Hi all,
We have an investment property where we have paid the loan interest in advance until April 09. The LVR is low and we where wondering whether it is possible to borrow the annual payment due in April 09 against the equity in the property. This way we dont have to come up with the cash flow ourselves! Are there any other considerations (tax / legal / etc) that I should be aware of? Thanks jazamite
Possibly – depending on your income.
You will be capitalising interest – the ATO seems to be fine with this as long as the dominant purpose is not tax minimisation.
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
Thanks Terry. Could you expand on your comments re: income and tax minimisation?
Hi
To get a loan you need to demonstrate serviceability, so with increasing the loan you will have t prove you have the income to service.
There is a section in the tax act called part IVa whereby the ATO can deny a deduction if the scheme had a dominant purpose of reducing tax. There was a case called Harts where they capitalised interest on an investment loan and poured all of their income into the home loan first. The High Court said this was a scheme to get a bigger deduction. However, In the same judgment it was stating that capitalising interest is allowable- you just have to set it up so it doesn't look like a scheme. Even if you have the cash available you may still be able to borrow money to pay interest – businesses do it all the time. Just be careful and run evrything by your accountant.
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
Great post Terry. Well backed up and informative.
That information should come in very handy to all the brokers and borrowers out there that ues this method, or use a 'Cash Flow' Style loan to run parts of their portfolio.
Keep up the good work.
Tmi
Thanks Tmi
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
Thanks for the info. I found an interest post that covers this in some further detail.
http://www.somersoft.com/forums/showthread.php?t=26532&page=4
Of particular interest is the post from the 27/07/06. One would expect that by capitalising interest on a prepay in advance loan would qualify?
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