Forum Replies Created
I was just reading about this issue this afternoon. You CAN capitalise interest, as long as it isn't part of some other scheme to avoid tax.
bundyanimal wrote:I would be looking at something like this in a couple of months. I was going to rent out the investment property to myself after it has become vacant, to do some maintenance works to it. I was going to rent it out from my Company (who owns it). As I am a director, is this not allowed.
Is the rental property owned by a company or a SMSF? Do you mean the company is the trustee of the SMSF?
If it's a SMSF trustee company, then no, you can't rent it, but if it's a trading company with no connection to an SMSF, then yes.
The problem occurs because your current IP loan is $160,000, and after re-financing it will be $220,000, plus $55,000 on an LOC. You have borrowed an extra $115,000. The deductibility of interest on this amount is based on the primary use of the funds. If these funds are used to pay down your PPOR, the interest on this portion would not be deductible, regardless of the security offered.
The offset account is an interesting idea, but I'm not sure it would pass the 'primary use' test, because the funds you have borrowed are just sitting in an account reducing the interest on your wife's loan. Even if you paid that amount off your wife's loan, you are just shifting the interest deduction from the lower income earner to the higher income earner. I think you would have a hard time explaining to the ATO why your interest bill was $12,000 one year and $20,000 the next.
The 20% deposit from the LOC would be for NEW IP's, not re-financing a current IP.
The interest deductibility rule is basically, what did you do with the funds, so increasing the debt on your IP's to pay down the debt on your PPOR would not make the extra debt on the IP's deductible.
No, you can't claim the property as your PPOR, and, once sold, the CGT will be calculated at the marginal rates of the beneficiaries of the trust.
The trust will be able to claim interest, council rates etc, provided the tenants (you) pay a market rent.
The issue is you are gaining an advantage – why else would you do it? The govt and ATO are cracking down on loans between companies and shareholders / directors. I would get some solid advice about this from an accountant who specialises in FBT, or a tax lawyer, before proceeding.
Did you ask the mortgage broker if he / she is a registered tax agent, or whether they would give you this advice in writing? Go see a professional, it may cost you a few dollars now, but it may save you if the mortgage broker's tax advice is incorrect.
You get the main residence exemption for your PPOR. Your intention at the time of buying basically has no impact. If you were living in it and you had no other main residence, then any gain should be exempt from CGT.
The full amount would be depreciated, and the insurance money received would be recorded as income. Also, you can write off any undepreciated balance of the old air conditioner.
Hi Lil,
The $600 establishment fee is deductible but over 5 full years, not all in one year.
1. Yes, you have to pro rata the first 6 months, and pay CGT on this portion. You bought the unit knowing that it had a tenant, so you have to pay the CGT.
2. Yes, you have to declare the rental income, but you get to claim the interest, council rates, water rates, etc for the first 6 months also. Depending on your level of borrowing, and the rental yield, this may be a loss.
3.You would be better off to claim the rental costs agains the rental income, as it gives you an immediate deduction, rather than waiting until you sell the property.
Terry's right, you have to live in it first. It's an absence from your main residence, and doesn't apply if you are claiming the main residence exemption for another property.
In your example she would pay CGT on the gain for 6.5 years.
god_of_money wrote:Cattleya,where did you invent such the formula?
You would get exemption up to 6 years, unless you have more than one PPORThe basic formula shows the time it was used as a rental property, generating income, as a percentage of the total ownership period.
In practice the 6 year exemption is not a common occurrence, as most people generally have a PPOR.
Hi Elizabeth,
The investment losses are income losses, not unrealised capital losses. eg, say you have a margin loan to buy shares, and your income from the shares is $3,000, and your interest bill is $5,000. You have a tax-deductible loss of $2,000.
However from (I think) July 1, this $2,000 loss will be added back for Centrelink purposes. This situation will now be the same as negatively geared property, where the losses have been added back for years.
The superannuation is being added back, I think, because people were rorting the system. People were salary sacrificing amounts to avoid child support etc. If you can afford to salary sacrifice super, you don't need government welfare payments.
Hi Nepash,
I've just sent you a PM.
Super funds pay 15% tax. If the property has been held for over 12 months, there is a 1/3 discount, reducing the tax rate to 10% on the capital gain of the property.
jazz77 wrote:Dont you just get back 30% (company tax rate) of the 50% ?
So it really just knocks off 15% of the purchase price, not bad, but not as good as some people think.
Plus the yearly depreciation. So over the life of the asset, you would get the tax deductions as described earlier, assuming no private use reduction.
Hi Mick,
Yes, this is available for anyone operating a business, regardless of the structure they are using. The tax saving is harder to quantify, due to the marginal tax rates. On the above example, at top marginal rate, that tax saving would be $1500 x 46.5%, = $697.50.
To qualify for the 50% reduction, your turnover must be under $2 million.
The interest on your borrowing affects your profits, and your return on investment, but the yield is simply the income / the property cost or value.
Borrowing doesn't affect the rental yield.
The deduction would be claimed in your tax return, along with all of your other deductions for running your business.
