A rental property has to be available for rent (not necessarily rented) to claim tax deductions.
There are exemptions (time of building etc) but this is the general rule.
ATO to reject capitalisation of interest on investment property loans?
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A rental property has to be available for rent (not necessarily rented) to claim tax deductions.
There are exemptions (time of building etc) but this is the general rule.
If you read Part IVA, pretty much anything qualifies as a scheme.
Technically, perhaps. But the Courts don't interpret legislation literally - they read down provisions like this if it results in unconscionable outcomes that go against the intentions of the legislature.
Dan,
I don't think this is possible due to a few reasons.
Suppose I run a business. Does ATO say I am not allowed to borrow money to pay for business expenses (interest tax deductible) while taking out profits, paying tax on it and using the after-tax income on private purposes like living? As far as I can understand, this happens. Otherwise, how can I live till I start to make a profit?
I understand your sentiments; which I share as well. In these cases (capitalising the interest while using the income for private purpose), we are not operating the business/investment in the least cost way. Operating in the least cost way means we use all the income produced to pay for any business/investment expenses and only take out money if there is still surplus.
Sure the property has to be available to rent; but does not mean you have to rent it out if you can't find the suitable tenants. Suitable tenants mean those who can pay the rent and look after the property as well. If you have an expensive property, it will very well be the case that you can't find a suitable tenant for a while.
A busines is a separate entity - a company which would be paying you a wage. This is different to the situation of not paying interest on an investment loan so that you can pay down personal expenses faster.
I disagree.
ATO cannot say that you must find a tenant and somehow extract rent from the tenants. You may not be able to find a suitable tenants. Or your tenants may not be able to pay rent.
Whatever the case, if you get a rental income of $15K, you end up paying tax on it.
If you get $30K rent on the same property, you end up paying tax on $30K.
How much ever you get from the rent, you end up paying tax on it. The bottom line is, you pay tax (ie taxable) on every dollar you earn from the rent. Sure you don't pay tax if your nett income is less than the lowest tax threshold. But the crux of the matter is, your rental income is taxable and assessed for tax.
After you pay tax on an income, doesn't it become your private matter on how to spend it?
That is why I question how ATO can impose restrictions on how to spend an after-tax income.
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Thanks Terry - I thought about that. I end up questioning whether I could operate the IP through a business (sole owner as myself?) and my salary would be equal to the rental income, so the business capitalise interest to pay for expenses. I have no knowledge here.
1) It has to be available to rent for you to claim the deductions.
2) If you have no other income, $100k rent, $120K deductions, you pay no tax. You only pay tax if the income EXCEEDS the expenses.
3) The ATO will not allow you to claim interest unless the asset you have purchased with borrowed funds is income producing. You can not claim interest as a deduction for a capital, non-income producing asset. (like diamonds, as per your earlier example)
You don't understand how the tax system works. Let's say the government didn't allow negative gearing. Your wage is $80k, your rent is $15k and your expenses are $20k.
What is your taxable income? $80K. Same as it was BEFORE any rent or expenses.
Because we have negative gearing, you can offset your rental LOSS against your other income. So you only pay tax on $75k.
That's $80k wages, less the rental loss of $5k. No tas is paid on the $15k income. None, nada, zip.
1. It has to be available for rent, but you certainly are allowed to have it vacant if you cannot find suitable tenants. What ATO emphases is that you cannot use it for private purposes. It has be available for its business purpose of renting out and making money. If your tenants don't pay the rent or you can't find the right tenants, you can still fully deduct the expenses.
2. A clarification; if you make a negative income, it is assessed for tax, but no tax is payable as there is no tax for income below $0. Further, if you have a positive income but still under $6000, it is still assessed for tax, but no tax is payable. If the income is above $6,000, it assessed for tax and there is a tax to pay. So, what matters here is whatever the income you make is assessed for tax. Anything below is $6000 is exempted from paying tax, but still assessed.
3. I didn't know this. I highly doubt what you say is correct. Suppose I invest in non income producing assets like Diamonds. The underlying principle of negative gearing is that if "business income" is taxable, then the "business expenses" must be exempted from tax. As far as I understand, this is the underlying principle that applies to individuals and companies.
So, whether I invest in houses or diamonds or antiques, business expenses (of holding on to the assets while servicing the loans) should be tax deductible. If buy diamonds for $500K on a interest only loan, my understanding is that all the interest is deductible as the interest is the business expense of maintaining the asset.
Now, I am saying this from my basic understanding of tax concepts. I could be WRONG and ATO may be not allowing the deduction of business expenses of non income producing assets. I did a quick search on google, but could not find any specific regulations on non-income producing assets. I will do more searching on this. Thanks for pointing out.
Look at this way.
Wages - $80K.
IP Expenses - $20K.
Rental - $0
Your house is available for rent, but you could not find a suitable tenant
Or you have tenant, but he did not pay the rent.
These are valid cases.
So your taxable income is $80K - $20K + $0 (rent) = $60K.
Next year, you earn $10K in rent.
So your taxable income is $80K - $20K + $10K (rent) = $70K. Taxable income increased by $10K, which is the rent.
Next year, you earn $12K in rent.
So your taxable income is $80K - $20K + $12K (rent) = $72K. Taxable income increased by $12K, which is the rent.
Next year, again you can't find a tenant.
So your taxable income is $80K - $20K + $0 (rent) = $60K. Taxable income decreased by $12K, which was the rent.
So, the bottom line is, every dollar you earned from the rental income is assessed for tax and you pay tax on every rental dollar depending on the tax bracket you are.
What is the "business" of, say buying a diamond? It's not income producing. It may be speculation that the price will increase, but unless you make a BUSINESS of TRADING in diamonds, any interest on debt to purchase your diamond would NOT be tax-deductible.
OK, your rental income is ASSESSED for tax, but...
...you don't in fact "pay tax on every rental dollar". As your own examples have shown, you only pay tax on money that you KEEP. If you have $20k expenses and $20k rental, you don't pay ANY tax on on your $20k rental.
Trading diamonds is
1. buying
2. holding on to them while a good price is obtained. This could be days, months, years, decades. Meet business expenses during this period ie. pay interest.
3. sell.
Same goes for antiques.
Suppose you don't have a rental income (could not find a tenant, tenant defaulted, etc)
So, you pay tax on $wages -$expenses.
Now, if you get rent,
you pay tax on $wages -$expenses + $rent
Please note that your taxable income went up by $rent ie. every dollar in $rent is taxable ie has been subjected to taxing. How much you pay tax is dependent on your tax bracket.
What happens is that,
every dollar you pay for IP expenses is tax deductible, and,
every dollar the IP produces for you is taxable.
The outcome of the example you mentioned -- one completely negates the other, so you see no difference.
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No, you are wrong. There is no 'business income' from investing in diamonds. Hoping to one day make a capital gain is not enough.
Buying diamonds or antiques or property with the hope of selling in the futire for a capital gain is not a "business". The interest is offset against the asset at the time of sale, reducing the capital gain. But you are not able to 'negative gear' an asset that doesn't produce income.
You can not claim the holdng costs of these assets, if they aren't producing income. Similarly, you can not deduct holding costs of a property if it is vacant and not availablefor rent.
You'd struggle to convince the ATO that you are in a diamond trading business. Most likely they would classify you as an investor, unless you could show some characteristics of a business. (number of trades, time spent trading, advertising, etc)
Just a question; I thought the interest from the money you borrow is tax deductible even when using it to purchase investments (ie. shares or commodities - gold, oil, silver) or even using it to buy or set up a business?
Correct me if I'm mistaken, I'm fairly new to this stuff
cheers
Pierre
Zactly...
4.30 am's no time to be thinking about the hard questions like tax law though
Zactly...
4.30 am's no time to be thinking about the hard questions like tax law though
Ha I know, just couldn't get to sleep after finding this forum and some of the threads here are excellent.
That's right. The deduction for interest is against the dividends (income), not the shares.
