Borrowing for expenses

[DavidC]

Hi,

Any guidance as to whether one can claim, as an expense, the interest costs for a loan for the purpose of paying for all the expenses associated with one's IPs for that year?

This loan would be part of a loan for a new IP. For example, for a new IP costing $200K plus $15K stamp duty, etc plus $30K to pay for all the interest payments and other IP expenses for the remainder of the financial year. Total loan would be $245K and 100% of interest payments would be claimed.

To re-phrase, does the tax office expect that rent be used for expenses or can it be siphoned off for private purposes?

In my situation, this excess cash would sit in my PPOR offset account, saving me interest and would serve as a source of emergency funds.

DaveC

 

[Kevmeister]

It would be fair to say that the ATO are looking at these types of schemes questioningly.

A financial product (whose name I cannot remember) came out with the idea of buying an IP (using equity in your PPOR), putting all rental payments back against your mortgage, and capitalising the interest on the IP.

The ATO took someone to court over this and lost. But from what I've heard the ATO will have another crack at it soon enough.

 

[geoffw]

David,

I'd be suspecting that only that part of the loan which was actually used for expenses associated with the IPs would be deductible. I thought it was the purpose of the loan which was imporatant.

I have a LOC which I use for deductible expenses. I justify every withdrawal as deductiblein order to be able to claim the interest as an expense.

And my understanding is that even if the expense itself is not immediately claimable (it may be for a depreciable item for instance), the interest incurred by borrowing to pay for that item is claimable.

So if you have borrowed, and it's just sitting around,you probably can't claim a deduction.

However, another approach. Let's say you have $20K sitting in that account. And let's also say you have a mortgage on your own home. From time to time, you have expenses for which you can claim a deduction. Perhaps books, tools, computers, expenses against your IP, whatever. So, instead of just paying those expenses straight out of your pocket, pay it out of your LOC. And put the same amount out of your pocket against your mortgage.

So after one year you might have $5,000 in deductible expenses. You've reduced your home mortgage (non-deductible) by $5K and increased your deductible LOC by $5K.

In one year, perhaps chicken feed. But you get the benefit of this for years to come.

But you do need to account for every single item you take out of that LOC to claim a deduction. It is the purpose of the loan which is important, not the origin. If you start to use it for private expenditure, tha accounting gets messy.

 

[tenofdiamonds]

Hi All,

I have a similar question:

If you had an LOC set up against an IP, would there be any problems with drawing out for property expenses like body corporate, rates etc., (but not interest, so there is no interest capitalisation), while putting all rent and salary payments directly into the home mortgage, or in an offset account against the home mortgage?

Is there any legislation or rulings which indicate that if you are claiming interest borrowings for ongoing costs as an expense, then you should be paying your rent into that same account to offset the costs?

Thanks in advance.
TOD