Furthermore, are there any examples of investors who have capitalised interest within a margin loan or company overdraft who have fallen foul of the ATO?
Capitalising Interest - How 'Aggressive' Are You?
- Thread starter Shadow
- Start date
Furthermore, are there any examples of investors who have capitalised interest within a margin loan or company overdraft who have fallen foul of the ATO?
I would of thought that if the ATO really were that interested in preventing capitalising interest then they would target margin loans and overdrafts as these are quite common practices.
Capitalising intetest on margin loans whilst distributing dividend income elsewhere has been happening for years.
That's why I don't understand the fear surrounding capitalising IP interest. Seems quite legit widely precedented.
True, and there is no problem with capitalising interest per se. Capitalisation of the shortfall between interest and rental income is definitely fine, and there are several PBRs that cover this structure.
The potential issue is with regards to the distribution of rental income.
If I have the choice of distributing my rental income either towards my PPOR loan, or towards my IP loans, and I choose to distribute to my PPOR loan in order to gain a tax advantage... then this is where the ATO may decide that Part IVA applies. But as concluded by most here, this is a grey area.
I don't think I have seen any PBRs covering the capitalisation of all margin loan interest while dividend income is distributed towards a PPOR loan, but I agree this could be a good comparison or precedent. If you use the dividend income to buy a boat, then this is probably OK, but if you use it to reduce non-deductible debt, while increasing tax-deductible debt... this could be a problem.
Tax law is too vague in this country!
Cheers,
Shadow.
Shouldn't this also apply for IP purchase. Found this in another similar thread.
View attachment 69725 LOC int.PDF
It basically explains my circumstances entirely and makes no mention whatsoever relating to the distribution of the income or how that income can be spent.
In my case my justification would be that I entered into the scheme, establishing a LOC and Mortgage whose sole purpose is for investment and I do not wish to service the interest on those loans via personal funds.
The LOC will be used to establish a mortgage to purchase and renovate an income producing asset and I wish to capitalise the interest incurred in the LOC for the first 18 months of the scheme as paying the interest deficit from personal funds would create financial stress and the ability to hold the asset and/or maintain the scheme could be threatened.
The volume of LOC funds are sufficient to continue the scheme for the foreseeable future.
If we had to talk about income (which we don't to my understanding), I would state that the income being produced from that asset is being conserved to allow continued business operations and eventual purchase of additional income producing assets.
The conservation of these funds provides a liquid cash headroom against potentially difficult economic times regarding tightening credit and the ability to attain further credit from financial institutions in the event that such credit is required to maintain the scheme.
That is, if the income is of any consequence, then surely it must be in your favour to show the ATO that you're not spending it on beer and smokes and plasma TV's?
Though as far as I understand it the income has nothing to do with it. It's the purpose of the loans that is important and both loans and all associated interest are purely investment related and no personal expenditure has or ever will be taken from either.
From what I can gather from the ruling attached the tax advantage under the scrutiny of the ATO is the advantage of the deduction of the capitalised interest. Not the advantage of interest saved by using the income to offset against non deductible debt (the part that people seem to be a little sheepish about).
It gets more complicated when you add in that you're the Director of a corporate trustee and also a beneficiary of the trust that holds the asset. You're also the owner of the income units and negative gearing the loans but the reality is that it's not being done for taxation advantage. It's being used as a business tool to provide the ability to hold and maintain an income producing asset for the initial startup time it often takes for a business to establish itself. My reasons for using a trust structure are primarily for estate planning. I want my siblings looked after and any wealth we create to be kept in the family irrespective of marriage and divorce. Asset protection is likely of little concern to me but it doesn't hurt and the expenditure of moving assets to structures later on is prohibitive, therefore it needs to be done in advance.
I'm more than happy to work within the requirements of the law. Including redeeming units (when the time comes), for agreed market value, paying all CGT as necessary, and then performing income distribution as per the governing requirements at the time. There is no "intent to defraud", or recklessness or negligence. It just s@#ts me off when, even with every honest intent and thousands spent on professional advice; you still don't know if you're covered!
The above can likely be pulled to bits easily and I'm no accountant nor would I expect to have to write a justification without the aid of an accountant who should be able to put the above in the correct terminology and broaden the detail to attain a positive outcome.
Just trying to offer my thoughts on this topic and answer the realistic question of "Why are you doing it if not for a taxation advantage". In terms of the interest portion of the loan (including capitalisation), and business expenditure there is no simpler way to maintain the asset than to use pre-established credit to do so.
i.e. Without the borrowing and capitalisation I wouldn't be a business owner with an income producing asset.
Cheers,
Arkay.
View attachment 69725 LOC int.PDF
It basically explains my circumstances entirely and makes no mention whatsoever relating to the distribution of the income or how that income can be spent.
In my case my justification would be that I entered into the scheme, establishing a LOC and Mortgage whose sole purpose is for investment and I do not wish to service the interest on those loans via personal funds.
The LOC will be used to establish a mortgage to purchase and renovate an income producing asset and I wish to capitalise the interest incurred in the LOC for the first 18 months of the scheme as paying the interest deficit from personal funds would create financial stress and the ability to hold the asset and/or maintain the scheme could be threatened.
The volume of LOC funds are sufficient to continue the scheme for the foreseeable future.
If we had to talk about income (which we don't to my understanding), I would state that the income being produced from that asset is being conserved to allow continued business operations and eventual purchase of additional income producing assets.
The conservation of these funds provides a liquid cash headroom against potentially difficult economic times regarding tightening credit and the ability to attain further credit from financial institutions in the event that such credit is required to maintain the scheme.
That is, if the income is of any consequence, then surely it must be in your favour to show the ATO that you're not spending it on beer and smokes and plasma TV's?
Though as far as I understand it the income has nothing to do with it. It's the purpose of the loans that is important and both loans and all associated interest are purely investment related and no personal expenditure has or ever will be taken from either.
From what I can gather from the ruling attached the tax advantage under the scrutiny of the ATO is the advantage of the deduction of the capitalised interest. Not the advantage of interest saved by using the income to offset against non deductible debt (the part that people seem to be a little sheepish about).
It gets more complicated when you add in that you're the Director of a corporate trustee and also a beneficiary of the trust that holds the asset. You're also the owner of the income units and negative gearing the loans but the reality is that it's not being done for taxation advantage. It's being used as a business tool to provide the ability to hold and maintain an income producing asset for the initial startup time it often takes for a business to establish itself. My reasons for using a trust structure are primarily for estate planning. I want my siblings looked after and any wealth we create to be kept in the family irrespective of marriage and divorce. Asset protection is likely of little concern to me but it doesn't hurt and the expenditure of moving assets to structures later on is prohibitive, therefore it needs to be done in advance.
I'm more than happy to work within the requirements of the law. Including redeeming units (when the time comes), for agreed market value, paying all CGT as necessary, and then performing income distribution as per the governing requirements at the time. There is no "intent to defraud", or recklessness or negligence. It just s@#ts me off when, even with every honest intent and thousands spent on professional advice; you still don't know if you're covered!
The above can likely be pulled to bits easily and I'm no accountant nor would I expect to have to write a justification without the aid of an accountant who should be able to put the above in the correct terminology and broaden the detail to attain a positive outcome.
Just trying to offer my thoughts on this topic and answer the realistic question of "Why are you doing it if not for a taxation advantage". In terms of the interest portion of the loan (including capitalisation), and business expenditure there is no simpler way to maintain the asset than to use pre-established credit to do so.
i.e. Without the borrowing and capitalisation I wouldn't be a business owner with an income producing asset.
Cheers,
Arkay.
No problems with capitalising interest as such.
Effectively you have just borrowed an additional amount by not paying the interest.
Why was this money borrowed ?
Hard to argue if this is because you diverted the income to paying for a big holiday or new car and the investment itself does not make economic sense without the tax break.
Easier to argue if you see that it is part of an onging investment strategy - either to accumulate more capital or to cover a short-fall in revenue in an ongoing geared arrangement.
Always gets harder when you have complex structures and money and deductions flowing round between related entities.
There is a raft of Case Law that the Commissioner can rely on when payments get too remote from the income benefits.
Cheers,
Rob
Effectively you have just borrowed an additional amount by not paying the interest.
Why was this money borrowed ?
Hard to argue if this is because you diverted the income to paying for a big holiday or new car and the investment itself does not make economic sense without the tax break.
Easier to argue if you see that it is part of an onging investment strategy - either to accumulate more capital or to cover a short-fall in revenue in an ongoing geared arrangement.
Always gets harder when you have complex structures and money and deductions flowing round between related entities.
There is a raft of Case Law that the Commissioner can rely on when payments get too remote from the income benefits.
Cheers,
Rob
One word. Equity.
The later is the way I see it. Would have to structure and present that case well no doubt.
Yes, ridiculously and I believe unnecessarily complicated.
Cheers,
Arkay.
I love the irony of Case Law though.
Generally you cannot decide which part of a mixed loan to repay (e.g.Domjan).
BUT in some cases you can nominate which part of a mixed purpose expense your borrowing has funded - check out FC of T Carberry !!!!!!!!!!!
Maybe this should be the subject of a new thread ?????
Cheers,
Rob
Generally you cannot decide which part of a mixed loan to repay (e.g.Domjan).
BUT in some cases you can nominate which part of a mixed purpose expense your borrowing has funded - check out FC of T Carberry !!!!!!!!!!!
Maybe this should be the subject of a new thread ?????
Cheers,
Rob
