How much difference would this make?

[Stella]

After opinions here as I am considering making a change to our current setups.

Currently have "A" a/c - LOC on PPOR with all income (including rent) being paid to this a/c.
Have another LOC ("B" a/c)which is used to capitalise interest & costs on IP -this is borrowed against PPOR so is turning bad debt into good in $10k lots. When we have saved $10k we reduce LOC limit on "A" a/c by $10k & increase limit on "B" a/c by $10k so we still owe the same amount,just now more is deductible.
Also have seperate loan ("C" a/c) for IP but this loan remains the same with interest paid (around $1800 month)from from ("B" /c).
All loans are I/O & we have had the IP for just on 1yr now.

My concern is that the balance of the "B" a/c is growing and wonder how much difference it would make if we had the rent paid into the "B" a/c instead of into our PPOR LOC?

PPOR LOC is at 80% due to recent refinance for renos on PPOR. Combined owing on "B" & "C" a/cs is close to 100% of the IP value.

Considering CG is not likely to be huge in the short term ,am I better off using the rent (around $1020 month) to keep topping up funds in the "B" a/c as well as still trying to save in $10k lots?

Cheers
Stella

[Rolf Latham]

Hiya Stella

hard for me to work out the A b and Cs on ur post

Generally, (always?) better to target income to accounts that are NON deductible

ta
rolf

[Stella]

hard for me to work out the A b and Cs on ur post



I know - it does my head in sometimes too trying to sort them out!

[davewill]

Your plan sounds good to me as it is. I thought that it is your plan to have B account growing larger, whilst you reduce your A account.
Your overall loan balance (short term) would be the same whichever account you deposit your rental income. But by putting it in your A account you would be giving yourself a larger tax return (more Int on B) and hence ultimately you should be able to reduce your loan quicker.
Cheers
Dave

[Token Funder]

After opinions here as I am considering making a change to our current setups.

Currently have "A" a/c - LOC on PPOR with all income (including rent) being paid to this a/c.
Have another LOC ("B" a/c)which is used to capitalise interest & costs on IP -this is borrowed against PPOR so is turning bad debt into good in $10k lots. When we have saved $10k we reduce LOC limit on "A" a/c by $10k & increase limit on "B" a/c by $10k so we still owe the same amount,just now more is deductible.
Also have seperate loan ("C" a/c) for IP but this loan remains the same with interest paid (around $1800 month)from from ("B" /c).
All loans are I/O & we have had the IP for just on 1yr now.

My concern is that the balance of the "B" a/c is growing and wonder how much difference it would make if we had the rent paid into the "B" a/c instead of into our PPOR LOC?

PPOR LOC is at 80% due to recent refinance for renos on PPOR. Combined owing on "B" & "C" a/cs is close to 100% of the IP value.

Considering CG is not likely to be huge in the short term ,am I better off using the rent (around $1020 month) to keep topping up funds in the "B" a/c as well as still trying to save in $10k lots?

Cheers
Stella


I would strongly suggest you get a tax ruling , pronto.

[Stella]

I would strongly suggest you get a tax ruling , pronto.

Is this not classed as debt recycling - capitalising interest?

I met with an accountant awhilke ago ( recommended by someone on here) and he did not express concerns about the structure?

Suppose every now & again I just get concerned about not seeing the IP balance going down too (even though I know its really better that way while PPOR still has debt).

Cheers
Stella

[davewill]

I thought capitalising interest is ok if you have your accounts set up correctly?
I am in a similar situation with a rising investment loan account getting pretty scary! But as the overall loan positions are improving I am comfortable to leave as is.
If my over all equity position was decreasing I would be looking at alternatives ie sell and reduce debt or save harder and reduce debt

[BayView]

So, as I understand it,

PPoR LOC (a) has all rent paid into it. This is the non-deductible debt?

PPoR LOC (b) has balance of IP costs capitalising.

IP IO loan (c) is paid from (b).

Savings are used to decrease loan on (a), while (b) increases as it pays (c).

At this point in time, there is nothing illegal with doing this, but there was a case a while ago where a guy using this strategy had his tax deductions disallowed by the ATO. The whole thing went to court, and he won the case, but it may change in the future.

In my opinion it is not a sound financial practice anyway; you are hoping the cap growth will continue to increase at a greater rate than the interest is capitalising. If the debt increases, and the cap growth doesn't happen, and you need to sell in a hurry for some unforseen reason; you'll be in hot water.

If your cashflow is so tight that you have to do this to hold the investment then so be it, but it seems to me that this is a sighn you are over-committed.

To simply do it so you can hack away at the non-deductible PPoR debt and let the IP debt increase is a bit dangerous,and a bit of a dollar-swapping exercise anyway.

Better to pay the interest payments on all loans, and hack away at the non-deductible PPoR debt when you can.

[Token Funder]

So, as I understand it,

PPoR LOC (a) has all rent paid into it. This is the non-deductible debt?

PPoR LOC (b) has balance of IP costs capitalising.

IP IO loan (c) is paid from (b).

Savings are used to decrease loan on (a), while (b) increases as it pays (c).

At this point in time, there is nothing illegal with doing this, but there was a case a while ago where a guy using this strategy had his tax deductions disallowed by the ATO. The whole thing went to court, and he won the case, but it may change in the future.

In my opinion it is not a sound financial practice anyway; you are hoping the cap growth will continue to increase at a greater rate than the interest is capitalising. If the debt increases, and the cap growth doesn't happen, and you need to sell in a hurry for some unforseen reason; you'll be in hot water.

If your cashflow is so tight that you have to do this to hold the investment then so be it, but it seems to me that this is a sighn you are over-committed.

To simply do it so you can hack away at the non-deductible PPoR debt and let the IP debt increase is a bit dangerous,and a bit of a dollar-swapping exercise anyway.

Better to pay the interest payments on all loans, and hack away at the non-deductible PPoR debt when you can.

If the manner in which the loan structure is made involves steps that could only be seen to be introduced to obtain a tax benefit, and no other reseasonable explanation exists, then the tax avoidance provisions (*very nasty*) apply.

From the ATO website on split loan facilities:

Some or all of the following factors are present in a case to which Part IVA might apply:

·
a planned course of conduct designed to produce a tax benefit;
·
establishment fees associated with the restructuring of existing loan facilities;
·
the structure of these facilities is designed to produce additional interest deductions;
·
the facility is marketed in a manner that emphasises the associated tax benefits;
·
an accelerated payment of the private account and a corresponding increase in the amount owing on the investment account;
·
an absence of commercial reasons for capitalising the interest;
·
the rates of interest charged on loans under the facilities may be higher than the rates available under a separate loan structure

Never take a general tax office position and assume it applies to your "version". Seriously, get a ruling!

[Stella]

So, as I understand it,

PPoR LOC (a) has all rent paid into it. This is the non-deductible debt? Yes

PPoR LOC (b) has balance of IP costs capitalising.Yes

IP IO loan (c) is paid from (b). Yes again

Savings are used to decrease loan on (a), while (b) increases as it pays (c). Exactly

In my opinion it is not a sound financial practice anyway; you are hoping the cap growth will continue to increase at a greater rate than the interest is capitalising. If the debt increases, and the cap growth doesn't happen, and you need to sell in a hurry for some unforseen reason; you'll be in hot water. In the beginning I was ok with this as our overall debt moved from deductible to non deductible with the non deductible decreasing as we saved and reduced the LOC limit on the PPOR.
However, now we are a bit more knowledgeable, I am increasingly uneasy just letting the loan interest pile up on itself

If your cashflow is so tight that you have to do this to hold the investment then so be it, but it seems to me that this is a sighn you are over-committed.Cashflow is fine - this is the only debt we have so we can afford to make up the shortfall of interest.

To simply do it so you can hack away at the non-deductible PPoR debt and let the IP debt increase is a bit dangerous,and a bit of a dollar-swapping exercise anyway. At the time of setting up the broker convinced us this was the best way to go and it was common practice:mad:
Better to pay the interest payments on all loans, and hack away at the non-deductible PPoR debt when you can. So if we changed the rental income to go into the "B" a/c & topped up the shortfall? I guess topping up is what we are doing now (sort of) - by moving $ from PPOR except we do it in $10k lots instead of $800 or so every month?

.....time for a trip to the accountant I think.

I think I would feel a bit better paying the rent back in towards at least paying the interest on the IP - I'm guessing the effect on our tax would be neglible too? Just means around $1k less each month being paid on POR LOC.

Cheers
Stella

[Token Funder]

.....time for a trip to the accountant I think.

I think I would feel a bit better paying the rent back in towards at least paying the interest on the IP - I'm guessing the effect on our tax would be neglible too? Just means around $1k less each month being paid on POR LOC.

Cheers
Stella

Sorry to harp on it but the "we're all pretty sure it's legal" comments that fly around this forum are incredibly dangerous. There is little doubt in my mind that the material growth in the number and quantum of NG deductions are seriously concerning the ATO and I am prepared to bet there will be some *serious* resources thrown at retrospective reviews of claims over the next few years. It is simply too big a number accellerating at too great a rate for the Feds not to be tempted to have a close look.

If they assume a 10% over-statement or bullsh*t factor, they will be looking at a potential saving of close to $1B pa within a few years. How much effort would you throw at investigations with the potential of a $1B payoff?

In these sort of circumstances, certainty is only gained by a private ruling.

If (as I suspect many here are) you are concerned about the result you might get, you've answered you own question.

[Stella]

In these sort of circumstances, certainty is only gained by a private ruling.

If (as I suspect many here are) you are concerned about the result you might get, you've answered you own question.

Broker has set up at least 2 other clients that we know with the same structure before ours was done - this is how we came to use him - recommendation of friends who have used this structure for the last few years.

I am more concerned that the broker & previous accountant have set up things this way if there is doubt on the integrity/legitimacy of the structure:eek:

Cheers
Stella