Interest on Interest and Capitalising Interest - the Facts

Hi Redwing

Yes the above does look correct : )

Cheers

Corsa

Thanks Corsa,

Where does one go for assistance in setting up your accounts such as this..is it trial and error for the majority, i.e BC (Before Corsa), because the staff at the bank seem perplexed by it all;
4 IP's, 5 Loans, a working account, a Credit Card linked to the working account cleared each month, an Account for the HDT Trustee to recieve rents and then paid to the unit holders, a LOC partially drawn down and invested in a Income based Managed Fund whose returns pay back the LOC and reduce it,the rest as a Safety Buffer.

Now thanks to this thread I'm trying to sort out the accounts to maximize and clarify them (deductible debt and non-deductible debt as wellas business and personal expenses)..maybe when I'm a big enough customer the bank will give me a "relationship manager" :)
 
maybe when I'm a big enough customer the bank will give me a "relationship manager" :)

Trust me, you don't want one. Value Add: Big fat zero! What it does is puts the bank on notice of your whole financial affairs and make you think they have your interest at heart but really its how much more they can rip you off through x-selling insurance products, investments, x-collaterised loans..etc.. If you know the system, theres no need for a relationship manager. Eg. I hate going through call centres who keeps palming you off between departments. Just lodge a general complaint and make a note that FICS will also be informed if the matter needs to be escalated further. That will send em reeling. Just drip feed info as it suits your needs, not theirs. Play the system.

By the way ChrisOs, I think what Redwing means was you can't set up a direct debit service against your LOC. ie. you can't have Shire rates automatically take money out or another bank charging IP loans against your LOC. I am yet to find an account that allows for this. So it looks like you will have to withdraw from LOC and put into your "Property Account" which probably needs to be interest bearing to satisfy interest deductibility rules.
 
I dont believe (or at least the bank tells me) that you can direct debit a LOC, so this means your Property Costs account would have to be topped up manually (in my situation) would it not?

Redwing,

I have 3 Loc's with WBC and have direct debits set up from all of them.
 
By the way ChrisOs, I think what Redwing means was you can't set up a direct debit service against your LOC. ie. you can't have Shire rates automatically take money out or another bank charging IP loans against your LOC. I am yet to find an account that allows for this. So it looks like you will have to withdraw from LOC and put into your "Property Account" which probably needs to be interest bearing to satisfy interest deductibility rules.

Rixter said:
I have 3 Loc's with WBC and have direct debits set up from all of them.

Hi asdf,
I'm with Rixter. I pay interest on another loan directly out of the LOC by direct debit. It is a BankSA/St George LOC.

Regards,
Chris.
 
Redwing,

I have 3 Loc's with WBC and have direct debits set up from all of them.

Arghhhh :mad:

And you're with the same Bank as me :D

Oh well, different day, different person and maybe I'll get a different result (here's hoping)..must be your boyish charm Rixter, can you get your people to talk to my people (ooops just remembered, your people are my people..back to square One).
 
Trust me, you don't want one.

Value Add: Big fat zero!

What it does is puts the bank on notice of your whole financial affairs and make you think they have your interest at heart but really its how much more they can rip you off through x-selling insurance products, investments, x-collaterised loans..etc.. If you know the system, theres no need for a relationship manager. .

Thanks ASDF

And here I was; I was hoping it would be beneficial
:D

I'm getting calls at the moment from them for insurance products (Landlords, Home etc)
 
*BUMP*

Dropped into another branch and spoke to a different person..

"paying the loans from your LOC..hmm...hang on, let me call The Mortgage Centre..yes..okay..uh huh..yes sir; that should be no problems I'll get the forms".

;)

Making some progress at last towards an ideal structure..

The question still is though, how are you supposed to get assistance in ensuring you structure not only your loans etc correctly, but your accounts for maximum benefit :confused:

  1. Broker
  2. Accountant
  3. Bank
  4. Financial Planner

:confused:

Next is to revalue the IP's and try and set up a seperate LOC above each IP
 
I have a RM and she is fantastic, she understands investment and even suggests structures that are suitable for my structure (all disclaimers of course). One call to her for more $$ and she chases it up, even pushing for 85% lends whitout LMI when the suburb may not justify it. so i would have to disagree that RM's a nil value adds.
pieman
 
private ruling

What great posting with such valuable info. Kudos to you.

The one important question I have is "has anyone had a private ruling about this that they would like to share?"

I will be happy funding my loss from an inv loc but would be alot more cautious about funding the whole lot without anyone having had a ruling in their favour.

Cheers
Andrew
 
Hi all

I'm pretty new to property investing and am still trying to get my head around some of the financial concepts (never been my strong suit!) Corsa's post was fantastic - I've read all the posts to here and have tried to model Corsa's LOE diagram for my own needs (see attached), but would like to confirm some things, please.

What differs for me is that our PPOR is fully paid off, so no non-tax-deductable debt :) While some of you may feel this isn't the best use of equity, and that it's sitting idle, I have also saved enough of a deposit for an IP, but want to set up the right financial structure.

Can you please advise:

1. If the best type of mortgate is a LOC or offset account, can I combine the Rental Income account and Household account and pay both Rental Income and Salary into the single account, offset against my IP mortgage (I believe I can)?

2. If there's a reason for keeping the accounts separate, I'd just be transferring my salary to the Rental Income account to offset the mortgage and then transferring it back to the Household account to pay personal expenses and holidays. If so, why keep the two accounts separate?

3. The key to Corsa's structure is separation of personal expenses from investment expenses (and interest) - personal and investment income sources can be mixed, correct?

4. Why would I need a LOC in addition to a mortgage offset account?

Thanks all,
The Green Goblin
 

Attachments

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Please advise...

Just quoting my previous message as I didn't flag it as a question :eek:
Hi all

I'm pretty new to property investing and am still trying to get my head around some of the financial concepts (never been my strong suit!) Corsa's post was fantastic - I've read all the posts to here and have tried to model Corsa's LOE diagram for my own needs (see attached), but would like to confirm some things, please.

What differs for me is that our PPOR is fully paid off, so no non-tax-deductable debt :) While some of you may feel this isn't the best use of equity, and that it's sitting idle, I have also saved enough of a deposit for an IP, but want to set up the right financial structure.

Can you please advise:

1. If the best type of mortgate is a LOC or offset account, can I combine the Rental Income account and Household account and pay both Rental Income and Salary into the single account, offset against my IP mortgage (I believe I can)?

2. If there's a reason for keeping the accounts separate, I'd just be transferring my salary to the Rental Income account to offset the mortgage and then transferring it back to the Household account to pay personal expenses and holidays. If so, why keep the two accounts separate?

3. The key to Corsa's structure is separation of personal expenses from investment expenses (and interest) - personal and investment income sources can be mixed, correct?

4. Why would I need a LOC in addition to a mortgage offset account?

Thanks all,
The Green Goblin
 
Let me try to summarise this discussion to see if I understand correctly...

- - - - -

It's not OK to capitalise interest on an IP loan, but it's OK to pay the interest on an IP loan using a Line of Credit and capitalise the interest on the LOC. Right?

So... if the same amount of interest is being capitalised, why is this capitalised interest tax deductible if it's in the LOC, but not if it's in the IP loan?

- - - - -

It's not OK to deposit all IP rental income into a PPOR loan, but it's OK to deposit all rental income into an offset account attached to the PPOR loan. Right?

So if the same IP rental income is being used to reduce the non-deductible interest on the PPOR loan, why is this OK when the rental income sits in an offset account, but not OK if it goes directly into the PPOR loan?

- - - - -

I'm just trying to look at this from an ATO perspective. If they allow one method, why don't they just allow all IP loan interest to be capitalised directly, and all rental income to go diectly into the PPOR loan? That is what is effectively happening with the structure suggested anyway, so why do we need the complex structure to make it acceptable to the ATO? :confused:

Cheers,

Shadow.
 
Let me try to summarise this discussion to see if I understand correctly...

- - - - -

It's not OK to capitalise interest on an IP loan, but it's OK to pay the interest on an IP loan using a Line of Credit and capitalise the interest on the LOC. Right?

So... if the same amount of interest is being capitalised, why is this capitalised interest tax deductible if it's in the LOC, but not if it's in the IP loan?


I'll try and answer, but may not put it across effectively;

How do you capitalise the interest in he normal IP loan?

If you didn't pay it on the appointed day I'm sure you'd start getting letters/calls maybe eventually visits :D

Whereas the LOC is similar to a big credit card


- - - - -

It's not OK to deposit all IP rental income into a PPOR loan, but it's OK to deposit all rental income into an offset account attached to the PPOR loan. Right?

So if the same IP rental income is being used to reduce the non-deductible interest on the PPOR loan, why is this OK when the rental income sits in an offset account, but not OK if it goes directly into the PPOR loan?

Because you are paying down the loan when you put it into the PPoR Loan, whereas in the Offset its sitting there ready to be used again, but reducing your interest payable

- - - - -

I'm just trying to look at this from an ATO perspective. If they allow one method, why don't they just allow all IP loan interest to be capitalised directly, and all rental income to go diectly into the PPOR loan? That is what is effectively happening with the structure suggested anyway, so why do we need the complex structure to make it acceptable to the ATO? :confused:

Cheers,

Shadow.

Tried to answer the above with my limited knowledge..
 
Hi Redwing, thanks, yes that makes sense, I can see your point...

However, what if the IP Loan limit is set higher than needed to buy the IP. For example, say I arrange the IP loan limit for $800K, but I only need to draw $600K to actually buy the IP, then I have $200K spare for capitalising interest within the IP loan.

Or to look at it another away, what if the IP loan is a actually Line of Credit itself.

In this case, do you think it would be OK with the ATO to capitalise inside the IP loan?

Cheers,

Shadow.
 
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I've heard of 106% Loans, but, not real sure about what you mention here, I'd defer to the wisdom of the Brokers here

In fact talking to one of the brokers will certainly assist you, I've asked many "Can i do this..hmmm, no? ...well, how about this then?" type of questions myself, the answers help formulate my forward plan ;)

If I dont have enough cash/equity/serviceability at least I can try and plan for when i do :D
 
I've heard of 106% Loans, but, not real sure about what you mention here, I'd defer to the wisdom of the Brokers here

Hi Redwing!

I used to borrow 106% of the IP purchase price. I did this for my first few properties.

You simply cross coll until such time as the IP grows in value to where the loan becomes 80% LVR, then release the crossed security.

It was simply apply to the bank to release the security on a form and they did the rest internally with the stroke of a pen. No fee to pay and they sent me a letter of variation to go with my original loan documents stating the loan for the particular IP now stood alone.

It worked well for me as I didnt have enough equity starting out to set up a LOC for the deposits and costs as I do nowadays.
 
Thanks Shadow for your summary. It would appear a technicality is the key however don’t take my comment as anything other than an observation.

What I can add, if a technicality (and I don't wish to advise anyone doing this to stop, but) history tells us these loopholes (low docs loans, put rent in to PPOR, hybrid trusts, overseas cards and accounts, etc..) are found and that within 2 years of so that ATO catches up and closes the loophole.

Now that is ok but they usually then target AKA audit:eek: those tax payers who used these methods.

In some cases like low docs, and if you are not hiding cashincome then it is a pain and a cost but not a concern.

However the recent Overseas accounts via credit cards breach has caught a few and I understand trials are forthcoming. I remember this one as a semi-friend was telling me how despite living here, he never paid Aus tax with his Bahamas accounts and paid everything via credit card.

He was trying to convince me to do it and I thought "too good to be true" and it was. I wonder how he feels now.

Hybrid trusts seem to be going the same way.

Tax wise the ATO works on fundamental fairness. That is costs incurred in obtaining income are deductible. It is the intent is to gain income then you are ok. If the intent is to avoid tax then they want to have a chat.;)

My 2 cents, Peter 14.7
 
Is the amount in the off-set account taken into consideration when calculating the total loan amount, for the purpose of calculating LVR?

Or would using the structure described in this thread cause LVR to increase as the IP loan interest is capitalised?

If so, this could be a major disadvantage of capitalising the interest, if you suddenly find you have exceeded your allowable LVR because your total loan size has grown?
 
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