Another Capitalised Interest Ruling

Hi All

I have been very busy lately, finally finished the book but still haven't done by 2006 ITRs, so I have not been watching the posts here for a while. Has anyone drawn your attention to PBR 69725. Gives us a bit more certainty on using lines of credit and capitalising interest but I still recommend you don't go with anyone promoting the arrangement as that is what sunk Harts. Just discuss it with your accountant and get a normal line of credit.
 
That's the interesting thing about the discussion people have here about capitalised interest. If you put into plan an documented arrangement to capitalise interest to maximise tax deductions, it appears you will get sunk under Part IVA. But if it just 'happens', not a problem. If I was an ATO auditor and I found a documented plan on how to capitalise interest in the taxpayer's documents, or even requests to an accountant to set up an arrangement to capitalise interest, I could probably get them.
 
That's the interesting thing about the discussion people have here about capitalised interest. If you put into plan an documented arrangement to capitalise interest to maximise tax deductions, it appears you will get sunk under Part IVA. But if it just 'happens', not a problem. If I was an ATO auditor and I found a documented plan on how to capitalise interest in the taxpayer's documents, or even requests to an accountant to set up an arrangement to capitalise interest, I could probably get them.

And what about membership of a forum which documents the structure, and arguably advocates its use?
 
Julia said:
but I still recommend you don't go with anyone promoting the arrangement as that is what sunk Harts

Please explain?

If you put into plan an documented arrangement to capitalise interest to maximise tax deductions, it appears you will get sunk under Part IVA.

But who would actually do that? Someone who's only intent is tax avoidance? and therefore Part IVA should kick them in the pants....

I see it as perfectly legitimate to capitalise interest when the obvious way to service the necessary debt is via this method.

Many businesses must leverage borrowings and capitalise interest to continue to function.. They should be entitled to do so. It's a business tool.

Many people seem concerned that they are doing something wrong.

If a person believes it to be wrong it would be my assertion that perhaps that person is the one the ATO should be looking at (in Part IVA terms). :p

Cheers,

Arkay.
 
Please explain?

I see it as perfectly legitimate to capitalise interest when the obvious way to service the necessary debt is via this method.

Many businesses must leverage borrowings and capitalise interest to continue to function.. They should be entitled to do so. It's a business tool.

Cheers,

Arkay.


I agree, it's a way of doing business.
Many people in this forum would have no way of servicing their huge loans
if it wasn't for the support loans they have established using existing equity.

This doesn't mean that people borrow funds from loan A
in order to service the same loan as that would be regarded as capitalising interest.

However if they borrowed funds from LOAN B in order to service LOAN A
and paid the monthly interest on LOAN B (which is significantly lower than loan A) it is not tax avoidance it is simply a powerful business tool as it allows people to continue to hold
those assets and enjoy the capital gain that comes with it.

As those assets appreciate in value so does the portion that will go to the ATO
so they also make money.

Cheers
 
But who would actually do that? Someone who's only intent is tax avoidance? and therefore Part IVA should kick them in the pants....
Many, many many people.

I see it as perfectly legitimate to capitalise interest when the obvious way to service the necessary debt is via this method.

Many businesses must leverage borrowings and capitalise interest to continue to function. They should be entitled to do so. It's a business tool.
I haven't said that they aren't. And it is legitimate. But that's what Part IVA is intended to do, bypass perfectly legal arrangements to destroy them if your intent is to enter into them to avoid tax.

If you look very carefully at the private ruling, it is right on the knife's edge. It was just enough to convince the ATO that Part IVA would not apply. It was a masterfully simple argument that was not embellished overly by the person making the application.

So you can go ahead and have your loan products which allow you to capitalise interest. Just make sure that you have a good reason for it and don't have any "Capitalise to max your tax deductions!" stuff lying around.

I was glad that the ATO allowed the applicant to say that they didn't want to put their own extra funds into the investment and not call it a 'private purpose'.
 
This is an interesting thread, Thanks for starting it julia.

Sooooo
Explain to me please what would be the correct way to structure an ip purchase with capatilised interest and costs. For this example no personal funds will be contributed

Purchase price of ip 500k
interest only loan
loan needs to cover purchase costs
loan needs to pay interest and holding costs for several years[not in advance]
what loan would l deposit the rental income.

hope someone can explain this
cheers yadreamin
 
Btw here is my private ruling for capitalising interested. My dominate purpose is not tax, but of course there also happens to be some tax benefits.

It's not hard to structure affairs to make good reasons for borrowing to pay interest. Mine was to be able to prepay and obtain good rates (ie 0.1% discount :rolleyes: ) And, as it was about $64k of interest, I needed to borrow as I did not have that cash in June. Of course, when come July and the distributions arrived I did. These I paid into the home loan as the investment loans were fixed. Pity about that, paying of private debt first.

This PR took 14 days from fax to letter, even got a call ("Hi, I from the ATO" :eek: ) to say it was well prepared and approved.

All my investment properties and funds are 100+% financed. It's not hard. When I have cash it's paid into PPOR loan. Later it is redrawn for investment along with the loan secured by the investment. ATO rules say that's a new loan and if for investment the interest is deductible.
 
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Many, many many people.

and I guess that's the scary part.

I haven't said that they aren't. And it is legitimate. But that's what Part IVA is intended to do, bypass perfectly legal arrangements to destroy them if your intent is to enter into them to avoid tax.

If you look very carefully at the private ruling, it is right on the knife's edge. It was just enough to convince the ATO that Part IVA would not apply. It was a masterfully simple argument that was not embellished overly by the person making the application.

So you can go ahead and have your loan products which allow you to capitalise interest. Just make sure that you have a good reason for it and don't have any "Capitalise to max your tax deductions!" stuff lying around.

I was glad that the ATO allowed the applicant to say that they didn't want to put their own extra funds into the investment and not call it a 'private purpose'.

Agreed though I have to say that this type of structure is what I would call an advanced technique. I would think that someone advanced enough to employ it would also be aware of the implication of invalid reasons for doing so.

Not being armed with enough information to adequately express the reasons for doing it would, to me, show a lack of investigation on the part of the user of that technique and I would be concerned that someone could get themselves into such a situation and blatantly represent it as "I wanted to save on some taxation".

Understanding the implications and using it as a valid and legal method is allowable to my knowledge.

It's one of those things where there isn't a problem with it until the person doing it creates one. That is certainly cause for alarm but to me it doesn't warrant comments such as:

I still recommend you don't go with anyone promoting the arrangement as that is what sunk Harts"

To me "Use at your own risk with caution and understanding" would be better advice and all that can really be offered given the "greyness' of the topic.

I hope that the continued focus of it in these threads doesn't become cause in the long run for the ATO to start viewing it differently (as the incidence of misuse potentially rises).

I guess there have been many times in the past where knife edge tactics have hurt a group of people when the situation is changed but ultimately it is the individuals risk profile that will determine whether they go with something or not. The important thing is to gain enough information to assess that risk and I believe anyone that does will no longer perceive this structure as being risky.

Cheers,

Arkay.
 
Btw here is my private ruling for capitalising interested. My dominate purpose is not tax, but of course there also happens to be some tax benefits.

It's not hard to structure affairs to make good reasons for borrowing to pay interest. Mine was to be able to prepay and obtain good rates (ie 0.1% discount :rolleyes: ) And, as it was about $64k of interest, I needed to borrow as I did not have that cash in June. Of course, when come July and the distributions arrived I did. These I paid into the home loan as the investment loans were fixed. Pity about that, paying of private debt first.

This PR took 14 days from fax to letter, even got a call ("Hi, I from the ATO" :eek: ) to say it was well prepared and approved.

All my investment properties and funds are 100+% financed. It's not hard. When I have cash it's paid into PPOR loan. Later it is redrawn for investment along with the loan secured by the investment. ATO rules say that's a new loan and if for investment the interest is deductible.

this is great to see someone who has finally "beat" the ATO

for the benefit of the forum (and me) is there any chance you could post in this thread the letter (or even just email it to me) you sent to ATO to see how it was worded
 
Btw here is my private ruling for capitalising interested. My dominate purpose is not tax, but of course there also happens to be some tax benefits.

Maniyak,
The ATO took an each way bet on your ruling to quote:
We have not fully consider the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA of the applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether PartIVA may apply.

In other words the dream police have yet to investigate your thoughts. Make sure you never let that evil vision into your mind ... tax benefit!!!!
 
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