- mortgagedetective wrote:The ATO's position is that you don't need to have a separate loan account so long as you clearly apportion the interest in the LoC (or any other loan account for that matter) based on what the principle balances were used for.
Mortgagedetective what part of "it's still 50% investment and 50% private" didn't you understand???
You're way off the mark I'm afraid. I'm all about getting rid of the private part of the debt, nothing more. You can't do that unless you pay out the entire principal when it's 50/50 investment/private.Sorry for the confusion StumpCam,
It probably relates to the notion that the portions are fixed for time immemorial which is incorrect. Your post then extended this concept to the idea that the entire principle must be repaid to change the apportionment, which is also incorrect.
You can pay down the private debt independent of the investment debt regardless of whether it is in a single LoC or multiples, or a single SVR etc.
i.e. the 50/50 applied at the time of the switch, however if you received a lump sum of say $100,000 (and I hope you do!), providing that didn't come from the actual IP, your accountant/bookkeeper can still assign it to paying out the personal debt over the investment debt, so the apportionment changes to say $100K personal to $200K investment i.e. 2/3 investment, remainder personal.
There's a little bit of grey around interest savings generated by rental receipts for the IP, but that is a relatively minor thing that the bookkeeper can clean up (especially easy in this day and age of .xls bank statement downloads)
Once you get to the point of LoC with $200,000 drawn down, you can reduce the limit and create a new split if you really want to.
Again, separation only simplifies the bookkeeper/accountant task, but only by a little bit when dealing with neat investment portion of $200K. A good accountant/bookkeeper should be able to manage this quite easily.
I hope this helps.
Thanks for that Michael. I've always been given that impression by my accountant, ie that everything has to be proportional. I would certainly like to be able to just kill the private half. Perhaps when I bring my shares back out of super it would be appropriate to apply that capital back to the half that was used to fund the shares originally. Sounds like I need a new accountant.
I know how to apportion private/investment interest; I've written my own database program to do that on a daily basis. I've also used it for my children who have been dipping into my private LOC for years. I apportion interest to each of them. Effectively I spoon feed my accountant who charges me a fair bit just to essentially (with a few minor tweaks of depreciations) transfer my data into his database. I've only kept using him for the odd bit of advice, eg what happens when I pay a lump sum off my LOC which is 50/50 inv/pvt?
I've also used him just so I could stretch my tax bill to June the next year. I'll be doing my own tax this year though.Now in regard to your comment about moving my shares into super, there were a few good reasons for it as I'll outline below. I did this of my own accord, ie without consulting my adviser, so I've only myself to blame!
I'm at the TTR stage as I mentioned above, so I'm drawing a tax free pension for that part of my super derived from the undeducted transfer of shares, so I've gone from deductible debt and taxable dividends to private debt and tax free dividends. At the moment I'm ahead because the grossed up (including franking credits) dividends are greater than my interest. That may change shortly of course, but effectively the two scenarios aren't much different net income wise.
Secondly I get better asset protection with my shares in super and my debt out of it.
Thirdly, and this is the most important, I had 200k worth of shares purchased with a 200k LOC. After the GFC they dropped to just below 150k. This fitted neatly under the one year undeducted contribution limit of 150k and I moved them into super. This crystallised a 50k loss in my name, which will come in handy later if I sell an IP. Now that I'm drawing a TTR pension from them, any capital gain I make from them will be tax free. I'm confident they will be worth a lot more when I turn 60, at which time I can sell them and withdraw the lot tax free to kill my private debt and hopefully a fair chunk of investment debt.
That would depend on the interest rate at the time of course. In the current climate, if I were 60 now, I wouldn't be withdrawing super to pay off investment debt, as the shares in super are grossing about 8 – 9% tax free dividend, compared to tax deductible interest of 5.11% (ie about 3% after tax in the 41.5% bracket)
I hope all this makes sense; sorry if I've hijacked the theme of the post.
Cheers, S/C.Hi Michael,
Do you have authoritative literature to back up your comment:
“You can pay down the private debt independent of the investment debt regardless of whether it is in a single LoC or multiples, or a single SVR etc.”I have to say, it is not a simple scenario, so it is understandable that people get confused over these complex circumstances (I guess that’s how tax accountants / lawyers earn their pay)
I’m not an expert on the scenario mentioned, but my understand is that any repayment on the mixed purposed loan account will need to be apportioned between the private and income generating portion to a reasonable diligence. However, please correct me if I'm wrong.
I have not been able to dig up the relevant sections of ITAA. However, I have managed to find the following link: (which is a very good read I might add)
http://www.bdo.com.au/media-centre/m_r/qld/10_tax_return_mistakes_to_avoid
and in particular “Common mistake #4: Interest is interest is interest”Btw, I have enjoyed your contribution in this forum. Thanks
Regards,
KennyThanks Kenny and StumpCam,
I appreciate feedback, support and challenges.
The GFC has touched most of us StumpCam, a small, but noteworthy consolation
Kenny – My answer comes in two parts. The first is that my accountant guided me out of a similar situation, so first hand experience over the last few years. It wasn't specifically in relation to an IP, however strictly investment debt mixed up with a smaller portion of O/O from a splash out.
I don't think there is a misalignment between what I've written/experienced and the bdo media release. I presume the reference is to common mistake 4 and the comment on apportioning on a reasonable basis.
As your response highlights, there is a grey area when it comes to the definition of reasonable, which as with most tax law, gives the Commissioner quite a bit of discretionary power, however that is seldom wielded 'unreasonably'.
So in the explanation I have given, the two areas likely to spark some concern are if the $100,000 came from the IP (wrap/sale etc) or in relation to arguably nominal interest savings from rental receipts.
Although the ATO is often vilified (ever had that feeling?) they are unlikely to be unreasonable unless you are pulling dodgies specifically designed to reduce or avoid the big T with no other arguable benefit. If the scheme is set up deliberately to achieve either of these two outcomes it would matter naught whether you had set up one loan account or twenty loan accounts.
I can't and won't argue against the bdo release – each to their own. My main point is it's not fatal or perhaps as doom and gloom as it might seem. To top that off, setting up separate accounts isn't the cure it might seem to be either. But KISS always applies.
Oh… I don't know if you searched the bdo release, but I failed to find tax contamination there either. I think tax contamination is a more like fact contamination, or as I like to call it, Faction – where a touch of fact is added to a fiction to make it sound credible.
All,
Found this link:
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958“21. Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.”
In relation to the definition of “reasonable” used in BDO link, it refers to the level of detail and the method of the apportionment calculation:
“15. Where a taxpayer has a mixed purpose sub-account, the interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis. One approach that we accept as fair and reasonable in relation to the apportionment of interest that has accrued on a daily basis on a mixed purpose account is set out in the following paragraphs. We accept that this approach to apportionment is not the only approach that is fair and reasonable.”I’m not aware of the term “tax contamination”
When it comes to tax law, it is best to seek clarification from the ATO and obtain a private ruling in advance. There is no value risking misinterpretation.
Thanks
KennyGreat comment Kenny and valuable advice.
Always get your information form the horses mouth, and get it in writing.
Thanks for those links Kenny. All the examples seem show pretty clearly that I have to apportion any payments according to the investment/private ratio, but one paragraph was particularly interesting:
Second Exception – Refinancing mixed purpose debt
18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.
Does this mean I can refinance the LOC into two new LOCs with one considered to be investment, and the other private? This is exactly what I'd like to be able to do, but my accountant told me I must maintain the investment / private ratio in each new sub-account which doesn't achieve anything.
On another note: one of those paragraphs in your first link pointed out an error I've been making for a while, namely claiming all the body corporate fees as a deduction. The sinking fund isn't deductible for example. I'm not sure how to account for them properly. They couldn't be building depreciable items until they are actually used on the building. Some may be eventually used on repairs though, which should be deductible. Sounds like a real pita to account for properly.
StumpCam,
This doesn't answer the question to Kenny, however the ATO link also notes:
21. Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.
It is probably this statement that is causing the perception of 'locked' ratios because of the grey area on what 'notionally' means. I went back to my accountant on that and he then explained he had obtained a private ruling as Kenny suggested.
Sorry I didn't mention this prior, however I was unaware that he sought the ruling. I pay him to do the work so getting into the nitty gritty defeats the purpose of paying him to look after me in the first place.Kenny's comment is spot on and you can take your question to the ATO where the buck stops. Based on the information at hand and the ruling in my case, your situation is quite arguable and it will set your mind at ease.
The only one that can finalise it for you is the horse (ATO).
StumpCam,
It sounds like the ATO has made an allowance for investors to refinance their mixed purpose account to separate income producing portion and private portion. (note that this only applies if you refinance the entire subaccount) If I were you, I would show the Tax Ruling to your accountant and get him to investigate further (and possibly obtain a Private Ruling from the ATO). Note also, the link shown is a Tax Ruling, so you will not be penalised by the ATO for relying on the judgement if your situation is similar.
As Michael suggested, it’s best that you get it from the horse’s mouth. (though I have to say, ATO is not known for their timely service when it comes to complex issues)I guess the title speaks for itself! They are common mistakes for a reason!
There is no doubt that sometimes it’s an onerous task to keep track of all the expenses that are tax deductible or otherwise. However, in the case you mentioned, the Body Corporate is responsible for producing monthly statements as well as the backing documents (tax invoices etc):
http://www.justice.qld.gov.au/files/CourtsAndTribunals/3.4_-_Administrative_fund_and_sinking_fund.pdf
“Reconciliation statements (SM s149)
If a body corporate manager is authorised to administer the body corporate’s administrative or sinking fund or if the body corporate decides by ordinary resolution that reconciliation statements must be prepared, a statement must be prepared within 21 days after the last day of each month for each account kept for the fund showing the reconciliation of:
? the financial institution statement showing amounts paid into and from the account during the month;
? invoices and other documents showing payments into and from the account during the month.
The reconciliation statement must be prepared by a body corporate manager who is authorised to administer the fund or otherwise the treasurer.”Note the document maybe Qld specific.
No pain no gain eh?
KennyThanks Kenny and Michael, I really appreciate the effort you've put into your responses. I'll look into getting a private ruling, or maybe just split my loans and plead the private ruling above as you say Kenny.
I already have 17 accounts of various flavours, so the collating of statements is already a bit unreal, but it would be worth it (creating extra ones) to be able to attack the private loan by itself.
Cheers, S/CSC,
Just a point of clairifcation. There are several types of ATO rulings, but mainly Public and Private.
You can only rely on the Public Rulings (not other people’s Private Rulings or Product Rulings). Public Rulings come in the form of Taxation Rulings and Taxation Determinations. Public Rulings like a the one attached above are binding to the ATO.Private Rulings will only be binding to the ATO if you were the applicant and full facts were given.
As one famous fictitious bug hero’s uncle once said: “Great power comes great responsibility!”
I hope to have your conundrum somedayThanks Michael for the compliments.
Sorry all for going off the tangent from the original post!
KennyJust having a quick look on the ATO site and cant find any info on the allocation of repays, where a loan is split between investment and personal. Anyone have any additional information?
Maybe the Mortgage Detective will pop back in an answer this question unless he is too busy on another forum.
Whilst we all sit and wait for him to come back you might want to check out Bantics website as Julie has a PR example there.
Richard Taylor | Australia's leading private lender
I've also used him just so I could stretch my tax bill to June the next year. I'll be doing my own tax this year though.
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