ATO to reject capitalisation of interest on investment property loans?

http://www.theage.com.au/business/p...es-interest-20120424-1xjbv.html#ixzz1szzbp8iK

A NEW tax ruling sounds a warning to some of Australia's 1.5 million property investors and may cost them thousands of dollars in tax breaks, experts say.

The Australian Taxation Office has flagged it will crack down on property investors claiming deductions for interest expenses on certain types of loan arrangements.

Property owners using some or all of the rental income from an investment property to pay off their own home loan while adding the interest from the investment loan to the principal and claiming it as a deduction would come under scrutiny, accountants BDO said.

In a determination last month, the ATO said it would reject such arrangements.

''People are trying to divert all the rental income off into their home loan.

That's pushing it too far and that's what the Tax Office is getting at,'' said Age columnist and tax expert Max Newnham.
 
It was difficult to quantify how many investors would be affected, Mr xxxxxxx said. ''Of our clients, I'd be surprised if 10 per cent were doing it,'' said Age columnist and tax expert xxx xxxxxxxx.

1 in 10 investors are capitalising their interest - that is a fair proportion.

Wouldnt want to be within that bracket - also ATO might take a little bit more notice now Mr xxxxxxx has identified his clients as potentials.
 
There have been some specific scheme rulings.

Stay outside of those schemes, get specific advice, get your own PBR and you should be fine.

Too many media folks look at wet blanket generalisations.

There are many (acceptable) reasons why someone would want to cap interest other than fall foul of IVA.

Again folks, please dont make assumptions about YOU SPECIFICALLY can and cant do. Get specific advice and you will be surprised.

ta
rolf
 
Page 2 of this, headed "Capitalised Interest Ruling Finalised" from Julia H, has some info: http://bantacs.com.au/newsflash/Newsflash_243_15th-March-2012.pdf

Call me old-fashioned, but reading through those examples Julia offers I couldn't help but feel saddened that such legalistic contrivances are necessary. It tells me there's a plenty of money in this particular game destined for places other than people's bank accounts or the ATO's bank account. Something about collectively cutting off our nose to save our face comes to mind. Damn is our tax system a mess!
 
C
all me old-fashioned, but reading through those examples Julia offers I couldn't help but feel saddened that such legalistic contrivances are necessary. It tells me there's a plenty of money in this particular game destined for places other than people's bank accounts or the ATO's bank account. Something about collectively cutting off our nose to save our face comes to mind. Damn is our tax system a mess!

Yup

Ta

Rolf
 
See the other threads on TD 2012/1.

Your heading to the threat is misleading, the ATO hasn't rejected capitalisation. It is still possible, but if it is done as a scheme with a dominant purpose of paying off the home loan sooner then they can deny the extra deductions.
 
See the other threads on TD 2012/1.

Your heading to the threat is misleading, the ATO hasn't rejected capitalisation

Please note the question mark at the end of the thread title. It means I'm asking a question...

Besides, I think the quoted text in my first post describes the specific scenario in question.

Are there other threads on TD 2012/1... I searched but couldn't find any. Would you mind linking to them?
 

No worries. Thanks, one of those three threads is my one... the other two just mention TD 2012/1 in passing, there's not much discussion there.

I think Julia's PDF linked above offers some good insight...

It is all about your reason for not making the interest payment on the rental property and whether that is
considered by the ATO to be more dominant than the tax benefit. Some examples worthy of consideration:
1) Wanting to save for a holiday or safety net for unforeseen circumstances. Choosing to do this
through the offset account attached to your home loan is practical as your only other source of funds
in an emergency is the LOC used to pay rental property expenses. If this was accessed for private
purposes it would create the record keeping nightmare of interest apportionment on a mixed purpose
loan.
2) Your home loan is over 10 years so the repayments are high, add to this a detailed budget of your
living expenses and you just can’t afford the interest repayments on the rental property but
fortunately, you have enough equity to secure a LOC for these borrowings.
3) You have organised the LOC so that you have all the rental property expenses recorded separately
and on one statement and so that you can be sure that payments are met when due because you have
so much available credit. All your income is directed to the offset account for you home loan. The
question you have for the ATO is what happens when due to the order that expenses are drawn from
the LOC or because the property is negative cash flow or because you are not that organised and
irregularly transfer money into the LOC and then only what you feel you can afford considering
possible private expenses. As a result of any of these interest will capitalise on the LOC is this also
caught by Part IVA. Is the dominant purpose of your lack of attention to your accounts on a daily
basis, to obtain a tax benefit?
4) It is your intention to start a family as soon as it is financially viable but it is a personal choice that
during the first few years of your children’s life that you will live off one wage. To be able to
manage on such a reduced income you will need to be far enough ahead on you home loan to not be
required to make repayments during that period. The question for the ATO is whether letting
interest capitalise on you rental property while saving to have a family is a scheme with the
dominant purpose of a tax benefit.
5) You had thought you could meet your financial commitments but due to a change or circumstances
such as pregnancy, demotion, unemployment, sickness etc you are finding it difficult to pay your
bills and are anxious about future doctor’s bills unemployment etc. You wish to concentrate all your
income towards you offset account to ensure you can meet your home loan repayments and
emergencies. Fortunately, you have plenty of equity so can use a LOC to support the rental
property. Is the ATO going to use Part IVA to force you to borrow for personal expenses rather than
rental property expenses?
6) The interest rate on your private debt is higher than that on the LOC. This maybe because your
private debt is a credit card or car loan. It may even be the case with your home loan. This scenario
may even be the one opportunity where the way the loans are organised can affect the success of
your arrangement. In this case you argue that your dominant purpose is simply to reduce your
interest expense by paying the highest interest rate loan off as soon as possible.
7) If you have sufficient equity in assets other than your home to finance the growing LOC debt then
the concept of paying off your home sooner has much more punch. You dominant purpose could be
to make sure that only your rental properties are exposed to risk of mortgage repossession.
 
mmmm so if I have an LOC on my PPOR to raise the deposit for purchasing IPs and then pay the LOC off before the mortgage on the IPs do I get caught by this?

JB
 
mmmm so if I have an LOC on my PPOR to raise the deposit for purchasing IPs and then pay the LOC off before the mortgage on the IPs do I get caught by this?

JB

This should not be a problem as you are paying off dedutible debt.

The problem may arise when you use rent to pay off non deductible debt.
 
One thing is certain... More tax audits for investment property owners whose interest expenses significately increases since the last financial year...
 
I'm abit confused by all this if I have 2 properties and 2 loans, 1 for each property. The loan on the investment property I am paying interest only and the loan for the property I live in has an offset account. Any rent money left over after paying the bank interest of the 1st loan gets deposited into the offset account of the 2nd loan. Is this the type of setup ATO trying to crack?
 
I'm abit confused by all this if I have 2 properties and 2 loans, 1 for each property. The loan on the investment property I am paying interest only and the loan for the property I live in has an offset account. Any rent money left over after paying the bank interest of the 1st loan gets deposited into the offset account of the 2nd loan. Is this the type of setup ATO trying to crack?

Nope.

The ATO is targeting an arrangement whereby someon borrows from a LOC to pay the interest on the investment property which then frees up cash from rents etc which can be paid into the offset/home loan to pay it off sooner.
 
Nope.

The ATO is targeting an arrangement whereby someon borrows from a LOC to pay the interest on the investment property which then frees up cash from rents etc which can be paid into the offset/home loan to pay it off sooner.

Don't know about you, but I think the observations made in the ruling at 17 (e) and (f) are big news. It would be interesting to run a poll here to find out how many people runniging the int. capitalisation approach would fit neatly into those examples.
 
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