Forum Replies Created
Fair call.
I've already taken steps to contact these professionals. Have found a tax accountant who can advise on how I can safely restore tax deductibility with the IP loan's surplus being put in the IP loan's offset account.
Thank you very much for your help, Terry – will look for a solicitor who understands these matters well.
Found this advice from BANTACS that I believe should answer my question above:
"The basic rule is that the interest on a loan is only tax deductible when the money was used to buy an income producing asset or to refinance a loan that was used to buy an income producing asset."
Looks like the answer is YES – I can sell my PPOR to my wife for zero consideration, pay no CGT or stamp duty for the transfer, 'refinance' the investment loan secured against PPOR to include both our names, yet still claim as deductible 100% of the interest incurred by this loan as the original purpose (to purchase IP1 in my name only) remains unchanged.
Will run this by a tax accountant, mortgage broker and conveyancer shortly.
Thanks again for clarifying this.
I found some corroborating comments from tax accountants BANTACS:
"Interest on a loan is tax deductible when the money borrowed is used for income producing purposes. Case
J54 (1958) 9 TBRD established the principle that interest is apportioned according to the ownership of the
investment purchased. Accordingly, a couple can borrow money jointly for an investment that is held in just
one name. The whole amount of the interest attributable to the investment will be deductible to the partner in
whose name the investment is held."
Hence I could transfer my PPOR into my wife's name, 'refinance' the IP1 loan secured against PPOR such that both our names are on the mortgage, yet still claim 100% of the interest on this loan, as its original purpose was to purchase IP1.
My question then becomes this:
Would the original loan purpose be retained/carry over even after the loan is 'refinanced' into both our names? Would there be any reason for the ATO to deny 100% interest deductibility on the basis that the new 'refinanced' loan no longer retains its original purpose…?
Zanshibui wrote:But if I follow the money I don't see the profits that you are trying to save tax on…The house is currently your PPOR – no income
when you rent it with your 80% loan still owing – not likely much income on this one
if you continue to refinance to fund deposits on IP2 and IP3 as you have stated even less likely much income on this one
Would all of this effort and extra expense really lead to reduced tax?
Say in 3 years' time we rent my PPOR out at 20k/yr. Sure, I still have an 80% loan owing against this property, but the 20k/yr rent income cannot be offset against the loan, because the loan purpose was to purchase IP1. Hence, I still end up losing my marginal 34% on the 20k/yr. However, if the PPOR were transferred to my non-working wife earlier, she gets the full untaxed 20k/yr.
Ok we definitely dont want to go down the mixed loan path… I take it what I need to do then is clearly split that IP loan into one 170k investment portion, and another 100k private portion… then fully pay back the 100k private portion. When I'm ready I can then take out that 100k as a new investment loan towards the deposit for another IP.
I just got off the phone to the ATO. I explained my question and was directed to a lady who answered that as long as the funds in the IP loan's offset account is used exclusively for investment purposes such as shares or deposit towards another IP, interest paid on the loan is fully tax deductible… Terry is this perhaps what you meant by the ATO not "strictly" enforcing tax law for these sorts of cases?
Happily (in a sea of despair), OSR does allow this. It is not allowed for the FHOG, but is for the first home owner zero stamp duty concession.
Top call centre question #1 listed on OSR website:
Q: "A husband and wife purchase a home to live in as their principal place of residence. The property is valued at $490,000. The husband has not owned residential land previously; however, his wife has owned numerous properties. Can the husband claim the first home concession?"
A: "Yes. The husband can claim the first home concession, and will need to complete a Form D2.1."
I know of the existing exemption when adding a spouse to title of main residence as you rightly point out, but this is a separate concession that applies here.
The QLD govt brought in a zero stamp duty concession for first home owners' purchase of a main residence effective from 21 Sept 2012.
This is the equity loan I've taken out over the PPOR currently in my name. The loan was at 80% LVR of the PPOR value and was fully directed to purchase the IP (which I'm having the offset dramas with).
If I transferred the property to my wife's name or go tenants-in-common with her, then that would mean the loan would have to be refinanced. If her name is added to the loan after refinance, doesn't that mean that I can only claim 50% of the loan interest as deductible?
Tom,
My understanding is that if my wife who is not working and does not derive an income is on the mortgage, I can only claim 50% of the loan interest as deductible.
Happy to be corrected if wrong.
A big mistake on my part – I made the call after reading a number of posts including the response by Rolf Latham in this thread: http://somersoft.com/forums/showthread.php?t=69416
I'm hoping I can reverse this error by repaying the surplus in offset back into the loan account, then redrawing in future for new investments…?
Terryw wrote:This is also a mistake – parking money into an offset account.. You have borrowed money and placed into a savings account. This is not a commercial transaction and therefore the interest is no longer deductible. Later when you go and use the funds for investing the interest won't be claimable because the funds that you will be using are no longer borrowed.
Oh dear… error upon error… thanks for bringing this to my attention, Tom and Terry. This looks bad. I was intending to use the offset account attached to the IP to receive rent and pay loan interest/body corp/council/repairs expenses, capitalising the difference. Certainly am not planning on placing wages or other monies not related to the IP into the offset (and haven't done so).
After reading a number of forum posts, particularly Rolf Latham's response in this somersoft thread: http://somersoft.com/forums/showthread.php?t=69416 , I had become quite sure that the surplus funds invested in "cash" in the offset account would be interest-deductible should I use it to purchase shares, etc. But if deductibility of borrowings is acceptable to the ATO only if the original transaction was a commercial one, I haven't got a defense.
So to untangle myself from this added blunder, would this approach work to restore complete tax-deductibility?:
* repay the 100k surplus in the offset back into the IP loan (270k) reducing it to 170k, whose interest is fully tax deductible
* when purchasing another IP in future, organise for a loan split to cover the deposit + sundries (e.g. 70k) for the new IP, which would be clearly for investment purpose this time
Thanks Terry.
The key benefit that we would derive from the PPOR being fully owned by my wife is that when it becomes an IP she will be able to collect about 15k of rent which being under the 20.5k pa effective tax free threshold will mean she pays no tax on the income. So her taking out a loan to buy it off me at the full market value wont really help as she doesn't have an income against which to negatively gear. I was thinking of selling it to her at no consideration. The purchase would have zero stamp duty (exempt for first home owners in QLD – my wife qualifies as per OSR website) and zero CGT (because it is the PPOR).
All the lenders I have spoken with have said that if hers is the only name on the title, she must be on the mortgage as well. Perhaps the solution is for her to buy it from me under some kind of tenants-in-common arrangement where she owns 90% and I own 10%…? Perhaps that way she can provide a security guarantee for the loan which would be 100% in my name only?
I really appreciate the advice I'm receiving.
