Capitalising Costs

[astroboy]

Hi MJK,

The easiest solution with the Cashbond; is to use the proceeds to purchase income producing assets, like SHARES for example (clearly deductible) and use the income from the shares to pay down your non-deductible debt.

Regards,

Steve

Yes. Obviously this is the easiest solution.
On the other hand you must have clients using the same strategy for purely lifestyle sufficiency, that is 100% non-deductable debt. Or am I mistaken?
Astroboy.

 

[likewow]

Im a simple guy who believes in the KISS principle. Is what you call 'capitalising costs' getting a LOC using the quity in your PPOR as security and then using the LOC funds to pay for IP expenses?

 

[geoffw]

Im a simple guy who believes in the KISS principle. Is what you call 'capitalising costs' getting a LOC using the quity in your PPOR as security and then using the LOC funds to pay for IP expenses?

Yep.

What some people in the thread are doing is decreasing their PPOR debt at the same rate they are increasing their LOC debt. Net debt position is the same- but deductible debt is increasing.

 

[likewow]

OK thanks, a very simple process made complex. Is 'capitalising costs' the correct term for this?

 

[MJK]

Steve & all

I dont have non deductable debt .My PPOR is paid.
My interest is from a cashflow point of veiw. Cashflow to service and expand current holdings. Everything needs to be serviced if you gear, even the Navra fund being an income fund only pays 3 monthly.
Because this year I recieved a redundancy payout (note I'm working again) , I banked a lump sum. Now I'm not claiming a variation in my paye because I don't believe I will be entitled to it after recieving the lump sum and my new wage etc... ( long story). Anyway the point is I'm not claiming a variation on PAYE for the rest of 2004/05 so cash flow is much tighter because I dont want to spend my lump sum . The lump sum has gone into my portfolio which improves cashflow but not to the same extent as a variation.
Soooo I was interested in "the idea of capitalising expenses" for the short term and also interested in the concept as a way to accelerate ones abitity to invest more (service more). That is not service more in the banks eyes but actually feel practically comfortable servicing more.

MJK

 

[Twitch]

IMHO, capitalising should only be done for a handful of reasons
1) to convert non-Decutable debt to Deductable (in this case total debt is still being reduced)
or
2) during a construction phase
or
3) unexpected/short term loss of income

Personally I wouldn't use it as a business as usual strategy to free cash flow.

 

[House_Keeper]

IMHO, capitalising should only be done for a handful of reasons
1) to convert non-Decutable debt to Deductable (in this case total debt is still being reduced)
or
2) during a construction phase
or
3) unexpected/short term loss of income

Personally I wouldn't use it as a business as usual strategy to free cash flow.

Why not? Is it because you are concerned that debt could spiral out of control or is there another reason?

 

[Keen]

I understand that general expenses are okay.

But if I recall correctly didn't the ATO have issues with capitalising interest?
Particularly if one pays rent into the PPOR and let the IP debt rise.

My previous account was hesistant to recommend capitalisation - he was weary of what the tax man might percieve.

I'm due for a sizable tax refund this year - due to not having a tax adjustment lodged. If I pay all of this in to my PPOR loan and let my IP debt rise does this create an issue for the tax man?

I'd be keen to hear Dales take on this thread.

Regards

Keen

 

[Twitch]

There were a number of factors at play in the Harts case
1) capitalising of interest
2) having rent paid into PPOR
3) having investment and non-investment loans as sub accounts in the one LOC
4) the whole scheme was packaged and marketted as a way to reduce tax

My understanding is that the ATO won the case not on point #1, but because of point #4. I don't believe the case was therefore directly relevant to 1, 2 or 3.

<disclaimer>But then I could very very be wrong..... </disclaimer>

 

[Twitch]

Why not? Is it because you are concerned that debt could spiral out of control or is there another reason?

That is the reason.