Hi all,
This is my first posting and I apologise if this question has been answered in the past.I recently signed a contract to buy a block of land to build a rental property on it(factory built home)
On my PPoR I have over 500k in the MISA/offset account which means I have been paying no interest over the last year or two.
If I pay for the Land and the construction cost of the new house by redrawing money from MISA account will I be able to claim the interest as tax deductible.
My accountant says I need to discharge my mortgage and apply for a new loan , apart from the cost of new loan application I have been told I wont be able to get as good a loan deal that I currently enjoy.
My question is if I can prove to the ATO that prior to purchasing the IP I was paying no interest at all and after buying it I am paying X amount, why should they care how the finance is organised? My accountant says I am being too logical and ATO doesn't work like that!! Is he right?
MrFish
PS my Accountant also thinks that Interest/rates/expenses paid prior to having the house available for rental is not tax deductible and are added to the base cost.The term redraw refers to a mortgage so if you redraw – you borrow back money that has been over paid off your mortgage.
Taking money out of your MISA account is like taking money out of a savings account.
So you start to pay interest on your PPOR purpose loan. So the loan is not for a investment purpose.
So the loan cannot be deemed as being an investment loan.
The purpose of the loan has to have a direct nexus with the income producing expense incurred.
Nexus means direct relationship it is the term used in the ITAA 1997 tax legislation.Rather better idea might be to take out just enough out of the MISA account to cover the deposit and purchase costs for the investment property with another mortgage for the rest of the money needed.
Then you can claim say 80% of the new mortgage interest costs ( if LVR is 80%) as an investment property expense.
You then have a small interest cost on the PPOR that you would want to pay off ASAP the 20% into the MISA to build it up to over 500k again.
Be aware if the PPOR loan is <500 k the MISA cant' be 500k as it has to not exceed the loan amount.The interest you are saving from the PPOR is non tax deductible interest.
A line of credit loan usually can't be done on a linked offset mortgage.
No, the interest will not be deductible because you are essentially paying cash for the property, not borrowing.
The ATO works on the legal principle that interest on money borrowed to purchase income producing assets is deductible.What you could do is to deposit the money into your loan and then redraw it out to borrow – but even this is less than ideal. I wouldn't be worrying about saving a few hundred in fees or interest when you could be jeopardising tens of thousands in potential deductions.
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
Sounds like a touch of CBA itis.
As the boys have pointed out NO the interest will not be deductible as it fails the "Purpose Test".
Also watch out with the MISA Account as it is not a fully transactional offset and may prove useless if you have regular transactions going in an out of the account through the construction phase.
Richard Taylor | Australia's leading private lender
Honestly don't know why the MISA exists these days, I really feels like a 1990's product! CBA should really just bin it and catch up with the rest of the world.
I agree… do things properly, it's not worth the hassle in the future if you get something wrong.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
