capitalised interest and tax

[Mry]

1. The ATO officer did talk about property. I think what he said could probably apply to shares, though that would contradict the private ruling. At the moment, I am treating what he said as 'interesting'.

2. I changed my post and replaced the words 'private deductions' with 'non deductible'. Private deductions was not the words I should have used.

The ATO Officer's way of calculating the deductible portion of the loan is Loan value + interest - profit = Deductible portion of the loan. Easy enough to work out on an annual basis (once your tax return is completed) but quite difficult if you had to recalculate the loan every time rental income hits a private account and then you had to add back expenses when they were incurred and working in depreciation, etc. I mean, it really is an unworkable proposition when you look at it that way.

 

[redwing]

You're a Legend Mry..

With the patience of a saint if your dealing with numerous people at the ATO..i..t'll be interesting to see Final Results, particulary when you start questioning the application of what is stated above regarding shares vs property as well..

 

[RichardC]

I would be interested to see this subject tackled from a different angle.

It would be a rare business indeed which has no debt and yet the owners are still entitled to withdraw a salary. They will of course pay off private debt, mortgage included, but the buisness will continue to pay, and claim, interest on it's debt and it will be fully deductable, and this can go on ad-infinitum.

You don't need to be incorporated to "enjoy this privelage". A sole trader can, indeed is expected to, draw a salary even if maintaining debt. What if this trader's business is in the share market? Isn't paying the mortgage out the margin account the same thing? Where do they draw the line if property is your business?

Note that I am not discussing "artificial" schemes, just people living their lives.

Thommo

 

[WillG]

It certainly appears that shares have a better treatment than property. More tax benefits(deductable capitalised interest) and no land tax

 

[RichardC]

It certainly appears that shares have a better treatment than property. More tax benefits(deductable capitalised interest) and no land tax

No rates.
No repairs.
No tenants.
No PMs.

 

[twodogs]

No rates.
No repairs.
No tenants.
No PMs.

You left off the biggie,

No LAND TAX
[edit - oops, already mentioned, but worth another !]

But also,
No depeciation
Less leverage
Higher finance cost

 

[Simon]

No ability to add value through your own efforts.

But we all know there are differences. But these differences makes the different assets meld together into your portfolio like jigsaw pieces!

 

[lizzie]

after reading mry's long and detailed answer - i suddenly feel very sorry for my accountant. i tend to run my various properties together as one big slush funds - all funds come in, all funds go out as required.

the accounting (income/expenses) is kept separated for each and every property, but not where the proportions of the interest on each were allocated ... suddenly i feel very confused myself.

just as well i've almost got my loc sorted

 

[Glebe]

This thread might be of value to some:

http://www.invested.com.au/forums/showthread.php?t=823&page=1&pp=15

 

[Mry]

I asked a tax presenter today at an NTAA seminar about the issue.

He said that what the ATO officer said was a load of garbage and has no understanding of tax law. I think most people will agree with that assessment. With Hart's case, the Commissioner was forced to amend TR 98/22 with TR 98/22A on 11 August 2004 and scratched every section limiting the deductibility of capitalized interest under their interpretation of section 8-1, the general deduction provision. In Hart's case, the judge allowed the deductibility of capitalized interest (yay!) but Part IVA applied to limit the deductions. Much was made of the Part IVA application but little of the section 8-1 consequences.

I don't have to wait for a private ruling anymore. In my opinion, section 8-1 allows deductions for capitalized interest on loans. Just look out for Part 4A.

Thanks to tasman and all those who commented. I'm just glad to have arrived at a correct answer.

With regards to Part 4A for these sorts of arrangements, it appears that just having loans that allow you to do these sorts of things would still be arguably ok. The core argument being used by tax practioners is that you are operating within the conditions of the loan product just as anyone else would, they are not being advertised as tax minimisers and that you would be allowed under Hart's case to let the balance build up on the IP loan even if your private loans did not exist and you spent the money privately.

However you should ensure that there is little to tie the loans together, that there are no special conditions out of the ordinary to these loans and most importantly make sure that there is no mention/discussion of the tax benefits of entering into these loans. It was even suggested that having different banks for the IP and the PPOR loan would be advantageous.

 

[asdf]

Thank you MRY for following through with this. Perhaps another suggestion is rather than allow your loans to capitalise and draw down, set up a separate LOC and pay all bills from this. You can then argue that this is your only out-going slush fund which to me makes clean commercial sense. You will be able to track all your investment outgoings out of one account and then all receipts into your savinngs account which so happen also doubles as your offset account.

 

[kissfan]

I asked a tax presenter today at an NTAA seminar about the issue.

He said that what the ATO officer said was a load of garbage and has no understanding of tax law.

If the officers at the ATO can't get it right, what hope does the everyday tax payer have!?!? Sounds like it depends who you talk to.

Well done Mry for your persistance.

Regards
Marty

 

[talbashan]

mrY,
again thanks.

you mentioned that in your opinion capitalised interest is deductible. are you refereing to the whole amount? ie interest + interest on interest?

thanks
tal

 

[Mry]

mrY,
again thanks.

you mentioned that in your opinion capitalised interest is deductible. are you refereing to the whole amount? ie interest + interest on interest?

thanks
tal

Yes. You can claim interest + interest on interest. I spoke to the tax guy again today about another matter and he quickly reiterated what he said, and added 'Its funny. The tax office have tried to shove down our throats for 5 years their view of interest and then one day it disappears after it is defeated and isn't replaced by any other definitive view from them.'

 

[emu]

I found this posted on invested, SUBJECT capitalising prepayed interest http://http://www.ato.gov.au/rba/content.asp?doc=/rba/content/44746.htm

I am still not totally convinced.
Thank you very much MRY for your persistance and patience, very much appreciated.

 

[twodogs]

So, interest on loans used to service loans for investment is deductable, in this private ruling anyhow.

How about this situation. I'm about to prepay a little (ie alot!) of PI interest. This cash is currently parked in PPOR, so if I re-draw to pay my interest in advance, will that new debt have deductable interest ? Hmmm, I've not claim this before, still a bit of a grey area.

What do the accountants think ?