Dealing with a number of lending institutions I guess this changes almost on a daily basis for you, but the 1 year option was interesting........
When you refer to the lending institution(stupid or otherwise ) requiring a 5 year bond, is this the case if it was just to support a Lo-Doc type loan as well? ie. Is the 5 year requirement only for a 'standard' type loan or to support a Lo-Doc type loan as well?
Lo Docs will accept a 1 year bond.
Simply, at the point of signing the application you must be able to declare that the income exists / or is certified to exist in order to make a valid and honest assertion.
However, it comes back down to what is from a risk point reasonable. Is one comfortable to structure on this basis given that future value is uncertain. So, is one year enough to be confident that you will have accrued some capital gain on the property??
The longer the term the greater the prospect of being in positive territory is. Risk management et al.
For the interest on the loan to purchase the Cashbond to be tax deductible you may have to PROVE to the ATO at some stage it was used for investment purposes. In this case, to provide an additional income stream to allow additional borrowing should be seen as deductible.
My question is, if the ATO ever queried this, how would you PROVE that the FULL income stream was actually required by the lender to get loan approval in this particular loan application case?
On many loan applications you are also required to state the value of your car, furnishings etc. that in a borderline loan approval may get you the nod. It unfortunately doesn't mean that any borrowings on the car and furniture are tax deductible even though they may have 'contributed' in some way to you achieving a loan approval for investment purposes in this particular case. Therefore, just because I state an income or asset on an investment loan application and the loan application is subsequently approved presumably doesn't make everything in my application tax deductible.
So if you obtain a ruling that does allow the structure, I guess you MAY(?) still need to have some sort of separate/official/additional supporting documentation from the LENDER that stated, in this particular case, the full income from the cashbond was used to provide serviceability to the loan application.
See what I mean Steve? My friendly(?) local Tax Inspector rings me up and says "Why have you claimed this interest as tax deductible?". I say "I have a ruling that states my structure is fine". He/she says "the structure is fine but in this case, you prove to me that the bank required that FULL borrowing to achieve this particular loan approval".
I guess what I'm really asking is, to cover the above situation, should you then get an additional letter from the lender at the time of loan approval, stating that the annuity income stream was fully utilised in the investment loan assessment. Otherwise, how could you prove it? Also, would most lenders provide this?
For your own reasons(?) you may take out an initial loan to purchase a Cashbond larger than that is required to meet the serviceability requirements of the investment loan. I would then imagine that the ATO would want to apportion only that part of the loan that was required to meet the serviceability requirements as tax deductible. But again, how would you be able to prove what proportion of the annuity that the bank used towards granting your investment loan approval?
If after acquiring a Cashbond to provide increased serviceability for investment purposes(and you do use it for this purpose), you decide to 'cash it back in'; would the penalty costs incurred in doing this normally be viewed by the ATO as tax deductible as well?
Sorry Steve. Promise I'll leave you alone after these. It's a fascinating topic!
Maybe it's late (and I've gotten complacent in my old age), but your question reads like you're looking for reasons to not deduct the interest. Commercial considerations means I don't go looking for additional documentation just in case the Commissioner doesn't like my answers. You may have experience in this regard.
Would you have to prove that all the expenses of a restoration were required to achieve a rental return (or increased valuation) on a property?
Do I need to prove that 100% of my employees time is spent on "business". Could the Commissioner deny 15 mins per day that my staff spend on coffee breaks? Maybe but there'd be revolution.
Surely there must be a case for normal business practice.
I often ask myself, "How would IBM implement this investment/policy". If IBM could conceivably do something then maybe I should consider deducting it too.
Then again I could be naive at this time of night.
I take your point. Many years ago I shared a house with a Tax Inspector, so just call me cautious(ok....probably overly cautious.......oh all right.....have it your way.......ridiculously cautious ) when it comes to providing documentation that the ATO may require years down the track. He used to tell me some 'interesting', nay, terrible stories.
I don't doubt Steve's process at all and think it's a great idea. However, since it's a little different, I was just asking, based on his experience, whether any additional documenation was ever required. The answer is probably "no" but my poor old head often has trouble understanding the way the tax system works. Steve is the first to admit he enjoys the 'education' side so he's probably used to, what may be, a silly/basic question.
Let me put it this way, suppose you were to take out a Cashbond for $300K which returned you $66K per year over 5 years. You apply for an investment loan using this figure and it's approved. However, it's not really a huge loan you are after and in fact the income from a $150K Cashbond may have been sufficient to get the Loan Approval. You claim the interest on the entire $300K as that's what you've used on the application, even though it might have only been an income stream from $150K that was required to achieve the loan. You could then, theoretically have a Tax Deductible loan of $300K that in part was being used for non-investment purposes.
Thanks in advance for what may well be a basic question.