Capitalising interest when no PPOR loan?

[Lawry]

Hi, sorry I thought I saw a thread about this and now I cant find it.

There have been lots of posts about the allow-ability (or not) of capitalizing interest on investment loans, and the issue of whether the reason "doing it to pay down the PPOR loan quicker" is okay or (mostly) not ok.

My question is what if a borrower doesn't have any home loan (non deductible debt) - is it then okay to capitalize investment loan interest e.g. in a line of credit account - and claim the interest, or if not - is the ATO expecting you to pay for the investment loan interest before paying for other personal expenses?

Is there a valid argument to be made that you need personal cashflow now, e.g. to pay for living expenses/ healthcare bills/ school fees/ whatever - but your plan/ expectation is that over the long term the capital growth will be sufficient to pay off the loan plus capitalized interest? so you are not doing it to avoid tax per se?

 

[Rolf Latham]

Hi Lawry

Im not an accountant.

the primary reason for capping interest on an IP ( assuming you have the equity capacity) is to improve your cashflow so u can buy another investment and one day, pay more income tax.

A secondary consideration is that on another part of the loan facilities you hold an offset acct that increases by a dollar every time your LOC increases by one dollar.

ta
rolf

 

[Terry_w]

Capitalising interest is ok. If the underlying loan is deductible then the interest on interest for this loan would generally be deductible. There is a TR to this effect.

The latest TR is all about 'paying the home loan off sooner' so this may not apply if you don't have one. But if your intention is to build up money in an offset and then pay cash for a home loan then it may apply.

 

[Aaron_C]

Read Part IVA. It comes down to the 'dominant purpose'.