Tax Deductions on Interest

You have wandered down the wrong track just a little.

It is simpler than what you have described.

At the end of the FY the IP will have made a profit or a loss (pos or neg geared).

You simply add that profit or that loss to your taxable income and pay the tax on the end figure.

Sometimes the loss may drop you to a lower tax bracket or a profit may lift you to a higher one. In both cases you will pay a proportion of tax at both higher and lower rates.

If you are two people then you each use 50% of the profit/loss. Assuming 50% is the agreed split of the asset.

Hope this helps.

Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985

Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

hey kuade,

you might be better off having the “negatively geared property” in you name. You’ll be on a much higher tax rate. Means you’ll get to claim a bigger percentage on the deductions. (well thats my understanding of it anyway) and if it was a pos geared investment you’d want it in your wifes name as she’ll pay less tax on the money you make.

As for the tax calc. You’ve made a loss of $13 602 from the IP. So im guessing that’ll be your deduction mate. But it depends what percentage of the IP you own. Dont forget depreciation as well, its a good interest free loan in a way.

ive decided to try and be abit more helpful [biggrin]

providing the IP is split 50/50 with your wife.

your income is 75000- tax to be paid on 06/07 tax rates is $17,850.
but the IP will bring down ur taxable income to $68 199 ($13602/2)

plus depreciation needs to be added into the equation mate.
and it depends on your tax witheld.

Kuade,

If your employer allows salary packaging, you can salary package the expenses effectively claiming all cash deductions in your name, and then the remaining profit is split 50/50

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http://www.guardianaccounting.com

Kuade,

There is no FBT, because the salary package is “otherwise deductible”. So no effect on anything except your tax, and it may also help with avoiding the medicare surcharge if you don’t have health insurance.

[email protected]
http://www.guardianaccounting.com

Here’s a very simple guide to calculate if you can afford the property or not. I call it my one minute cashflow formula. It will give you a ball park figure on how negative (or maybe positive) your cashflow will be, before the tax returns are considered. If you are factoring in the tax return as part of your overall return then you are probably trying to buy the wrong property. The tax return is the icing on the cake as far as I’m concerned. Assume the property will be cashflow negative, but this formula will give you the degree of negative and you can decide if you can carry that drain on your funds each week/month.
Calculate per annum-
1. purchase price + 5-6% for purchase costs = total purchase price.
2. total interest on loan + 1/2% more for ‘surprises’. If you are using a p&i loan this figure will be higher. I work on interest only. % of finance for purchase will affect the figure also.
3. total amount of rent.
4. deduct 20% of rent for all outgoings such as repairs, management, rates insurance, vacancy. etc.
5. deduct total interest on loan from rent.
You are left with a net cashflow figure. For example:
$100k property purchase price.
+ 6% costs = $106k (will work in most areas of Aus).
interest on 100% finance of $106k = 6.5 % (+ .5%) = 7%.
total interest on loan = $7,420 p.a
total rent @ $120 p/w = $6,240 p.a
less 20% for outgoings = $1248 p.a
less interest on loan.
figure is:
rent: $6,240
– interest 7,420
– outgoings 1,248
nett cashflow = -$2,428 p.a ($46 per week)
These figures over-estimate the expenses, and don’t take into account depreciation.
Are you willing to shoulder a negative of $46 per week before tax return? This assumes 100% finance on purchase.
If you pay a 20% cash deposit, the nett figure is -$1028 p.a ($19 per week).
Even a conservative ball-park estimate of tax return of $1,040 ($20 per week) would assume this property is now cashflow positive with a 20% cash deposit. My guess is the tax return would be considerably higher.

Cheers,
Marc.
[email protected]

Hello Paul

On browsing through some of the back threads/posts I found yours unanswered. Even though I am not Marc I will give it a shot. [smiling]

Yes the 20% Marc uses will include all expenses except the interest on the loan.

In a residential IP the tenant pays electricity and water usage.
The other charges on your water bill are charged to the owner.

The exception to this is if you have 2 different tenants on your property (e.g house with Granny accommodation rented seperately) and there is only one water meter. In this case the owner has the pleasure of paying the usage bill as well.

Hope this helps
Elka