Hi,
This is a question with-respect-to appropriate loan structure that won't raise the eyebrows of the ATO.
I currently have a single PPOR and a single IP.
Up until recently, the rental income from the IP was going directly onto the loan against the IP. I have recently changed this so that the rental income now comes directly onto the loan against my PPOR so that it reduces the interest each month.
When interest is applied against the IP, I then withdraw the funds from the loan on the PPOR and pay the funds into the IP loan account.
Is this valid or am I creating a nightmare for myself later with the tax office?
Thx.
i think it should be ok. But you could have set it up better in my opinion.
eg.
IO home loan, with 100% offset account attached.
LOC on the home loan for any spare equity.
IO loan on the IP. (separate bank)What you are doing now is essentially borrowing to pay the interest on the IP. This may be set up so you can tax deduct it.
using the above example. You place all the rent into the offset account. ie, not pay off the loan.
You then use the LOC solely for all IP expenses, council rates, insurance, repairs and lnterest repayments. Each month you only pay the interest on this loan. this should be deductible if you set it up correctly.Overtime you will gradually build up a nice balance in your offset which will save you non-deductible interest. At the same time you will be increasing your deductible interest.
check with your tax advisor as this needs to be set up properly
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
Hi Terry,
I like your idea of having the LOC pay for the IP running costs (including interest of the I/O loan) and thereby increasing your tax deductible LOC liability over time while at the same time the I/O loan for the IP remaining the same balance and the offset balance increasing over time.
Do you recommend using the investor's salary/other income to pay for the interest payable on the LOC or use money from the offset account? If using the offset account money to pay for the LOC interest, the offset account will not increase as quickly (depends on the relative amounts of the rent income versus LOC interest – these 2 competing forces can either increase or decrease the offset balance over time).
Also, gotta be careful of Part IVA, because any loan arrangement with the "dominant purpose" of obtaining a tax benefit will not be favoured by the ATO. Have to argue this arrangement have another dominant purpose other than tax benefits
Do you have to pay CGT if you sell your existing PPOR to a Trust then borrow to buy another PPOR?
No just Stamp Duty.
Richard Taylor | Australia's leading private lender
Excellent I thought that but forgot, There is some rumblings in WA about the govt cancelling stamp duty on houses. That will make things easier to buy a house hopefully.
Yes rumblings in every State.
I remember in June 2000 when we were told GST was going to replace all State duties and taxes but someone forgot to tell the Qld Govt and they still charge it.
Mind you thank god they do or the State will have gone well and trully bust with a capital B.
Richard Taylor | Australia's leading private lender
Edvico_kvn wrote:Hi Terry,I like your idea of having the LOC pay for the IP running costs (including interest of the I/O loan) and thereby increasing your tax deductible LOC liability over time while at the same time the I/O loan for the IP remaining the same balance and the offset balance increasing over time.
Do you recommend using the investor's salary/other income to pay for the interest payable on the LOC or use money from the offset account? If using the offset account money to pay for the LOC interest, the offset account will not increase as quickly (depends on the relative amounts of the rent income versus LOC interest – these 2 competing forces can either increase or decrease the offset balance over time).
Also, gotta be careful of Part IVA, because any loan arrangement with the "dominant purpose" of obtaining a tax benefit will not be favoured by the ATO. Have to argue this arrangement have another dominant purpose other than tax benefits
Hi Kevin
Yes, you have to be careful with Part IVA and have to find a good reason why you are doing it this way. But there is no rule, as far as I know, that says you must use your own funds to pay business expenses.
As for the interest on the LOC, i don't think it matters what you use to pay it, because all the income would be going into the offset account anyway. It may even be possible for this interest to be capitalised anyway.
Need to seek expert advice on this strategy as it is potentially dangerous, but could result in a rapid repayment of your home loan.
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 everyone for your comments.
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