Borrow from LOC for IP repairs and other costs?

I just spoke to ATO and they advised you cannot claim tax deduction for council,water and other expenses related to investment property and at the same time claim tax deduction on interest on LOC used to borrow for paying these expenses.

Has anybody got more information on this? If you can choose one of them only, I would imagine claiming expenses will be better than just claiming tax deduction on interest.

Hi All
   I send a general email to ATO as well. Please see the reply I got. Reading from text in red, it seems it is safe to say that interest on loan taken to pay for expenses incurred to maintain property are tax deductible. It does not seems ATO has any problem if the rent is going into PPOR offset instead of LOC.

It will be interesting to see if anyone has tested any of the 7 cases answered by Julia recently on http://www.bantacs.com.au/QandA/index.php?xq=368 to arrange for mortgage payment on IP from LOC.   Any thoughts?

"If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you start to use the property for private purposes, you cannot claim any interest expenses you incur after you start using the property for private purposes.

Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes – for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income – you cannot claim the interest after your intention changes.

While the property is rented, or available for rent, you may also claim interest charged on loans taken out:

– to purchase depreciating assets
– for renovations
– for repairs.

Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property. Many of these products permit flexible repayment and redraw facilities. As a consequence, a loan might be obtained to purchase both a rental property and a private car. In cases of this type, the interest on the loan must be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes.

If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and for rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan; that is, you must separate the interest that relates to the rental property from any interest that relates to the private use of the funds.

Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is so whether or not the loan for the new home is secured against the former home.

For further information about rental income and deductions, please refer to the following Tax Office publications:

'Rental Properties' (NAT 1729)
'Guide to Depreciating Assets' (NAT 1996)
'Guide to Capital Gains Tax' (NAT 4151)."

Terry
         Initially I wanted to clarify if eligible for tax deduction when borrowing for general expenses, shares and mortgage. The first two have been confirmed all ok. Thanks to you as well.

But now question is with borrowing to pay for interest? What are the acceptable reasons for ATO to believe that it is not a scheme but a genuine management of cash flow depending upon individual situation. Julia has mentioned couple of them on http://www.bantacs.com.au/QandA/index.php?xq=368 but not sure if anyone has tried them.

  My accountant is not that Property savvy to assist with the correct reasoning depending upon my situation. Can anybody assist with obtaining private ruling on this?

I know, LOC are already under increased scrutiny by ATO and to make up cashflow reasoning to pay IP mortgage from LOC is inviting trouble.

Does anyone know if there is there any timeframe I need to pay back on LOC once I have been using it to pay IP council,water bills from it ? I have an IP loan of 320K and 50K LOC. From tax-deduction perspective, it seems good if in 5-10 years time I have used up all available on LOC and can continuing claiming deduction on 320 +50K for the life of the loan (or get another LOC down the line and use it same way). Wouldn't that be seen as a scheme by ATO?

Thanks Terry.
     Just one last quick Question. Tenants pay the Water Usage charges of the Water Bill. If I am paying full Water Bill from LOC but getting Usage charges paid back by Tenants later, will that be still fine with ATO?