mixing personal $ with LOC: will ATO disallow deduction?

[nomadic]

Hello everyone, i'm another lurker who's come out of the closet to register :)

I've spent many hours reading old posts to educate myself but have not been able to find an answer to this question, so here goes my first post :o

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses? Is the interest on this LOC still 100% tax deductable?

I'm guessing that because my rent is in excess of my ATM transfers, that it shouldn't be a problem?

Is this an ok way to structure things, or should i get my property manager to deposit the $200 directly into my ATM so as not to muddy the waters?

Thanks for any advice that can be made,

Dan :)

[Twitch]

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses?
uh oh, it isn't coming out if the LOC is it? If so that is not so great, and interest on those $200 xfrs will definitely not be deductable. :( Maybe you can also clarify why you think the original LOC is tax deductable.

[nomadic]

uh oh, it isn't coming out if the LOC is it?

Yes it is :(

And i've been doing this for about 2-3 years now and always been claiming all of the interest on the LOC :o

Until reading some old posts, i've always thought that it would be ok because it's only a small part of my total rent.

Maybe i should be getting the property manager to transfer the $200 directly into my ATM and have the balance put into the LOC? :confused:

[Twitch]

Maybe i should be getting the property manager to transfer the $200 directly into my ATM and have the balance put into the LOC? :confused:
Yes that is the way to do it.

The issue is that once the funds go into the LOC it is treated as a pay down of the principle, any xfr out is treated as a new draw down and must must be for investment purposes if it is to be tax deductable. There is no such thing as parking personal funds temporarily in an investment LOC.

I think you need to have a heart to heart with your accountant to see how to untangle the situation you're in. :( Don't feel too bad, many have done something similiar, I did a few years ago much to my accountants frustration.

[Rolf Latham]

Hiya Nomad

Welcome

You likley cant do much about the past.............but you can fix it NOW ?

Simply refinance into an Interest only product with a 100 % offset acct, park all cash in the offset, claim all interest on the loan.

ta

rolf

[Mry]

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

OK, stop right there. It sounds as if you have 2 loans there, your basic run of the mill loan with a set repayment, and a Line of Credit.

Here is the important question - Was each loan devoted to the purchase of this IP? (For example, you have a $400,000 house and you get two loans of $200,000 each to purchase it?) Or where each of them for different properties? Once you answer that, we can comment further.

A loan does not become deductible merely because rent goes into it and repayments come out. The original purpose for the loan must be considered.

[nomadic]

Thanks for the advice guys :)

mdk92 - i appreciate your comments as i didn't realise each withdrawal from a LOC is considered a new draw down and that there's no such thing as parking personal funds temporarily in an investment LOC :(

Rolf - i'm a bit confused about your advice. Yes i'd like to fix the situation but i'm unsure what you mean about "refinancing into an interest only product with a 100% offset acct, park all cash in the offset, claim all interest on the loan".

My LOC is a Viridian with $20k limit. Are you saying that i should open an offset account with C'wealth bank and link it to the LOC... and then get the rent money deposited into the offset rather than the LOC? But what about the loan repayments: if i continue to get the repayments deducted from the LOC, i will go through the lot within a year (my interest bill last year was $24,300) :confused:

Mry - No, each loan was not devoted to the purchase of this IP. Of the 2 loans with C'wealth, one is the I.O. home loan and the other is the $20k LOC. The home loan was a refinance for my I.P. and the $20k was set up to make my loan repayments. I guess you could say the original intention of the LOC was for my loan repayments to come out of, but i also did buy some shares with it.

Thanks for any more advice that can be offered :confused:

[Mry]

Mry - No, each loan was not devoted to the purchase of this IP. Of the 2 loans with C'wealth, one is the I.O. home loan and the other is the $20k LOC. The home loan was a refinance for my I.P. and the $20k was set up to make my loan repayments. I guess you could say the original intention of the LOC was for my loan repayments to come out of, but i also did buy some shares with it.

My goodness, this is quite convoluted. My poor brain is still trying to recover from the LOC guy I had in today with 2 rental properties and several parcels of different shares all financed from one line of credit which he also used to pull money out from ATMs every few days, a boat and to pay of his private credit card every month. What a horror.

Anyway, I assume that I.O. is the rental property loan. I also assume that the refinance did not take into consideration the debt of anything other than the loan used to purchase the rental property (for example you didn't pay off a credit card, your place of residence or a debt for any other matter when the property loan was refinanced). If my assumptions are correct, the IP loan is deductible.

As for the line of credit, your evidence suggests that it is not deductible for the rental property as it was not used in the purchase of it, but merely as an account for managing your finances. The fact that rent is received and repayments are made out of it does not make it deductible. To the extent that it was used to purchase shares, that portion will be deductible but to be honest it wasn't a very good place for you to buy the shares from since it appears to be a rather active account.

Why? It will be a nightmare for you to track the amount deductible for the shares. Everytime you make a withdrawal, you have to recalculate the deductible % of the loan using this formula:

Balance prior to withdrawal x deductible % of loan / Balance after withdrawal.

eg 40,000 x 20% / 40,200 = 19.90%

This must be done for every single withdrawal for non share matters (excluding bank fees). ATM withdrawals, credit card payments, milkman, etc. That should make the spreadsheet from hell.

Theres probably a lot more I could say or add but I recommend you take all those bank statements down to an accountant and discuss the matter with them at tax time.

[Thommo]

This subject comes up regularly and I always shake my head.

For decades my personal/business/investment accounts have been hopelessly intertwined. I pay all bills from my cheque a/c which has an overdreft facility attached. These bills include my lady's credit card every month. I would be happy to buy a car or boat this way. When you do your tax they are simply "drawings". The ATO expects you to draw money from your enterprise or why would you be doing it? Besides if you aren't drawing enough to live on you must be cheating!!!! (This has always been a strong reason for me to run these bills through my accounts..... the ATO can see I am paying myself)

I have NEVER apportioned bank charges, interest and overdraft charges.

I also have a LOC into which I transfer excess funds in my bank a/c, regardless of whether these were private or taxable incomings. To buy a car I would simply transfer the funds out of this a/c into my bank and write a cheque. My wife's salary also goes into this a/c.

Again I have NEVER apportioned interest or charges. I have claimed the lot.

My credit cards are used mainly for biz but not exclusively and again ALL costs are claimed against tax.

This has evolved over four decades and nobody has a problem with it, either ATO or my accountant.

I just wouldn't try with -ve geared investments ;)

It works for me :D

Thommo

[Twitch]

True, but I could go today, buy myself a Rolex as "an investment" and claim it on my tax, and get a refund. Thats a beauty/danger of our self assessment tax system.

Of course, come audit time .... :o .... :eek: .... $$$$

[Thommo]

True, but I could go today, buy myself a Rolex as "an investment" and claim it on my tax, and get a refund. Thats a beauty/danger of our self assessment tax system.

Of course, come audit time .... :o .... :eek: .... $$$$Why, if you want a Rolex personally, couldn't you pay for it out of the biz and simply call it drawings? Calling it an "investment" is probably fraud but calling it "drawings" is honest and the money is taxable.

You enter into business to make a profit and you are expected to draw down on that profit to fund your lifestyle, even if the enterprise still has outstanding debts! As long as you pay appropriate tax on your lifestyle, it should be OK. IMHO, of course.

[coastymike]

If you are operating through a partnership then it will be treated as drawings and the partners are then assessed on this as taxable income.

Similarly if you purchased the Rolex through the business your accountant will want to treat it as salaries & wages and so there will be no tax benefit from purchasing it through a company.

If you are operating through a company and treat is as an expense where are you going to put it to ? If you put it to directors loan then you have a Division 7A issue. If you put it to another account and the accountant reviews it because of abnormal expenditure patterns then it will be detected at the preparation of your Income Tax Return and you will need to reclassify it.

Technically you could purchase every single private transaction and code it to business accounts. However this is tax evasion..plan and simple...in the case of an audit you would suffer severe penalties, possibly even a gaol term. If your accountant detected it and you refused to reclassify the transaction the accountant, if they were a professional, would indicate to you that if you chose to continue with tax evasion then they could no longer be your accountant. The professional indemnity issues are not worth it. No matter how much you pay them.

If you want a Rolex then pay for it from your personal account.

Thommo I think your advice re purchasing all transaction (private and business) on credit cards and then claiming the entire interest expense is incorrect. I personally know of one individual - not a client, who did that very thing. When it was time for an ATO audit they reviewed the interest account (it was huge because they put everything on credit cards holidays, etc.) and claimed it as a business expense. They got hit with penalties (75%), interest and ended up with an enormous tax bill. What you are doing is incorrect and although your accountant may not have a problem with it (they should) the ATO certainly does. Just put a private ruling into the ATO with those facts and ask if the interest is deductible. I dont think they will say its ok. Because it's not. The purpose of the borrowings (credit card) were used for private purposes and therefore not deductible. The method for determining interest deductibility has been correctly outlined by Mry and is in fact discussed in a Taxation Ruling. I think you should review your position.

[Thommo]

If you are operating through a partnership then it will be treated as drawings and the partners are then assessed on this as taxable income.

Similarly if you purchased the Rolex through the business your accountant will want to treat it as salaries & wages and so there will be no tax benefit from purchasing it through a company.

If you are operating through a company and treat is as an expense where are you going to put it to ? If you put it to directors loan then you have a Division 7A issue. If you put it to another account and the accountant reviews it because of abnormal expenditure patterns then it will be detected at the preparation of your Income Tax Return and you will need to reclassify it.

Technically you could purchase every single private transaction and code it to business accounts. However this is tax evasion..plan and simple...in the case of an audit you would suffer severe penalties, possibly even a gaol term. If your accountant detected it and you refused to reclassify the transaction the accountant, if they were a professional, would indicate to you that if you chose to continue with tax evasion then they could no longer be your accountant. The professional indemnity issues are not worth it. No matter how much you pay them.

If you want a Rolex then pay for it from your personal account. Gee! I didn't know we were talking about tax on the spend. I thought we were discussing deductability of interest on the debt AFTER the spend.

Nothing I suggested could be considered tax evasion, it fact I spoke of paying appropriate tax. (sigh!)

[Corsa]

Hi Thommo

You are not being serious are you?

Expenditure on non-investment related items are not tax deductible. Period.

Anyone claiming personal items that do not have a necessary connection with earning income are simply avoiding tax which is illegal.

I am all for minimising tax but avoiding tax is just wrong.

Nomadic: the responses so far give you a good idea how to deal with your specific situation, but talking to an accountant to work out how to structure things and taking on boards Rolf's advice about having an offset account against an Interest only loan, should get you back on track again.

Good luck

Best Wishes

Corsa

[Corsa]

Gee! I didn't know we were talking about tax on the spend. I thought we were discussing deductability of interest on the debt AFTER the spend.

Nothing I suggested could be considered tax evasion, it fact I spoke of paying appropriate tax. (sigh!)


Thommo, whilst I posted my post, Mike and yourself have also reposted.

Thommo, if you thought that we were discussing deductibility of interest on the debt after the spend, this is not clear from your posts.


Your comment "I have NEVER apportioned bank charges, interest and overdraft charges....I have claimed the lot." does imply that you claim as a deduction both personal and investment expenditure.

If that's not the case then that is fine, but we can only go on the posts you are making....

[Thommo]

Hi Thommo

You are not being serious are you?

Expenditure on non-investment related items are not tax deductible. Period.

Anyone claiming personal items that do not have a necessary connection with earning income are simply avoiding tax which is illegal.


CorsaCorsa, Please indicate where I advocated calling "Expenditure on non-investment related items" a business expense.

How can I state it more clearly than I did, that I have for near 40yrs paid private expenses out of my business (partnership) accounts while it similtaneously has debts which are acrueing interest WITHOUT apportioning any of the interest as "private". My accounts are always signed of by a partner in PriceWaterhouseCoopers.

I thought that was what Nomadic was asking about.

If you guys can't read, that's not my concern.
If I can't write good then I will have to try harder.

Over and out!!!!!

[coastymike]

Thommo,

So you are claiming all the interest on this account despite the purpose of the borrowing being for both private and business purposes ? It may be that the partner at PwC is not aware that you are using this account for both private and business purposes. If you are then a portion of the interest is NOT deductible.

I was referring first to the point being raised by the individual trying to claim non business expenditure (i.e. a rolex) as business expenditure. Secondly I was then referring to your post when you said that you claim ALL interest on your credit card despite the fact you use it for both business and private purchases.

I would refer you to Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities, provides the Commissioner’s view on the taxation treatment of loan interest expenses incurred in your circumstances.

No need to get defensive. If we have misread what you are doing then that is find but even from your subsequent post I get the impression you are claiming ALL interest expenses.

[Corsa]

Corsa, Please indicate where I advocated calling "Expenditure on non-investment related items" a business expense.

How can I state it more clearly than I did, that I have for near 40yrs paid private expenses out of my business (partnership) accounts while it similtaneously has debts which are acrueing interest WITHOUT apportioning any of the interest as "private". My accounts are always signed of by a partner in PriceWaterhouseCoopers.

Hi Thommo,

Where I believe you advocated calling "expenditure on non-investment related items a taxable deduction" is where you say "I have NEVER apportioned bank charges, interest and overdraft charges....I have claimed the lot." Even when you point out "These bills include my lady's credit card every month. I would be happy to buy a car or boat this way. When you do your tax they are simply "drawings"..

And on a later post you mention"Why, if you want a Rolex personally, couldn't you pay for it out of the biz and simply call it drawings? Calling it an "investment" is probably fraud but calling it "drawings" is honest and the money is taxable."

So this leads me to believe that you consider expenditure on non-investment related items (ie boat, car, rolex, wife's shopping), categorise it drawings and consider it tax deductible expenditure.

What are you exactly saying here? If you are saying that you agree that non investment related exenditure is not deductible, then we do not have a problem here, and I hope I haven't confused things to much by seeking a clarification.

That is what Nomadics question effectively is "If I use a LOC for personal and investment, is the whole amount of interest deductible?" Which is the answer is it is not. The interest associated with the investment is deductible whereas interest associated with personal is not, and each line item will need to be apportioned.

Does this assist you understand where I am coming from with my questions?

You must be prepared to accept some critique if you post a response that appears as if you claim as a tax deduction regardless of whether it is personal or investment.

The other day, Asy corrected Kristine on a post about land tax or something and Kristine took it very well.

Btw: What the hell is the "over and out" comment about?


Best Wishes

Corsa

[Mry]

Thommo, you would be able to claim interest deductions for the partnership for your drawings, but only to the extent that you make those drawings on your taxable profit distributions only, and anything in excess of that would breach the Roberts and Smith principle. That would require permanent apportionment.

Partners are not taxed on drawings, only on their share of the profit of the partnership. Drawings are not tax deductible and can be used for anything really.

However I would not claim any of the interest on your line of credit. It is a personal account from what I read, and I would assume that none of the expenditure in that account relates to the business or any other income producing asset.

Be very careful. The big accounting firms may be good at what they do, but they aren't immune to mistakes. I would be calling them up right now, explaining that you are spending private funds through your LOC and how they are claiming it, and ensuring that they check the drawings out of your partnership to ensure compliance with the Roberts and Smith case. I would also ask if they are claiming expenses you are using for personal purposes as tax deductions. And I would get the response in writing.

As for having it done for 40 years, a have a nice auditor joke that describes my feelings on that -
Q Why did the auditor cross the road?
A Because he looked in the file and that's what they did last year.

[geoffw]

have a nice auditor joke that describes my feelings on that -
Q Why did the auditor cross the road?
A Because he looked in the file and that's what they did last year.And my feelings on auditors...

What's the definition of an auditor?
A person who goes in after the battle is over to bayonet the wounded.

[madmurf]

GW

Or this is one I heard actually said to an auditor


Why are auditors payed so much ?

So when they need a friend they can buy one :)

Cheers :D

[ralph wiggum]

I thought auditors were good friends with parking inspectors :)

[Thommo]

Partners are not taxed on drawings, only on their share of the profit of the partnership. Drawings are not tax deductible and can be used for anything really.

I thought that was what I was saying.

Partner's salary aka "drawings" is not only a legitimate expense it is a mandatory one. If you are not drawing from your enterprise, How are you living? Undeclared income?

Back to Nomadic's Q,

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses? Is the interest on this LOC still 100% tax deductable?

Why can't the $200/m simply be "proprietor's salary"? That way the total debt remains 100% business.

It's OK about my accountant too. I don't need to make a phone call but if I needed clarification on these matters I would ask her, provided she isn't asleep when I go to bed. But then she may not know what she is talking about: She has only been in the industry over 40yrs afterall. And don't be so condescending about the big accounting firms. Your "damned by faint praise" post smacked of professional jealousy. The senior partner of Price Waterhouse has been in town for 25 years and earned a reputation as the best, if you can afford him.

This time it is "over and out". It would be impossible for me to state this simple fact that I have been doing it for decades any simpler. Besides why should I cop ****? I was just saying how I do it.

[Mry]

I thought I would offer some advice on your situation Thommo, as I do when I see something that believe is wrong or requires assistance, but if you don't want it, thats fine. But I would have expected a little more respect in a professional forum. I stand by my words. Lets leave it at that.

[Aceyducey]

Thommo,

Doing something for decades doesn't make it legal.

I remember one of the world's largest accounting firms disappearing recently due to poor accounting practices.

I cannot comment on whether Mry is correct or not - but if I was in your shoes I'd be looking for a second opinion just in case.

The couple of hundred it costs is a worthwhile risk management investment.


Nomadic,

Keep personal and investment monies separate. There are too many risks in doing it any other way.

Cheers,

Aceyducey

[A95]

Hello everyone, i'm another lurker who's come out of the closet to register :)

I've spent many hours reading old posts to educate myself but have not been able to find an answer to this question, so here goes my first post :o

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses? Is the interest on this LOC still 100% tax deductable?

I'm guessing that because my rent is in excess of my ATM transfers, that it shouldn't be a problem?

Is this an ok way to structure things, or should i get my property manager to deposit the $200 directly into my ATM so as not to muddy the waters?

Thanks for any advice that can be made,

Dan :)
Hi nomadic,
I think that your rent should not be deposited into your LOC at all.
Have a look at an example in the attached spreadsheet.
ScenarioB would give you more flexibility. Of course there other possible options on how to structure your loan/s.

Regards
A95

[nomadic]

Thanks for your reply Mry - my replies are in bold:


Anyway, I assume that I.O. is the rental property loan.

Yes

I also assume that the refinance did not take into consideration the debt of anything other than the loan used to purchase the rental property (for example you didn't pay off a credit card, your place of residence or a debt for any other matter when the property loan was refinanced). If my assumptions are correct, the IP loan is deductible.

Yes, the refinancing was only for the IP

As for the line of credit, your evidence suggests that it is not deductible for the rental property as it was not used in the purchase of it, but merely as an account for managing your finances.

Can you please confirm this, as i was under the impression that my IP loan repayments from the LOC are deductible because i am repaying debt on an income producing asset.

[Corsa]

Partner's salary aka "drawings" is not only a legitimate expense it is a mandatory one. If you are not drawing from your enterprise, How are you living? Undeclared income?

You are mixing all these issues up, no-one is talking about undeclared income, we are talking about expenditure incurred in an income tax year and discussing the tax deductibility of certain expenditures types.


She has only been in the industry over 40yrs afterall. And don't be so condescending about the big accounting firms. Your "damned by faint praise" post smacked of professional jealousy. The senior partner of Price Waterhouse has been in town for 25 years and earned a reputation as the best, if you can afford him.

Thommo, I was trained in the Big 4 (then 6), starting with Coopers & Lybrand. Coopers merged with Pricewaterhouse to become PricewaterhouseCoopers and the group that I worked for was bought out by IBM. I have collectively over 8 years experience working in these global accounting environments and I have attained status as a Chartered Accountant.

At this point in time, my view is that your explanations are incorrect.

I think you need to review your understanding of how this process works. I am almost 99% confident that PwC have got your accounts correct and believe you to be big fish as a private client with PwC. However in this instance, your ability to explain this concept to Nomadic has been misleading which is why I have pulled you up for clarification.

Thommo, I have a very healthy respect for you from your previous posts on the forum. If I was saying something incorrect I would hope that someone would clarify the situation for me so that I could ensure that I was reflecting a view that was both true and accurate. I would have hoped that you would be able to do the same in this instance.

I hope that in all this, Nomadic's questions has been answered and that this "healthy" debate has worked through all the issues that anyone might have.

This time it is "over and out". It would be impossible for me to state this simple fact that I have been doing it for decades any simpler. Besides why should I cop ****? I was just saying how I do it.

Just because you have been doing it for decades Thommo does not make it right. Many people are under the false assumption that:
a) many private expenditures are tax deductible
b) LOC interest is 100% deductible
c) They can extract money out of a loan to pay for personal items and that loan continues to be deductible for them

I am not surprised that this question continues to come up and that it continues to generate debate. It is part of the education process.

Best Wishes

Corsa

[nomadic]

Nomadic: the responses so far give you a good idea how to deal with your specific situation, but talking to an accountant to work out how to structure things and taking on boards Rolf's advice about having an offset account against an Interest only loan, should get you back on track again.

Good luck

Best Wishes

Corsa

Thanks Corsa, i have taken all the advice on board and it looks like the best way to resolve this is to:

1) cancel the transfers from the LOC to the ATM account and,
2) get my property manager to transfer the $200 directly into my ATM account.

But i'm still unsure about Rolf's advice as i wrote previously, i.e.

My LOC is a Viridian with $20k limit and last years interest bill was about $24,300. If i open an offset account with the same bank (linked to the LOC) and then get the rent money deposited into the offset (instead of the LOC), my loan repayments will chew through my LOC limit.

However i understand the concept as i have another St George IO loan where my repayments are coming out of a LOC (also with St George). It's pretty much the same setup as the C'wealth bank except i don't have any personal drawings on this LOC.

[nomadic]

Back to Nomadic's Q,

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses? Is the interest on this LOC still 100% tax deductable?

Why can't the $200/m simply be "proprietor's salary"? That way the total debt remains 100% business.


I never thought that i could draw the $200 as a "proprietor's salary", but thought that i could do it because the rent was in excess of this amount and it would be ok... but now that you mention it, perhaps i could argue that it's my "management" fee for dealing with the property manager :)

[nomadic]

Hi nomadic,
I think that your rent should not be deposited into your LOC at all.
Have a look at an example in the attached spreadsheet.
ScenarioB would give you more flexibility. Of course there other possible options on how to structure your loan/s.

Regards
A95

Thanks for that A95. I'm not too good with spreadsheets but do notice that i'd be better off with scenario B ($7,000) because i can claim much more interest as a deduction than scenario A (-$6093.26) - almost $14,000 more!

But i still think that my setup is ok (except for the $200 personal drawings).

Not sure how others do it? Maybe get the rent money paid directly into the IP loan? But then how do you access funds to pay rates, body corporate, repairs/maintenance etc?

What i've been doing is to pay it by credit card and then pay the c/c from the LOC. This c/c is solely devoted to IP maintenance/repairs/improvements and i do not buy ANY personal items on it.

[Thommo]

But there are others, more worthy of your compassion.

Many people are under the false assumption that:
a) many private expenditures are tax deductible
I and my accountant know perfectly well what "tax deductable items" are. What made you believe we don't?
b) LOC interest is 100% deductible
It is if used correctly. Mine is, and always has been, used to fund my business and later, my investments. It has also been used, on occasions, to fund my salary via "drawings"
c) They can extract money out of a loan to pay for personal items and that loan continues to be deductible for them
Can you clarify the difference between "partners' salary" and "Personal items". I don't know if it exists.

I reckon the free advice I (personally) recieved on this thread to be worth about what I paid for it. I will return the favour, if I may, and give a little free advice myself.

Don't jump to conclusions such as assuming the advice I recieve is NOT from full time, very experienced, tax professionals. Certain comments on this subject were ill-advised and professionally rude. At least I took offence at them, on my wife's behalf.

Thommo

[Mry]

Can you please confirm this, as i was under the impression that my IP loan repayments from the LOC are deductible because i am repaying debt on an income producing asset.

Because the loan repayment in of itself is not deductible and would be an "interest on interest" claim as well. The loan repayment is a financial obligation you incurred to acquire the IP. The actual deduction for the loan is the interest incurred on the IP loan, which takes place in the IP loan itself.

If you could get a deduction in the LOC on the interest for the repayments being made from the LOC to the IP loan, you would be claiming interest on a "financial obligation" for a loan which is there to pay off the house, not on the house or on an expense, which breaks the necessary nexus between the income producing asset and the outgoing.

Taking the principle to an extreme, lets say you bought a house for $400,000, you have a P & I loan of $400,000 and a line of credit, currently with a balance of $0 but a limit of $1 million with no requirement to repay it. Now, over the life of the $400,000 loan, you repay $525,000 to it (in principal and interest) from the LOC. If the repayments created a balance that was deductible in the LOC, you would have created a $525,000 deductible loan (ignoring the "interest on interest" within the LOC itself). If you converted that to a P & I loan and repaid that $525,000 over another 20 years, you would now have a deductible loan of say $675,000. On a $400,000 house.

Note that if you refinanced the loan, that would be transferring the capital amount of the loan to another one. That capital amount doesn't transfer when you just make normal loan repayments.

[Thommo]

Over breakfast my wife reminded me that our LOC was set up before the Hearts case and therefore is an unreliable example.

The correction is that I suggested to Nomadic that he could draw off profits as a salary. This is incorrect because it needs to be a business (I assume she meant "trading") to allow this. Investments don't have the option.

So with an old LOC and a trading business I have the flexability to continue doing as I do. I will cease and desist from using my situation as an example to others immediately. I was trying to promote the concept of keeping it simple, (I'm a big believer).

Thommo

[coastymike]

Thommo,

Thanks for your replies. I think it is great when we can all have healthly debates and keep learning from each other. I think all of us, both the accountants and non accountants, enjoy discussing issues on this forum. Even as accountants we can be wrong and i'll be the first to admit there have been times when I have thought that something would be allowed and when clarifying the situation for a client found out my first thoughts were wrong. But I think it was Albert Einstein who once said an expert is just someone who has made a shitload of mistakes and learnt from each one of them.

I don't think anyone was personally attacking you, your wife or your accountant. We were just trying to give our thoughts on the matter. I think we all would appreciate it (i know I would) if you also show some respect as your posts did indicate a fair amount of tension and anger and were quite condescending in some parts. We are all here to share ideas and concepts and hopefully in a manner where we can all learn together.

As to the value of the advice here for me as professional it has been invaluable. Concepts have been raised here that I have questioned and have had to further investigate. As a professional I use this forum to find out what issues are impacting on people and trying to ensure I am up to date in these areas to assist my clients. IN that respect I have found it very worthwhile.

[julieo]

While I have a few of you experts on line can I please ask a question. I am one of those who worriers that I am doing things correctly. I think I know the answer but after reading this thread am a little concerned.

I have a LOC that is on my PPOR. I also have a few investment properties whos loans are of course completely separate.

All the rents go into the LOC and all the interest comes out of the LOC. Also any outgoings eg rates etc come out of this LOC. Also my salary goes into this account

I don't claim any interest on this LOC as a taxable deduction. I only claim the interest on each of the loans.

My question is whether it is ok to have the rents and loan interest flowing through the LOC in the first place.

Many thanks
Julie

[Mry]

My question is whether it is ok to have the rents and loan interest flowing through the LOC in the first place.

Many thanks
Julie

Julie, in my opinion from the information you gave, you are perfectly fine.

I think you may have become worried because you are calling your repayments "loan interest". They are just repayments. The loan interest is incurred within the loans for the IP itself.

[Brizzy Boy]

Hi folks,
been following this thread fo awhile and to be honest it is a bit beyond my comprehension, "I am but a simple bloke".

But I have a the same set up as Julie, a loc on my PPOR with all my rental income,plus my wife's and my salaries going into thus reducing my principal and intrest on my PPOR. All out goings for rates, insurance 7 living expences etc come from CC, which is payed from loc account once a month aswell as all the IPs which are all seperate accounts.

This seems to be working as the principal on my PPOR has dropped dramatically since this was set up by my broker in January this year.

Is this setup ok

regards
john

[julieo]

I think you may have become worried because you are calling your repayments "loan interest". They are just repayments. The loan interest is incurred within the loans for the IP itself.[/QUOTE]

Thanks Mry I noticed that wording after the post. Yes the money going out of LOC is to pay the loan interest (all IO loans by the by).

Well thanks again for the reply I do worry a bit about stuff like that. It works very well for us and I have everthing flowing nice and smoothly now. It would have been awful if I was breaking some tax law.

Just as an aside on one of the IP loans I borrowed a bit more for private use but when I calculate loan interest at tax time I only calculate the interest for the IP so in other words I don't claim all the interest on that particular IP.

[Aceyducey]

Julie,

You might be better off using an offset account than the LOC for in and out goings. You'll find some past discussions on this topic.

Note there are many cases of banks charging too much interest on 'trading' LOCs. I suggest you keep a close eye on this. There are past discussions on this too.

I trust forum search more than I trust my memory or paraphrasing ability :)

Cheers,

Aceyducey

[julieo]

Thanks Aceyducey,

I will look back on these discussions and rethink my strategy.

Regards
Julie

[Mry]

The offset account idea works if you want to use your principal place of residence as a rental one day.

Brizzy Boy - Ok too, in my opinion from the information you gave. As you can see, it is working well for you too.

[Corsa]

It's OK about my accountant too. I don't need to make a phone call but if I needed clarification on these matters I would ask her, provided she isn't asleep when I go to bed. But then she may not know what she is talking about: She has only been in the industry over 40yrs afterall.

Thommo, are you saying your accountant is your wife? And you also use PwC? I am just trying to understand why you are getting so defensive with these posts, in addition to fixated on your position despite contrary information being offered to you regarding other ways of looking at this situation.


Many people are under the false assumption that:
a) many private expenditures are tax deductible

I and my accountant know perfectly well what "tax deductable items" are. What made you believe we don't?

All your posts have led me to believe that you claim both personal and investment related items on your tax which is not legal. If you dont do this, then quite frankly there is no issue and we are talking at cross purposes and have both misinterpreted each others posts.

I reckon the free advice I (personally) recieved on this thread to be worth about what I paid for it. I will return the favour, if I may, and give a little free advice myself.

This comment is specifically designed to point out to the forum that the opinions outlined in this post are worthless and that my point of view has no value or basis.

This is despite the fact that I have pointed out to you that I am a trained professional who has worked with PwC and big accounting firms who's opinions you also clearly value.

I will return the favour, if I may, and give a little free advice myself.

Don't jump to conclusions such as assuming the advice I recieve is NOT from full time, very experienced, tax professionals. Certain comments on this subject were ill-advised and professionally rude. At least I took offence at them, on my wife's behalf.

Thommo

As I pointed out before, I am 99% confident that your accounts are correct and the advice you have received is sound.

But you have made comments on this forum, which have led me to believe that you claim personal items on your tax (ie your wife credit card bills, boat and car purchases) which is not correct.

I have said enough as well on this topic, I have pointed out all the instances where I have felt confused by your intentions and you are still querying what led me to question your posts.

I dont know why I am getting so offended by your posts Thommo but the point is that I am feeling attacked and I feel that your posts are unnecessarily aggressive and appear to be talking at cross purposes to the issue initially raised regarding the deductibility of personal expenditure from a Line of credit.

Best Wishes

Corsa

[Thommo]

With respect Corsa, if you are now with IBM then your speciality is not taxation. Was it you said something like "The majors are OK as far as they go"? Someone did. To say this is totally unprofessional and I am sure nobody on this forum would like to have their professional standards described in this way.

What is so hard to understand about paying a private debt by cheque/credit card and calling it "drawings"? The amount is simply shifted from business profit to private income and full tax is paid.

But you have made comments on this forum, which have led me to believe that you claim personal items on your tax (ie your wife credit card bills, boat and car purchases) which is not correct.
This is a truly absurd statement and hardly worthy of a reply. If I were doing as you say it would be highly illegal. I won't ask why you think I am doing this or why you assume I would be so stupid that I would admit it on an open forum, but I will insist you to cut and paste the passage in which I said it. If you read properly you will see that I admit only to using a biz account but always catigorising it as "drawings". I can assure you this is not illegal.

I too am heartily sick of this argument but I am forced to continue while I am being accused of tax fraud and stupidity and my wife of being an incompetent tax accountant. If you read back you will notice Acey and one other subtly recommended I sack my accountant or at least that they knew more tax law than she. If you're reading this Acey "In your dreams!!"

A very determined Thommo.

[Les]

OK, people, - time for a deep breath, and a chance to settle down.....

This thread has been very interesting, if potent, but some comments have been bordering on attacks!! Fortunately, those being targetted have been kind enough to not take too much umbrage.

But it is borderline...... I recognise the value of the debate, and the worth to readers - and it is only this that has allowed the thread to remain open. It is still wavering on that borderline though....

Keep it respectful, or the thread will be locked,

Regards,

[possumcreek]

Hi Brizzy boy
When your say situation is like Julie's do you mean that you also don't claim any of the interest on the LOC? You only have problems if you try to claim this interest when it's essentially a loan for private borrowings (ie: PPOR) even though your IP expenses are paid from it.
That's my understanding anyway
Cheers

[Mry]

Over breakfast my wife reminded me that our LOC was set up before the Hearts case and therefore is an unreliable example.
Oh man, I completely and utterly missed out the hints that it was your wife who was the accountant! When you said that you could ask her those questions unless she was asleep, I thought it was like me, how I get called at 9pm to be asked if buying stamps to send letters to clients is deductible.

Out of interest, did she say that you had to change anything?

btw kudos to you for posting a correction.

[Brizzy Boy]

Hi Possumcreek,
have only had the loc on PPOR since January this year, all my IP's are seperate accounts, I live off my credit card and all expences for Ips are also payed from my credit card. My loc pays my C/card just before the payment is due so do not get charged interest, Loc also pays IPs monthly.
The way I see it work is that I can only claim interest on IPs plus all expences associated with these IPs.
I can not see how I can claim any interest on my loc, but I will leave that up to my accountant. All that I am really rapped in at the moment is seeing my principal on my PPOR drop dramatically, my wife gets on line and checks the balance daily and she is getting so excited.

Regards
John

[Thommo]

Out of interest, did she say that you had to change anything?

No, she is "comfortable" with what we do. But hings were more different then than I realised.

Thommo (read this quickly before he is banned)

[Aceyducey]

So Thommo,

Can you restate your position now that you've rechecked it with your accountant/wife.

So we can all understand where you stand.

Please keep in mind that no-one except you have made comments about the skills of your accountant or tax fraud. The rest of us are simply trying to understand what you're trying to say.

And keep in mind that even if you have the best doctor/lawyer/accountant in the world, a second opinion never hurts - if nothing else it verifies that your doctor/lawyer/accountant is correct.

Suggesting a second opinion is NOT at attack on the first opinion, that's simply what's in your head.

Cheers,

Aceyducey

[Corsa]

With respect Corsa, if you are now with IBM then your speciality is not taxation. Was it you said something like "The majors are OK as far as they go"? Someone did. To say this is totally unprofessional and I am sure nobody on this forum would like to have their professional standards described in this way.

Thommo, you are correct, my speciality is not taxation, but nevertheless I am a qualified accountant who is able to state with assertion various accounting and tax related matters.

No, I didnt say something like "the majors are ok as far as they go", I stated on two occassions that I am 99% confident your accounts are fine, it is just my/others interpretation of what you have posted here that is in question.

But you have made comments on this forum, which have led me to believe that you claim personal items on your tax (ie your wife credit card bills, boat and car purchases) which is not correct.
This is a truly absurd statement and hardly worthy of a reply.

Thommo, the reality of the situation is you have made these comments in your posts...how can you say my interpretaion of this is absurd when they are written in black & white for interpretation by others? you have also said my opinions are worthless.

As I have said previously, if you agree that claiming personal items on your tax like your wifes credit card, boat and car, is not correct, then we clearly have no issues, no breach of the tax law and clearly it has been a misunderstanding.

I sincerely apologise for any misinterpretation that may have been experienced by you by my posts, I am sorry for that Thommo.

Best wishes

Corsa

[/QUOTE]

[Thommo]

Thommo, you are correct, my speciality is not taxation, but nevertheless I am a qualified accountant who is able to state with assertion various accounting and tax related matters.

No, I didnt say something like "the majors are ok as far as they go", I stated on two occassions that I am 99% confident your accounts are fine, it is just my/others interpretation of what you have posted here that is in question.



Thommo, the reality of the situation is you have made these comments in your posts...how can you say my interpretaion of this is absurd when they are written in black & white for interpretation by others? you have also said my opinions are worthless.

As I have said previously, if you agree that claiming personal items on your tax like your wifes credit card, boat and car, is not correct, then we clearly have no issues, no breach of the tax law and clearly it has been a misunderstanding.

I sincerely apologise for any misinterpretation that may have been experienced by you by my posts, I am sorry for that Thommo.

Best wishes

Corsa

[/QUOTE]In case anyone's confused, nothing I have said should be interpreted as if I participate in or condone tax fraud

There has been a misunderstanding which I have addressed, beyond that I have simply offered my opinion. If you choose to read carelessly, so be it.

[Corsa]

Thommo, I havent read carelessly

i have read and reread all these posts to make sure that I am clear on contentious issues before I post.

quoting from your initial posts:

I also have a LOC into which I transfer excess funds in my bank a/c, regardless of whether these were private or taxable incomings. To buy a car I would simply transfer the funds out of this a/c into my bank and write a cheque. My wife's salary also goes into this a/c.

Again I have NEVER apportioned interest or charges. I have claimed the lot.


Why, if you want a Rolex personally, couldn't you pay for it out of the biz and simply call it drawings? Calling it an "investment" is probably fraud but calling it "drawings" is honest and the money is taxable.

These comments specifically have triggered my request for clarification, which i believe you have now provided with your subsequent posts.

All the best Thommo

Corsa

[Thommo]

Everyone wants to put this to bed, me more than anyone else.

Could I please make one small comment?

I posted in part (in reference to the "Rolex")..."Calling it an "investment" is probably fraud but calling it "drawings" is honest and the money is taxable.

"Probably" had no right to be there but in an earlier post someone spoke of "investing" in a Rolex and I merely followed the argument. But if my business was profitable enough to justify a high salary (but not drawn weekly), buying a Rolex would not be unreasonable.IMHO

[coastymike]

I think we should all just kiss and makeup. All relationships have there problems. Maybe this will be referred to in future posts as the "rolex incident". I just realised that we have also given Rolex an enormous amount of free advertising space.