Apportioning interest on a credit card

[DaveM]

Hi All

Quickie re apportioning interest. I have a low rate credit card (same as home loan rate, part of my ppor loan). I was thinking to use this to buy some IP related items using and run this is as a quasi LOC.

The credit card also has ppor aquisition costs on it (its one of those adelaide bank deals with visa card) which has an interest cost on it each month.

If I was to buy IP related stuff on the card is the interest apportionable between the personal and investment use (eg if I have something worth $2k I buy for an IP, and the interest rate is 5% on the card, can I claim 2k x 5.5% pa) or would it (I suspect) be not deductible as it has deductible and non deductible interest in the one statement?

Its just a way to look at using the card as a facility rather than pull money out of offset.

Cheers
Dave

 

[Terry_w]

Its going to get increasingly difficult and time consuming to to work out as payments are made. Also you won't be abl to pay down the non deductible portion of it independantly of the investment portion.

Why not just pay off the private use of the card before using for investment?

 

[DaveM]

Thanks Terry, that was my thought exactly as the CC is a P&I repayment.

The private use $ amount is a decent amount of $$, far more than the amount I would put on from an IP perspective. Once its paid down then I can likely use the card then solely for IP related expenses so I think I will hold off using it for mixed use till then, or in the interim use it and not claim a deduction on the interest as it wont be a huge amount anyway. My main aim was using it rather than cash for some minor IP work (AC and fencing).

 

[Paul@PFI]

This isnt a issue of magnitude and its probably trivial as far as a tax benefit. I would argue to accrue a tax benefit you have to create a debt problem that isnt worth having.

For example lets assume you fully utilise the card for $2,000 of IP expenses. After a full year has passed assuming the $2k was incurred on 1st July, the maximised deductible would be $2,000 + 5% interest of $100 = $2100. The additional sum of $100 would increase your deductions. At a marginal tax rate of around 37%...ie a benefit of $37. But your debt is still close to $2k.

In reality if you dont paydown the card the balance becomes higher and higher. This is demonstrated on card statements these days.. ie you pay minimum the card will be paid off in 32 years etc.

So for a $37 a year benefit you could rack up a debt increasingly accrues? ie $2,000 year one, $3,400 year two etc.. What might the debt be in year 5 in the pursuit of a $500 deduction ? $10K....What is the financial benefit of this?

 

[DaveM]

Hi Paul, thanks for the reply.

The plan is not to retain the balance on an ongoing basis, it is to use the CC as a quasi LOC to fund renovations prior to revaluation, preserving cash in offset for other investment uses. Funds from reval would then pay off the card purchases.

 

[Paul@PFI]

Then I consider its a triviality which adds at best 5% to deductions. Its like preferring to pay a card surcharge on an airfare and claiming it increases tax deductions. Yeah but its a triviality.

Its like asking if I drive my car every week to the IP to mow the grass is that deductible rather than paying someone else to mow. Yes both deductible but your labour isnt so its possiblly better to pay someone and avoid the travel and inconvenience. Looking at which costs the higher amount isnt reflective of a benefit!! You only "recover" 35% of each extra dollar spent. Looking at it the other way you payout 65cents in the dollar you dont recover as a tax saving.

 

[Qlds007]

Why not look to take a Nil interest rate on balance transfers card and pay down the non deductible portion of the low rate card.