2 on one title, 1 IP 1PPOR scenario

Can someone please run their eye over this for me?

2 units on one title, so one loan.

1 unit is rented, one is PPOR.

Now, just say we split the loan in two, one for each unit, and had the offset account fully offsetting the PPOR portion of the loan.

My thinking is that the remaining interest will still only be half deductible despite the PPOR half being fully offset, b/c from a tax perspective the loan is for the whole property and only half is rented.

Is this correct?

Thanks for your help :)
 
If its one title however there is a single CGT asset. A 50% main residence exemption would apply rather then a 100% MRE that applies to one of the assets like you normally see with an investor who owns two properties - 1 IP and 1 PPOR. So a pro-rata rule applies for CGT. 50% is exempt and 50% is subject to CGT.

Ditto you cant say that the loan applies to one use or another. It will always be 50/50. The offset is 50% useless.
 
Now, just say we split the loan in two, one for each unit, and had the offset account fully offsetting the PPOR portion of the loan.

My thinking is that the remaining interest will still only be half deductible despite the PPOR half being fully offset, b/c from a tax perspective the loan is for the whole property and only half is rented.

Is this correct?

Thanks for your help :)

I think you're on the right track. The splitting of the loan only creates two loans for the asset, rather than a loan for each unit. Therefore each loan is effectively 50% of each unit, so only 50% deductible.
 
There is some old case law on this topic which may assist.
Federal Commissioner of Taxation v. Carberry, Federal Court of Australia, 14 November 1988 ATC 5005
http://www.iknow.cch.com.au/#!/docu...y-federal-court-of-australia-14-november-1988

It may be possible to separate the loans and then subsequently set up offset on the non deductible portion. I suggest a private ruling.

See also IT 2661
12. In certain cases, such as Carberry, a single asset (such as land with a single title) may be capable of being properly regarded as having been notionally divided between a part acquired with a business purpose and a part acquired with a non-business purpose. In such a case, borrowings may be properly regarded as relating to the notional part of the asset acquired for a business purpose and a deduction will be allowed for the full amount of interest paid in respect of the borrowings.

13. However, for this method of apportionment to apply, it must be shown that the borrowings in fact relate solely to the notional part of the asset acquired for business purposes. In Carberry, for instance, the taxpayers were able to show that the part of the asset purchased for private purposes was paid for with the monies which the taxpayers had received from the sale of their previous residence. Accordingly, it was open to the Tribunal to find that part of the asset purchased for business purposes was in fact purchased with the borrowed funds.
 
The "business" elements in Carberry are different from the nature of assessable rental income but the basis of notional apportioning may be available IF there is equity from a former residence. Would be a tough one to get over the line I may imagine.

Terry - what about partitioned acquisition ? Normally partitioning can arise with a subdiv. What about when there is no possibility to subdiv ?
 
TR 2000/2 accepts that a mixed purpose loan can be split such that the investment portion retains its interest deductibility.

Where the loans are truly split into separate borrowings (caution: some banks only notionally split) then an offset could be set up against the PPOR loan.

Just bear in mind that split loans under a common security where repayments are directed to the PPOR loan whilst the IP loan capitalises may be subject to Part IVA.
 
Rob - Good point.

The initial loan would need to then to be split. This also seems not different to the concept of fixed + variable portions. The offset attaches to the variable only normally. Maybe even add redraw / LOC to PPOR portion etc These issues could also address Part IVA.
 
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