capitalising interest

From: Ian Findlay


Hi all,

My understanding is that capitalising interest on interest on loans and then
claiming capitalised interest (interest on interest) as a tax deduction the
is a big no no according to the ATO.

However don't we do this all the time? Banks calculate interest daily on
balance but charge monthly in arrears, isn't this capitalising on interest?

Why can't we pay all interest at the end of the financial year rather than
monthly thus maximising deductibility and keeping monthly cashflow high?

Ian
 
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Sim

Administrator
Reply: 1
From: Sim' Hampel


On 6/6/02 2:07:29 PM, Ian Findlay wrote:
>
>However don't we do this all
>the time? Banks calculate
>interest daily on
>balance but charge monthly in
>arrears, isn't this
>capitalising on interest?

No... banks calculate the interest daily on the outstanding balance on that day, which does not include interest amounts incurred for that month already. At the end of the month they then add up all those daily charges and charge you that.

The money is only compounded monthly, not daily.

>Why can't we pay all interest
>at the end of the financial
>year rather than
>monthly thus maximising
>deductibility and keeping
>monthly cashflow high?

If you can convince a bank to let you do that, then please let us all know ! Somehow, I think you might have more luck convincing them to let you pay your interest for the following year (in advance) at the end of the financial year.

 
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Reply: 1.1
From: Dale Gatherum-Goss


Hi

Bye the way, you might be interested in a recent court case where the courts rejected the tax office argument of interest on interest not being tax deductible.

Be careful - the tax office may appeal and the issue involved particular circumstances, BUT, it goes to show that the tax office views are not gospel.

have fun

Dale
 
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Reply: 2
From: Rolf Latham


Hi Ian

Sims right

The banks wont take an end of financial year payment for the same reason you wont one big rent payment from your landlord at the end of the day.

Ta

Rolf
 
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Reply: 2.1
From: Ian Findlay


Just an idea. I guess I'll have to keep trying . .

Ian

----- Original Message -----
From: "propertyforum Listmanager" <listmanager@bne003w.webcentral.com.au>
To: <Recipients of 'propertyforum' suppressed>
Sent: Thursday, June 06, 2002 6:55 PM
Subject: capitalising interest


> From: "Rolf Latham" <rlatham@asapfinancial.com.au>
>
> Hi Ian
>
> Sims right
>
> The banks wont take an end of financial year payment for the same reason
you wont one big rent payment from your landlord at the end of the day.
>
> Ta
>
> Rolf
>
>
>
> To reply: mailto:propertyforum.46237@bne003w.webcentral.com.au
> To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
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>
 
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Reply: 2.1.1
From: F. F.


Dale,
Any chance of getting a quick summary of the 'particular circumstances'?

Derek
 
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Reply: 2.1.1.1
From: Dale Gatherum-Goss


Hi Derek

The case in question was:

Firth v FCT and was reported on 1st of April 2002 (funny abt that date)

As part of the discussion within the case the premise that "interest is interest" and thus deductible was supported in general without being sanctioned.

I have a feeling that there was another case recently that even more closely dealt with this issue and I'll have to come back to you on this one.

Dale
 
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Reply: 2.1.1.1.1
From: Rolf Latham


Hi Dale

I recall a case Hart Vs ATO.

It was for a piddling amount but it was to substantiate or otherwise the nature of the deductability of interest on interest - made for an interesting read
Ta

Rolf
 
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Reply: 2.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Rolf

You beat me to it . ..

Here is the relevant comments made by the judge:

25 In my opinion, the interest upon capitalised interest does bear the same character for taxation purposes as the interest which was capitalised in the present circumstances. The payment of interest secures the use of borrowed money during the term of the loan. To the extent that the outgoings of interest incurred can be properly characterised as of a kind referred to in the first limb of s 51(1), they must draw their character from the use of the borrowed funds (see Fletcher at 19). Here, there is no issue as to that, as the funds were used to maintain an income earning asset. The capitalisation of interest was a feature of the contractual arrangement which cannot be severed. The same can be said of the failure to reduce the principal on Loan Account 2 in the first years. This meant that, in truth, the rate of interest on that part of the loan apportioned to Loan Account 2 was much higher than the rate of interest on that part of the loan apportioned to Loan Account 1. It may well be that the true rate of interest would be well in excess of market rates. This was not explored. This interest differential in itself is not a reason to deny deductibility. It was actually incurred in each year. That liability has no extraneous or collateral aspect.

26 In the present case, it may well be that in the future the compound interest on Loan Account 2 will exceed the assessable income earned from the property. However, that does not detract from the character of the payment as interest with a sufficient link to assessable income unless the contractual provisions are ignored. This cannot be done. There is no claim of sham or nullity. Despite a certain air of unreality about the transaction, the relevant payments of interest (both additional and further) were deductible pursuant to s 51(1) of the ITAA 1936 and s 8-1 of the ITAA 1997 respectively by each applicant.

Now, before we get too excited, the judge also found that the transactions involved were not allowed because of the anti avoidance issues involved in this case and on these facts.

The door has been opened . . .

Dale
 
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