Capitalising interest

[bundy1964]

On my travels I came across this site -

http://www.leveraged.com.au/index.asp?sect=hom

In there glossy brochure it says that you can capitalise interest on your loan.

Given the ATO stand on debt switching on linked loans, how would they look at doing this as a full deduction?

They arn't verry trust friendly but would it change the answer?

I was thinking of capitalising the interest untill dividends were paid.

Margin calls, no dividends and HIH type pear shaped events I see as my bigest risk......anything apart from interest rates I have missed?

bundy

 

[paul_s]

I have used them a bit in the past, the main worry is margin calls, when markets corrects being diversified doesn't neccessarily save you and its not great if you have to sell in a down market. The interest rates generally aren't really as low as rates you'll get on property. The other thing is brokerage rates are sometimes higher if you are using a margin loan with a discount broker compared to normal trades.

There are some handy tax features though, like being able to prepay interest a year in advance to maximise deductions.

 

[hwd007]

I understand this is going to court to decide. The ATO don't like it at all so be careful. Its a tricky one. technically you only benefit if you have funds from other sources that you dont use to pay your investment debt and use those funds to pay off personal debt. Its a sticky one.

 

[NormH]

Originally posted by hwd007
I understand this is going to court to decide. The ATO don't like it at all so be careful. Its a tricky one. technically you only benefit if you have funds from other sources that you dont use to pay your investment debt and use those funds to pay off personal debt. Its a sticky one.

Wealth Optimizer is the one that you are thinking of who are in court soon.

The ATO lost the initial case and have taken it up on appeal. The argument was the second home could never be purchased without the strategy being put in place. Hence the old story, it is the purpose of the money/strategy that give it legitimacy. Thing is this will make it difficult for the ATO to prove intent and many people will adopt the strategy of 'moving in to the new home' make all payments on that debt, capitalising the interest on the outstanding monies on the 'investment', you are effectively reducing quickly your non elligible and allowing your elligible tax deductions to climb.

This is not new by the way, corporations do it all the time and is part of doing business, it is not being applied in this particular way before and the ATO are worried about the floodgates.

The general belief is that the ATO will probably lose this appeal and they then have no where to go but to the government to change the legislation. The question will be will the government accomodate the ATO and if so when would the new legislation be effective.

The attraction to some is, if you do your sums, put the scheme into place now, follow the strategy, don't claim the capitalised interest as a claim, pay off your home, then switch full payment to your investment loan you will end up paying the same amount of interest anyway. So there is little risk in setting it up now, on the off chance the ATO lose. The legislation then makes that date the start date of new legislation, the gamblers meanwhile have got in before and may be OK but at worst, no worse off.

my interpretation of the current status

regards

Norman