there a limit? So all interest charged on LOC is Tax deductible as long as I am not borrowing for private use?
So far my RE has been paying off council and water charges of the rent I am receiving and Mortgage payment has been coming out of my PPOR offset.
amsaini15
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@amsaini15
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October 14, 2011 - 6:26 am
Guys, Apologies for the delay in updating you how I went with the process of change in lender and my 1st impression with the offering from loans.com.au.
– My loan settled in Aug and the whole process was very smooth.
-I can confirm that offset account is a separate offset account and causes no change in the loan account when funds are added/removed from the offset account. I have been with ripoff MyRate before and I know they advertise as offset account but actually provide redraw (same account as loan account). This was my biggest concern earlier but I am happy I went with them. Its not a redraw but 100% offset account.
– With 6.58%, Interest rate locked to RBA, total Discharge fee of $300, I have nothing to loose.
amsaini15
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July 22, 2011 - 4:36 am
I understand what you mean. Ideally, To pay down this loan with offset, re-borrow at time of purchase to have connectivity between borrowing and investment if using offset method. Also keep offset funds separate from personal use offset attached to the PPOR loan in case not refinancing at time of IP purchase. Otherwise go for LOC.
amsaini15
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July 21, 2011 - 9:32 am
Terryw wrote:
If you do decide to use the offset method, then make sure you have no money in that account when you deposit the borrowed funds. If you do then you will be in a greater mess.
This is exactly what I am trying to do. Will keep funds in separate offset accounts so that funds for investment are not mixed with my personal funds in PPOR loan offset.
amsaini15
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July 21, 2011 - 1:10 am
Terryw wrote:
What is the purpose. You cannot borrow for an increase in valuation. You also cannot refinance $1000 you paid into the loan last year – or youcan but the interest won't be deductible.
I think this is dangerous. You shouldn't borrow money and place it in a savings account as that can break the nexus between borrowing and investing. see Domjan's case.
It all sounds very messy.
Terry, Isn’t this what everybody would do to plan for next IP purchase. Refinance, reborrow and setup separate loan account and use funds for IP purchase. I am creating separate home loan account and having funds in offset. Everybody has been suggesting to have offset account and IO structure, So where am I wrong?
Do you mean to say that at time of IP purchase, I would have to pay off this 25k loan from offset and then reborrow to fund IP purchase as we discussed in the other thread? So for interest to be deductible, borrowing has to be done at time of IP purchase to define purpose? If thats the case, I am fine with it. As i have no immidiate plans to buy IP, I have to park funds in offset.
amsaini15
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@amsaini15
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July 21, 2011 - 12:13 am
Terryw wrote:
Amsaini,
Are you saying you want to borrow an extra $25,000 and put it in an offset account?
Terry I will borrow $24K for the increase in valuation and $1K which I have paid into the loan in last 1 Yr. I will create a new account for all funds (25K) on top of my existing loan commitment. Will keep 25K in offset of this account thereby incuring no interest on it until I withdraw this for next PPOR purchase or I guess will need to pay off and reborrow if purchasing next IP.
amsaini15
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@amsaini15
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July 20, 2011 - 11:41 am
Jamie,
Currently I have 3 loan accounts 107K (IO), 95K (P&I) and 45K (IO) (This is for my 1st IP purchase in 2010)
Moving on to fix up the mess I have created earlier, I will combine 107K and 95K loan account into one , will leave 45K one as it is and create a 3rd account with the increase roughly 25K. This will be used for future IP or PPOR purchase. All account will be IO now and offset attached to 202K account (which will keep my extra funds and 25K account with 25K parked in it.
Any suggestions for me? Thanks
amsaini15
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July 20, 2011 - 10:50 am
Thanks a lot Terry. The whole Investor community owe you a lot
That was very precise, to the point advise with a excellent example. I generally dont like/understamd LOCs. So when I will plan to buy IP, I would go with the pay off home loan with the offset, re-borrow upto 80%/90% (depending upon requirement) and use the increase to setup new loan account and use the offset now for deposit on IP. I think I have got it right this time
Now I understand if I would have used $200,000 from offset to pay for IP purchase, I would be paying interest on $1,000,000 but being a original PPOR loan, none would be deductible.
Thanks Terry. Much appreciated.
amsaini15
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July 20, 2011 - 10:27 am
Thanks Michael.. This is bit confusing for the beginners
I was under the impression once money has been paid off into loan (either in P&I loan or into Redraw), I have loss tax deductibility on the amount forever. But now I understand that by refinancing and topping up loan to 80% or 90% LVR (whatever required), we can create new loan account to use for investment purpose. These funds will be combination of re-borrowing paid amount and increase in equity over a period of time. I hope I am correct with my understanding now.
I will setup this loan account with 25K now and as you suggested put this 25K in the offset for this future investment account and not in the PPOR offset.
amsaini15
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July 20, 2011 - 7:47 am
So Terry, to arrange funds for IP purchase, are you suggesting the best possible way is by refinancing existing PPOR and then redraw funds for IP deposit?