Capitalising Interest - How 'Aggressive' Are You?
- Thread starter Shadow
- Start date
If you don't minf my asking, were they aware of your whole structure (ie that you'd paid down your PPOR loan etc)?
R
Not sure. My structure was quite transparent. They didnt seem interested in where the income went. I hadnt finished paying down ppor at the time.
They were interested in all my deductions...I needed to verify these.
I think it was the educational expenses that got me flagged i was travelling a fair bit to uni at the time.
dave
Cheers Dave...
Were you paying your PPOR loan off directly or were you using an offset?
I'll prob go see the accountant about this I guess but it's promising to get the lo-down from folks such as yourself who've actually been thru the auditing process.
More of a general question, how does the ATO view income in cases such as this?
From a tax payers point of view, so long as we're paying tax, what we do with income is really our perogative. Does this sound reasonable?
Rory
Were you paying your PPOR loan off directly or were you using an offset?
I'll prob go see the accountant about this I guess but it's promising to get the lo-down from folks such as yourself who've actually been thru the auditing process.
More of a general question, how does the ATO view income in cases such as this?
From a tax payers point of view, so long as we're paying tax, what we do with income is really our perogative. Does this sound reasonable?
Rory
This is exactly why I have recently changed our rental income from going to our PPOR LOC to going to the IP LOC instead. Now only the shortfall between the rent & the interest ($800per month approx) is capitalising. With a decent balance, it should look after itself for around 18mths & we can them look at what the situation is re growth.
Now I just need to resist the temptation to knock off a bit of whats owing in the IP LOC incase 18mths is not long enough for some equity growth.
Cheers
Stella
Someone asked what the potential impacts of the ATO disallowing 100% capitalisation would be.
I've done some rough calcs. My strategy is to capitalise for around 18 months to fully "recycle" the PPOR debt.
Over that time my roughly calced taxation savings are in the vicinity of $12000 per annum.
Speaking to my accountant he believes that what we are doing will be frowned upon. I basically told him that I couldn't care less, we're doing it this way and that's final
My reasoning here is that we have a larger asset base (up front) than we otherwise would have had without our current structure and capitalisation.
Simply put, if the ATO audit us in 1 or 2 years time our accountant suggests that "generally" you are not fined, just asked to pay back the "gain" you received + interest maybe.
Ok. So 2 years from now I may owe the ATO $18000 + interest. In that time frame I've had $18000 working for me (and leveraged). I've also had a larger asset base working for me. So basically a roughly 2-3% rise in CG will have fully paid what I may one day owe the ATO in years to come.
2-3% isn't much to expect from your property., should get that in less than 12 months. In the meantime I've fully offset my PPOR, saved a fair whack of interest there and have a large cash buffer sitting there with no redraw hassles (handy in this climate).
People seem to fear the ATO and audits (I'm sure they are no fun), but it isn't the end of the world. They don't repossess your properties and send you to prison. So if you're contemplating the risk vs reward position of this strategy then do it based on what you might have to pay back and what you can use it for in the mean time. The risk may not be as frightful as you think it is.
I do firmly believe that the strategy is justified and is not a scheme and should not attract Part IVA consequences.
I also believe that it is better not to ask a question when you don't want to have the wrong outcome. i.e. Why ask for a private ruling if the wrong answer is going to have too negative effect on your position.
In my case it's better not to ask now as getting what I currently get from this strategy is time sensitive and the longer I get it the better for me. If I ask now and they say no, I've potentially done myself out of all advantages from this point onward.
If later on the strategy is disallowed then I will deal with it then, coming from a much better position due to the advantage I gained over that time period.
Perhaps not a conventional way of soothing a SANF but it works for me
Cheers,
Arkay.
Disclaimer: None of the above is financial advice. I am not a finance professional. I know Nozzink!
I've done some rough calcs. My strategy is to capitalise for around 18 months to fully "recycle" the PPOR debt.
Over that time my roughly calced taxation savings are in the vicinity of $12000 per annum.
Speaking to my accountant he believes that what we are doing will be frowned upon. I basically told him that I couldn't care less, we're doing it this way and that's final
My reasoning here is that we have a larger asset base (up front) than we otherwise would have had without our current structure and capitalisation.
Simply put, if the ATO audit us in 1 or 2 years time our accountant suggests that "generally" you are not fined, just asked to pay back the "gain" you received + interest maybe.
Ok. So 2 years from now I may owe the ATO $18000 + interest. In that time frame I've had $18000 working for me (and leveraged). I've also had a larger asset base working for me. So basically a roughly 2-3% rise in CG will have fully paid what I may one day owe the ATO in years to come.
2-3% isn't much to expect from your property., should get that in less than 12 months. In the meantime I've fully offset my PPOR, saved a fair whack of interest there and have a large cash buffer sitting there with no redraw hassles (handy in this climate).
People seem to fear the ATO and audits (I'm sure they are no fun), but it isn't the end of the world. They don't repossess your properties and send you to prison. So if you're contemplating the risk vs reward position of this strategy then do it based on what you might have to pay back and what you can use it for in the mean time. The risk may not be as frightful as you think it is.
I do firmly believe that the strategy is justified and is not a scheme and should not attract Part IVA consequences.
I also believe that it is better not to ask a question when you don't want to have the wrong outcome. i.e. Why ask for a private ruling if the wrong answer is going to have too negative effect on your position.
In my case it's better not to ask now as getting what I currently get from this strategy is time sensitive and the longer I get it the better for me. If I ask now and they say no, I've potentially done myself out of all advantages from this point onward.
If later on the strategy is disallowed then I will deal with it then, coming from a much better position due to the advantage I gained over that time period.
Perhaps not a conventional way of soothing a SANF but it works for me
Cheers,
Arkay.
Disclaimer: None of the above is financial advice. I am not a finance professional. I know Nozzink!
Can anyone give me any examples of anyone who has capitalized IP interest only to be told by the ATO that the deductions are disallowed (apart from Hart’s case or any other where a financial product was designed specifically to avoid tax)?
It's a rare privilege to see such contradictory statements in such proximity.
Lukey13
Rental income is added to your other income and you pay tax on it so you are entitled to spend it as you see fit.
You are also entitled to borrow to pay the interest or shortfall on IP loans.
As long as you have a good business reason for doing so it should be ok.
However, paying down your PPOR loan is not a valid business reason for borrowing to cover IP interest.
Holding your IP's with the view that over time they will appreciate in value is a good and valid business reason and should be allowed.
Cheers
Glad you enjoyed it
Though I don't see it as contradictory. Because I believe that I will be ok doesn't mean I have to justify that by asking the question.
If my SANF was bad and I HAD to know, then that's a different story.
Cheers,
Arkay.
Likely no penalties, just GIC if you make an honest mistake.
However, you have been put on notice by your Accountant and have admitted as much.
Deliberately not asking the ATO to avoid hearing what you don't like does not mean you are not on notice. It could amount to recklessness or negligence.
Not only are penalties incurred for recklessness, but there is no time limit for the Commissioner to amend your old returns.
Therefore your argument that your investment returns will outperfrom the GIC is a bit flawed.
I suggest you get another opinion based on your specific circumstances if you don't like what you hear from your Accountant.
Cheers,
Rob
However, you have been put on notice by your Accountant and have admitted as much.
Deliberately not asking the ATO to avoid hearing what you don't like does not mean you are not on notice. It could amount to recklessness or negligence.
Not only are penalties incurred for recklessness, but there is no time limit for the Commissioner to amend your old returns.
Therefore your argument that your investment returns will outperfrom the GIC is a bit flawed.
I suggest you get another opinion based on your specific circumstances if you don't like what you hear from your Accountant.
Cheers,
Rob
Rob,
The structure was initially set up by "property savvy" accountants and I was informed that it is perfectly normal business practise to capitalise interest.
I wasn't impressed with the way that particular accountant handled us as clients or last years tax returns (having found several deductions that were missed), so went back to our original accountant this year.
He's a great accountant, with a differing point of view in what has clearly shown itself as a grey area of taxation law.
His advice is that it is not necessarily wrong, but that we are in a grey area. That is all. He is off researching it now and at no time have I been instructed not to do it.
I can also say that "I have not been put on notice by my previous accountant, and notified that this structure is sound and warranted".
It makes NO difference whatsoever, and the so called advice of all these "paid professionals", isn't worth squat given none of them take any responsibility for the advice provided.
The onus is on me, I sign the return and if I thought accountant advice would hold up as an excuse with the ATO I'd happily send them both accountants opinions and ask "How the hell is an untrained user of this taxation system supposed to know enough about which is right to be held accountable for decisions made?", but the ATO simply would not be interested in any such argument. The system sucks. They would likely turn around and ask why I didn't seek a private ruling up front to which my answer would be "Neither accountant informed me that such a thing even existed?". But again, that won't wash, even if it's true.
So I either become a taxation specialist or rely on the advice of paid professionals who are happy to have stand up arguments about it daily.
As I said. I can't easily change the structure (initiated on professional advice that I now have contrary professional advice for), so I will run with it and see how it goes.
It's not by far a contrived scheme or purposely in existence for taxation avoidance and the words "recklessness or negligence" do not apply to my circumstance.
They may however apply to the several accountants who do little for their profession by being unable to quantify any advice with fact or professional liability.
Interestingly the previous "property savvy" accountant did highlight a potential risk in negative gearing via a HDT. Yet the current one has no problem with that at all.
Taxation is a dog. No one, even the trained professionals with 40 years experience, can give you a straight answer and to my knowledge it depends on the direction of the wind on any given day how you will come out of a private ruling.
So it comes down to risk/reward ratios and the individuals tolerance for risk.
I choose to tolerate it. Others won't and that's their prerogative.
Cheers,
Arkay.
The structure was initially set up by "property savvy" accountants and I was informed that it is perfectly normal business practise to capitalise interest.
I wasn't impressed with the way that particular accountant handled us as clients or last years tax returns (having found several deductions that were missed), so went back to our original accountant this year.
He's a great accountant, with a differing point of view in what has clearly shown itself as a grey area of taxation law.
His advice is that it is not necessarily wrong, but that we are in a grey area. That is all. He is off researching it now and at no time have I been instructed not to do it.
I can also say that "I have not been put on notice by my previous accountant, and notified that this structure is sound and warranted".
It makes NO difference whatsoever, and the so called advice of all these "paid professionals", isn't worth squat given none of them take any responsibility for the advice provided.
The onus is on me, I sign the return and if I thought accountant advice would hold up as an excuse with the ATO I'd happily send them both accountants opinions and ask "How the hell is an untrained user of this taxation system supposed to know enough about which is right to be held accountable for decisions made?", but the ATO simply would not be interested in any such argument. The system sucks. They would likely turn around and ask why I didn't seek a private ruling up front to which my answer would be "Neither accountant informed me that such a thing even existed?". But again, that won't wash, even if it's true.
So I either become a taxation specialist or rely on the advice of paid professionals who are happy to have stand up arguments about it daily.
As I said. I can't easily change the structure (initiated on professional advice that I now have contrary professional advice for), so I will run with it and see how it goes.
It's not by far a contrived scheme or purposely in existence for taxation avoidance and the words "recklessness or negligence" do not apply to my circumstance.
They may however apply to the several accountants who do little for their profession by being unable to quantify any advice with fact or professional liability.
Interestingly the previous "property savvy" accountant did highlight a potential risk in negative gearing via a HDT. Yet the current one has no problem with that at all.
Taxation is a dog. No one, even the trained professionals with 40 years experience, can give you a straight answer and to my knowledge it depends on the direction of the wind on any given day how you will come out of a private ruling.
So it comes down to risk/reward ratios and the individuals tolerance for risk.
I choose to tolerate it. Others won't and that's their prerogative.
Cheers,
Arkay.
By all means "shop around" for opinions. But as you said, the responsibility lies with you.
We cannot hope to know all relevant facts in a post on a forum.
But remember 3 important facts when you want sail into legal uncertainty:
1) Every ruling & ID on this matter specifically mentions that the Commissioner reserves the right to apply Part IVA based on individual facts - even where ostensibly your facts may appear similar.
2) The arrangement must stand on its own economic credentials (Fletcher's Case).
3) An "agressive" Accountant is likely to be well known to the ATO - and importantly so will their clients.
So its your call whether an Accountant that suggests you get a ruling is overly conservative/ignorant or whether he likes his clients to create financial plans with as much certainty as possible in the long term.
Your previous posts suggested you did not want to ask for a ruling because you suspect that you will get an unfavourable answer. In which case you will have to rely on opinions for which you will have to pay and yet bear the responsibility if it is wrong.
I am getting confused by your switching from aggressive tax planning arguments to ones that you are a victim of the system. This is not good tactics to use in any appeal.
Cheers,
Rob
We cannot hope to know all relevant facts in a post on a forum.
But remember 3 important facts when you want sail into legal uncertainty:
1) Every ruling & ID on this matter specifically mentions that the Commissioner reserves the right to apply Part IVA based on individual facts - even where ostensibly your facts may appear similar.
2) The arrangement must stand on its own economic credentials (Fletcher's Case).
3) An "agressive" Accountant is likely to be well known to the ATO - and importantly so will their clients.
So its your call whether an Accountant that suggests you get a ruling is overly conservative/ignorant or whether he likes his clients to create financial plans with as much certainty as possible in the long term.
Your previous posts suggested you did not want to ask for a ruling because you suspect that you will get an unfavourable answer. In which case you will have to rely on opinions for which you will have to pay and yet bear the responsibility if it is wrong.
I am getting confused by your switching from aggressive tax planning arguments to ones that you are a victim of the system. This is not good tactics to use in any appeal.
Cheers,
Rob
Hi Rob,
I agree with your rules. It's all good advice.
My point partially from above is to do with this:
The accountancy firm I dealt with in the first instance gave no indication that I was sailing into uncertainty. The uncertainty arose much later on (from my perspective). Therefore, based on the professional advice of this firm I went ahead with decisions that may now land me in unfortunate circumstances in the future.
That possibly is my fault for not shopping around sooner however I may have been naive enough at the time to expect accountants advice to be at least somewhere in the ball park.
I'm happy to accept my position and any future consequence should it ever arise.
and I wouldn't use them in an appeal. It's just my current state of affairs. I wasn't made aware that what I was doing was "aggressive tax planning", hence the feeling of being uninformed by those paid well to inform me.
I also don't see myself as a victim. But I have learnt some valuable lessons.
It's interesting in investment circles that being annoyed with a lack of service makes you a victim where anyone else that failed to get service they paid for would be heralded a stand up guy for shouting it from the rooftops.
Cheers,
Arkay.
I agree with your rules. It's all good advice.
My point partially from above is to do with this:
The accountancy firm I dealt with in the first instance gave no indication that I was sailing into uncertainty. The uncertainty arose much later on (from my perspective). Therefore, based on the professional advice of this firm I went ahead with decisions that may now land me in unfortunate circumstances in the future.
That possibly is my fault for not shopping around sooner however I may have been naive enough at the time to expect accountants advice to be at least somewhere in the ball park.
I'm happy to accept my position and any future consequence should it ever arise.
and I wouldn't use them in an appeal. It's just my current state of affairs. I wasn't made aware that what I was doing was "aggressive tax planning", hence the feeling of being uninformed by those paid well to inform me.
I also don't see myself as a victim. But I have learnt some valuable lessons.
It's interesting in investment circles that being annoyed with a lack of service makes you a victim where anyone else that failed to get service they paid for would be heralded a stand up guy for shouting it from the rooftops.
Cheers,
Arkay.
Is your strategy more complex than one of the more popular debt recycling scenarios ?
Even then there is always a small print disclaimer by promoters, but they have been used relatively widely.
My suggestion is to make your scenario as similar to one that has had a favourable ruling as possible.
Cheers,
Rob
Even then there is always a small print disclaimer by promoters, but they have been used relatively widely.
My suggestion is to make your scenario as similar to one that has had a favourable ruling as possible.
Cheers,
Rob
Hi all
Read some info on another forum in regards to similar type of thread.
The situation was presented in this way.
PPOR home mortgage loan $100,000
PPOR Value $400,000
@80% $320,000- $100,000= $220,000
This LOC is split $50,000 personal use and $170,000 for investment
There is a savings offset account to the PPOR home mortgage loan.
One of the forumites suggested that the person can drawdown the LOC ($170,000) and park it in the Offset account against the PPOR home mortgage loan ($100,000).
This does not seem correct to me because the LOC interest would not be tax deductible because the drawdown was not for income producing purposes, however the person seems to think this is ok to do as you parking the money in the OFFSET account ready for an investment.
Anyone got thoughts on this.
Cheers
BC
Read some info on another forum in regards to similar type of thread.
The situation was presented in this way.
PPOR home mortgage loan $100,000
PPOR Value $400,000
@80% $320,000- $100,000= $220,000
This LOC is split $50,000 personal use and $170,000 for investment
There is a savings offset account to the PPOR home mortgage loan.
One of the forumites suggested that the person can drawdown the LOC ($170,000) and park it in the Offset account against the PPOR home mortgage loan ($100,000).
This does not seem correct to me because the LOC interest would not be tax deductible because the drawdown was not for income producing purposes, however the person seems to think this is ok to do as you parking the money in the OFFSET account ready for an investment.
Anyone got thoughts on this.
Cheers
BC
That is a weak argument based on the Commissioner's preferred method of tracing the use of the borrowed funds.
The longer the money remains in the personal offset account, the more the private advantage gained.
Also split loans and directing payments to private accounts was attacked in Hart's Case but the court did not rule on this.
Why not park it in an offset account linked to a separate investment loan ?
Cheers,
Rob
The longer the money remains in the personal offset account, the more the private advantage gained.
Also split loans and directing payments to private accounts was attacked in Hart's Case but the court did not rule on this.
Why not park it in an offset account linked to a separate investment loan ?
Cheers,
Rob
Thanks for all the comments guys. It seems from the voting that most of us do capitalise interest, and of those who do, most capitalise the shortfall only.
I think I'll play it safe for now and continue to capitalise the shortfall only. I honestly can't think of a valid reason for capitalising all the interest, except for the dominant purpose of gaining a tax advantage.
There were some good alternative reasons put forward, but I don't think I can use them... for example, if it was the case that I could really not afford to hold the properties without capitalising all interest then I might have a case, but holding costs are not an issue for me so I can't really use this excuse.
At the end of the day, the potential tax saving of approx. 40% on 8% interest on the rental income is not a huge amount anyway.
Cheers,
Shadow.
I think I'll play it safe for now and continue to capitalise the shortfall only. I honestly can't think of a valid reason for capitalising all the interest, except for the dominant purpose of gaining a tax advantage.
There were some good alternative reasons put forward, but I don't think I can use them... for example, if it was the case that I could really not afford to hold the properties without capitalising all interest then I might have a case, but holding costs are not an issue for me so I can't really use this excuse.
At the end of the day, the potential tax saving of approx. 40% on 8% interest on the rental income is not a huge amount anyway.
Cheers,
Shadow.
