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Does the borrower and lender have to be different entities or can they be the same entity? any legal precedent on such a basic detail?
What are you trying to achieve?
Can you form a company, become sole director and then do it?
Can you form a company, become sole director and then do it?
No you cannot. You cannot contract with yourself nor can you sue yourself - although some do argue with themselves.
To make that debt deductible, I'd need to close the loan and apply for a new loan for investment purposes, even if I use the same PPOR as security.
Not doubting you, just genuinely curious - where is the authority for this?
Went through 5 years of law school and not once did any of the case law / textbooks etc deal with this minor detail.
Not necessarily - as long as the loan doesn't discharge, you could pay the offset funds into the loan, making the loan balance zero, then redraw to buy your IP.
Get tax advice, but I can't see why this wouldn't work. I'm sure someone will explain if I'm wrong
Say I get a mortgage for a PPOR for $500,000 with offset account
I work and save and make $500,000, put it into the offset. I own that $500,000 in the offset, but I still owe the bank $500,000, and the bank charges me interest on the difference - $0, but that interest (if any) is not deductible because the loan was created for the purpose of PPOR. To make that debt deductible, I'd need to close the loan and apply for a new loan for investment purposes, even if I use the same PPOR as security.
Now what if I go and lend myself the $500,000, for the purpose of investing.
Before I had:
Assets:
PPOR
$500,000 in offset account
Debts:
$500,000 mortgage
I now have:
Assets:
PPOR
$500,000 in offset account
$500,000 loan to scientist
Debts:
$500,000 mortgage
$500,000 owed to scientist (deductible interest payments!)
I can then use that 500,000 to buy an IP without having to close the existing mortgage and effectively the interest payments on the original mortgage are tax deductible.
This only works if I can lend to myself.
Not necessarily - as long as the loan doesn't discharge, you could pay the offset funds into the loan, making the loan balance zero, then redraw to buy your IP.
Get tax advice, but I can't see why this wouldn't work. I'm sure someone will explain if I'm wrong
Thanks - this is probably practically the easiest way!
No you cannot. You cannot contract with yourself nor can you sue yourself - although some do argue with themselves.
Okay say you:
1. Sign a standard loan agreement with an accountant or solicitor, making it a proper transaction
2. Loan the funds to say a trust.
3. Trust gets deduction for the interest as you planned.
You have not considered the other side of the transaction..
If the trusts generates interest expense, on the other side of the equation YOU generate interest INCOME for loaning that money...
Sure there are additional strategies to add on to this one (for example personal situation, taxable income position of the trust/company etc) to get past this but I wanted you to consider this beforehand..
Cheers.