Capitalising Refinance Costs

[gabs247]

Hi,

This is an investment loan.

I'm in the process of refinancing, and the financier is stating that they will increase the borrowing limit, so that they can pay out the existing finance including any expenses. So basically, what are the tax implications of capitalising these costs, and also what happens with the remaining amount?

For instance, say it costs only about $700 to pay for administrative and legal costs to refinance the existing loan (which is what they are telling me) then the new financier lends me say an extra $3000, and pays me back the $2300 into my bank account, then what are the legal ramifications?

Do I have to pay that $2300 back into the loan to keep it tax deductible? Can I pay that $2300 back into the loan or would the loan then be mixed purpose?

Can refinancing costs like that be capitalised, so the interest on the existing loan amount + refinancing costs be tax deductible?

This appears to be a bit of a black spot from reading the ATO website. Any advice welcome, as I'm a bit confused.

cheers,
gabs

 

[gabs247]

No bites? Does anyone know someone in particular that might be willing to help?

 

[tobe]

you dont have to put the $2300 back into the loan, but if you dont, and spend it on non income producing assets, you cant claim the deduction on that portion of the loan. Becomes a bookkeeping nightmare.

 

[tobe]

In my experience, I have capitalised refinancing costs, and continued with the (increased) deduction. the purpose of the loan hasnt changed.

 

[gabs247]

Excellent, that's what I thought. Thanks very much tobe, I appreciate your reply.

So if the financier does provide that $2300 into my bank account, I can just put it back into the loan, and then I can continue to claim the interest as tax deductible (for the new loan = existing loan amount + refinancing costs).

My understanding, is that you can claim the interest on any borrowing costs and also depreciate them over 5 years, so this is the same for refinancing as well (which as I said, isn't explicitly talked about in Rental Properties guide)?

It seems like double dipping to me, but I guess if you borrowed $5k to purchase an air con for the rental property, then you can both claim interest on that $5k and also depreciate it over the life of the air con, right? So it'd be the same with costs to borrow/refinance the investment loan.

cheers,
gabs

 

[tobe]

yup, it initially seemed like double dipping to me too.

Note, Id get the financier to eft the extra back into the loan or cut you a cheque rather than eft it into your personal account. At the least into the offset account for that loan maybe.

 

[Marty McDonald]

yup, it initially seemed like double dipping to me too.

Note, Id get the financier to eft the extra back into the loan or cut you a cheque rather than eft it into your personal account. At the least into the offset account for that loan maybe.

I think this qualifies under the "don't take the ****" section of the tax act.

 

[Terry_w]

So if the financier does provide that $2300 into my bank account, I can just put it back into the loan, and then I can continue to claim the interest as tax deductible (for the new loan = existing loan amount + refinancing costs).

This is more complex than you realise.

If part of the borrowings goes into your savings account then you would have a mixed loan with only x% of interest being deductible.

When you then transfer money back from the savings account to the loan you cannot have the whole amount transferred come off the non deductible portion of the loan. The money would decrease the deductible portion of the loan and non deductible portion of the loan as in the percentage split of the loan.

eg. $100,000 loan with $5,000 placed in savings account.
Now only 95% of the loan relates to investments and therefore only 95% of the interest is deductible.

If you move the $5,000 back into the loan then 95% of this $5,000 will come off the investment portion and 5% of the $5,000 will come off the non deductible portion.

So 95% of $5,000 = $4,750.

This means your new deductible loan amount is $95,000 - $4,750 = $90,250.

Your overall loan amount would be still 95,000 so only 95% of the interest would be deductible still.

 

[Marty McDonald]

This is more complex than you realise.

If part of the borrowings goes into your savings account then you would have a mixed loan with only x% of interest being deductible.

When you then transfer money back from the savings account to the loan you cannot have the whole amount transferred come off the non deductible portion of the loan. The money would decrease the deductible portion of the loan and non deductible portion of the loan as in the percentage split of the loan.

eg. $100,000 loan with $5,000 placed in savings account.
Now only 95% of the loan relates to investments and therefore only 95% of the interest is deductible.

If you move the $5,000 back into the loan then 95% of this $5,000 will come off the investment portion and 5% of the $5,000 will come off the non deductible portion.

So 95% of $5,000 = $4,750.

This means your new deductible loan amount is $95,000 - $4,750 = $90,250.

Your overall loan amount would be still 95,000 so only 95% of the interest would be deductible still.

Terry I don't doubt you are correct however in practice all you would do is claim interest on the old bakance plus the loan refinance expenses. Assuming an IO loan it's no issue. Just don't pay the excess back to the loan.

 

[Terry_w]

Terry I don't doubt you are correct however in practice all you would do is claim interest on the old bakance plus the loan refinance expenses. Assuming an IO loan it's no issue. Just don't pay the excess back to the loan.

I think the ATO would not be too strict on this, but it is best avoiding the problem, if possible, by not mixing borrowed funds with cash.