Capitalising negative cash flow

[House_Keeper]

I am wondering whether it is OK from a tax-deductibility perspective to capitalise the negative cash flow that may occur in any year on an investment.

I have done a search on the forum about this topic, but I haven't found anything that exactly covers this. I understand that borrowing for additonal investment costs is OK. There is also a lot on capitalising interest, but many of the threads are mixed with the issue of split loan and reducing PPOR debt.

The scenario goes like this. Let's say that I have set up an investment, using a loan of 200k through a LOC. I put all the investment income into the LOC, and charge the interest to the LOC as well. In a particular year, the investment may be running a negative cash flow, say 3k, therefore increasing the debt level. Is interest on the whole debt of 203k deductible from next year onwards?

Thanks,

[bonecrusher]

Hi Housekeeper

I have a set up as you have described and all the enquiries i have made the answer has been the same YES you can.

As long as the investment account is seperate, debt increased due to investment expenditure. eg Rates Shortfalls etc.

My understanding from my accountant is that as long as you service the interest its fine.

Cheers
BC

[House_Keeper]

Thanks bonecrusher,

That is reassuring, as it is a simple way to keep track of an investment. The investment effectively funds itself, and the debt moves up or down based on its net income performance. I don't like having separate accounts for the same investment as it takes more effort to track its performance.

Cheers,

[Twitch]

I don't like having separate accounts for the same investment as it takes more effort to track its performance.

Cheers,
What you do get though with separate accounts is much much better cash flow because you can capitalise most of the interest. For example if you have a 200k LOC and your shortfall is 2k/yr, with separate accounts you could be paying interest out of your pocket on only the 2k (4k the next year, 6k the next .....) rather than the 202k. That is a big difference!

[House_Keeper]

What you do get though with separate accounts is much much better cash flow because you can capitalise most of the interest. For example if you have a 200k LOC and your shortfall is 2k/yr, with separate accounts you could be paying interest out of your pocket on only the 2k (4k the next year, 6k the next .....) rather than the 202k. That is a big difference!

I'm not sure what you are referring to.

No matter how many accounts you have, you still have the same debt, and the same interest, don't you? Since this is all investment related, all the interest is tax deductible, isn't it?

Am I missing something?

[Ray Brown]

Hi Housekeeper

YES you can.

As long as the investment account is seperate, debt increased due to investment expenditure. eg Rates Shortfalls etc.

My understanding from my accountant is that as long as you service the interest its fine.

Cheers
BC



Hi B'crusher or any IP tax accountant-types,


OK- Simple

One of my IP's cost me $25/week cash flow to hold last year.
It has -$145,000 balance on the loan, as it has since I bought it. I just pay interest only (fixed for 5 yrs at 6.4% ;) ), claiming this interest as a tax deductable expense.


OK- More Complicated

Are you saying that I can simply draw more funds and add this
(-$25 x 52 weeks = -$1300)
to the balance of the loan? The balance then being -$146,300 after the first year, claiming the extra interest cost when I do my tax return?

I have kept the rent a little low because of the excellent tenant, but when the rent does rise and the property becomes cashflow +ve, what then?
Does the ATO expect me to start paying off the loan? Or what?


Ohhhh Kayyy - Now you've lost me.

Also, I have a LOC set up for investing in income-producing assets only. Can I appart from borrowing to buy shares or whatever, just help myself to those funds to reduce my IP cashflows to zero? i.e just taking the $1300 and popping it into my PPOR offset account?

awaiting answers to this, with interest...

ciao

[Twitch]

I'm not sure what you are referring to.

No matter how many accounts you have, you still have the same debt, and the same interest, don't you? Since this is all investment related, all the interest is tax deductible, isn't it?

Am I missing something?
The bit you are missing is that it isn't about deductability, my point was cash flow. One LOC (lets call it an overdraft account) funds the NG shortfall of the main LOC and grows over time. Your out of pocket cash flow is to pay the interest on the overdraft a/c, an amount much smaller than NG cash short fall.

It is effectively borrowing to fund the short fall, and so rather than pay 100% of the short fall, you only pay 7% (say) although that grows over time.

[House_Keeper]

The bit you are missing is that it isn't about deductability, my point was cash flow. One LOC (lets call it an overdraft account) funds the NG shortfall of the main LOC and grows over time. Your out of pocket cash flow is to pay the interest on the overdraft a/c, an amount much smaller than NG cash short fall.

It is effectively borrowing to fund the short fall, and so rather than pay 100% of the short fall, you only pay 7% (say) although that grows over time.

The scenario that I am describing is effectivelly borrowing to fund the shortfall. The shortfall is added to the loan balance. I am effective borrowing 100% of the shortfall.

How does your method provide a better cash flow exactly?

[Twitch]

The scenario that I am describing is effectivelly borrowing to fund the shortfall. The shortfall is added to the loan balance. I am effective borrowing 100% of the shortfall.

How does your method provide a better cash flow exactly?
OK gotcha, my mistake. Answer is it doesn't, it just avoids capitalising interest within the same loan, but that probably is not a biggy anyway.