Another interest deductibility question!

[AMH]

From: Anne-Marie H


My understanding is that interest on a loan
for an IP that will produce income (rental)
is tax deductible.

If you use equity to jointly fund a
development project (eg. unitholder of a
trust or joint venture) with the sole object
of producing income on sale (profit), is the
interest on this income also tax deductible?

If it is, can you claim it in the financial
year that you pay it, or do you have to wait
until realization of the profit?

If it is not deductible, presumably when you
do sell you can deduct all the interest
regardless of which year it was paid in from
the profit before you pay CGT on it?

Thanks
A

 

[DaleGG]

Reply: 1
From: Dale Gatherum-Goss


Hi

I wish I could say that there was a simple answer to this question. Unfortunately, the issue goes before the courts so often and the judges pick tiny nuances from each case, that it is hard to say yes or no with any certainty.

You wrote: "My understanding is that interest on a loan for an IP that will produce income (rental) is tax deductible."

Yes, it is.

You then wrote: "If you use equity to jointly fund a development project (eg. unitholder of a trust or joint venture) with the sole object of producing income on sale (profit), is the interest on this income also tax deductible?"

Yes, it is if the development happens quite quickly. If you take too much time (undefined) then the tax office have shown a willingness to capitalise the interest as a cost of the development.

You also wrote: "If it is, can you claim it in the financial year that you pay it, or do you have to wait until realization of the profit?"

You would claim the interest along the way. If this spans two financial years, you claim it in proportion to each year's outlay.

Lastly, you asked: "If it is not deductible, presumably when you do sell you can deduct all the interest regardless of which year it was paid in from the profit before you pay CGT on it?"

Yes, you are right and the interest would come off the profit for CGT purposes.

This is a minefield and I urge you to do your homework properly before taking too many steps.

Have fun

Dale