Deductibility of interest - joint loan, individual title

[sam717]

Hi there,

I used to frequent this forum many years ago. I've got a question I'm looking for help with, so I thought it worth coming back as I've received some great help in the past.

I recently refinanced two investment properties while going through the process of buying (and financing) a new PPOR. The title for each of the investment properties properties is in my name (only). Title for the new PPOR is jointly held with my wife. Before the refinance, the loan against each investment property was also in my name (only). A silly mistake during the refinance process (as much my fault as anyone elses) meant that the investment properties are now financed under loans jointly held with my wife. The titles for these investment properties are still under my name (only).

Having the loans for the investment properties in joint names now is raising some big questions around the tax deductibility of the interest (hence this post). I've investigated having the loans switched back to my name only, however the investment properties are now financed through 3 year fixed loans which will incur reasonably significant break fees to do so.

My question - can I claim all of the interest on the joint loans for the investment properties as tax deductions? I've spoken to two accountants and have received conflicting advice. One says no - as the loan is joint, the interest expense needs to be split. The other says I can claim it all as the expense is linked to the income, which is all being paid to me (as the sole title holder of these properties). He says deductibility is determined based on the purpose of the loan.

I'd love to hear any thoughts on this one. Obviously not looking for financial advice, just keen to hear others' experiences and thoughts.

Many thanks!
sam

 

[D.T.]

Ownership of asset determines deductibility. Deduct the interest (and everything else property related) in proportion to the ownership shares of the asset.

 

[Rolf Latham]

Hi Sam

Ask the no accountant if the place was sold would they split the cgt ?

Ta

Rolf

 

[SYD]

If you refinanced IP loans for the purpose of buying your PPOR you will need to apportion the interest. Did you get a split loan when you did the re-fi ?

SYD

 

[Terry_w]

Hi there,

I used to frequent this forum many years ago. I've got a question I'm looking for help with, so I thought it worth coming back as I've received some great help in the past.

I recently refinanced two investment properties while going through the process of buying (and financing) a new PPOR. The title for each of the investment properties properties is in my name (only). Title for the new PPOR is jointly held with my wife. Before the refinance, the loan against each investment property was also in my name (only). A silly mistake during the refinance process (as much my fault as anyone elses) meant that the investment properties are now financed under loans jointly held with my wife. The titles for these investment properties are still under my name (only).

Having the loans for the investment properties in joint names now is raising some big questions around the tax deductibility of the interest (hence this post). I've investigated having the loans switched back to my name only, however the investment properties are now financed through 3 year fixed loans which will incur reasonably significant break fees to do so.

My question - can I claim all of the interest on the joint loans for the investment properties as tax deductions? I've spoken to two accountants and have received conflicting advice. One says no - as the loan is joint, the interest expense needs to be split. The other says I can claim it all as the expense is linked to the income, which is all being paid to me (as the sole title holder of these properties). He says deductibility is determined based on the purpose of the loan.

I'd love to hear any thoughts on this one. Obviously not looking for financial advice, just keen to hear others' experiences and thoughts.

Many thanks!
sam

Deductibility is determined by a number of factors. In this case your wife is only on the loan to assist in servicing and you will be able to keep claiming the interest as per normal. See TR 93/32. Any income or loss from a property must be apportioned in accordance with the ownership.


See also Edited version of private ruling Authorisation Number: 1011299816055. Question 2


I think you need a new tax advisor!

And you realise the mistake now, but tax is only 1 aspect, the other main 2 are:

1 Serviceability. Your spouse will have a harder time borrowing in the future now.

2. Asset protection - if things go bad your wife will be exposed as well as you. Double the risk for no benefit.

 

[sam717]

Thanks everyone, particularly Terry_w.

I haven't read the ruling in full yet, but I was hoping there would be a finding like this floating around somewhere.

As for the other question(s) about refinance, the PPOR borrowings were kept separate to the investment borrowings. The only link was that I decided to refinance them all at the same time to improve my negotiating power.

Cheers,
sam

 

[sam717]

Terry,

Could you give me a little more direction as to where I can find the private ruling details you've mentioned?

Google doesn't seem to know this one!

Ta,
sam

 

[Aaron_C]

Private rulings are called thus because they only apply to that particular individual.

 

[Paul@PFI]

Its a valid concern that the ATO haven't really addressed when joint borrowers use proceeds for one of them to acquire title. The basic rule is how were the funds used not who borrowed etc. This is demonstrated by the inability of one joint owner to claim specific costs. They both bear costs jointly. However it doesnt necessarily mean its a protected and final position. Your case appears to be the inverse. One owner joint borrowings.

We know that the ATO has fought to maintain that position on ownership which is why a former scheme to salary sacrifice some outgoings was defeated. The ATO arguies that the SalSac is also joint by virtue of the joint ownership "rule of common law" and is therefore not effective. Fair enough... But there have been cases where ATO doesnt automatically accept the joint borrowers arguement too.

In TD 2009/17 the Commissioner raises a concern that he enforces with Hybrid Trusts. That is joint parties borrow $ and units are issued just to one person. The ATO referred to its concerns that the arrangements can "benefit others"... Obviously this isnt identical to the same position as a spouse joint loan and one marital party owns title. But the counter arguement to their position on this is that the spouse joint loan arrangement is tolerated. The ATO view is the a concern if joint borrowers then issue units in say 60/40% or 10% / 90%...Why didnt they do 50/50 or 0/100% is a concern. Is it a scheme intended to obatin a tax benefit ??? That can only be detemined by an adverse finding by the Commissioner. Or a Binding Private Ruling. Both are costly and can remain uncertain.

I wouldnt expect the ATO to adopt an about-face on joint loans. Loans can be joint for example where the family home is in joint names and its being used as loan security. So the bank expects both owners to be joint borrowers to avoid other legakl concerns such as guarantees. Avoiding one name of title may be an asset protection issue? If the ATO wanted to about-face I suspect it would have a massive impact of many ordinary mums and dads. Treasury would find the social order imapct too significant. Treasury wouldnt want this and wouldnt permit such an approach to suddenly manifest itself.

That said beware of tampering with joint loans or title where there is a joint loan. You dont want to shift title for example without a legit loan refinance. This may result in a CGT burden falling differently on different taxpayers to that who financed originally. For example spouse transfers in Victoria may bypass duty BUT if a joint loan wasnt refinanced it could taint the whole loan and render the deductibility of interest to either apportionment or perhaps total loss and require the taxpayers to object and appeal at high cost.

The above arguements should have been part of the accountants advice so you understand the issue. Is a joint loan permitted ...Yes. Is it an assured position ? No. Personal advice should be relevant to your decisons.

 

[Paul@PFI]

A further issue that supports joint loans occurs with 'entity' loans. Banks will often give 'mum & dad' preliminary loan approval to a financing deal such as buying an IP. They then dont care who the final buyer is on title provided they have security and guarantees. They just want a mortgage and also a guarantee by Directors being the "principals" to the beneficial ownership...Whether its a ABC P/L as trustee for a disc trust or its Dad etc isnt a issue for them. This is very common for high net worth and business groups. The banks legals will include vetting that the loan proceeds are settled correctly - ie They wont advance the $$$ to Mum. They will settle for ownership costs and to the vendor.

You think a major bank lender care how Gina R finalises a loan and final ownership of the asset ?

 

[Terry_w]

Terry,

Could you give me a little more direction as to where I can find the private ruling details you've mentioned?

Google doesn't seem to know this one!

Ta,
sam

google the ATO private binding ruling search and put in the number.

 

[Paul@PFI]

Private Rulings arent binding and arent precedent. Often as useful as ti%s on an ant and the scope and questions put to Commr are abbreviated for space and true scope of ruling isn't capable of being read in many cases.

Also ONLY the taxpayers who apply can rely on it. Its useless for others unless they also apply and their questions and circumstance is identical. Also only binding if ALL aspects of scope comply at all times. eg in 1011299816055 refers to security over private res. What if original loan over private res is sold and loan security is switched / refinanced over other assets ?? A future private residence? A holiday home, another IP ? A blend of the above ?

Problem I see with some rulings is they either lack facts or embellish and omit a fact. This comes out in scheme cases. Often the scheme promoter has a ruling but actual scheme failed to comply. This issue occurred a bit with viticulture (vines) schemes - The promoter didnt spend all the $$$ investors put in on vines !! The Commissioner has an out. This was also very evident in volumes of rulings on various hybrid trust arrangements. So many said their complied when they didn't.